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You may remember that we posted a blog back in May that discussed how to increase your credit score. We touched on the importance of building solid credit as a home buyer, and why lenders require a good score from borrowers. If you haven’t, we recommend reading the full blog here. Now, we’re going to dive into the factors that impact your credit score in the first place, and why they may result in the need to build your credit up again. Here are some common culprits!
A quick recap on building your credit
First, let’s quickly review the main points from our previous blog. A high credit score helps put you into good standing with lenders, because it shows you are reliable and a good candidate for borrowing. To increase your score, you can consider a higher credit limit, striking the right balance of credit use, and setting up automated payments.
A higher credit limit is only advisable for borrowers who are sure they won’t actually use all that extra credit. The goal is to spend the same amount, but have a lower percentage of use. Spending too much can make lenders think you cannot handle more debt, while not spending enough may not show enough proof of use. You want to aim to spend around 30 per cent of your limit. Finally, setting up automated payments ensures you won’t miss any due dates and suffer a credit score decrease as a result.
What impacts your credit score?
So, what factors can actually lower your score in the first place, leaving you in need of solutions to increase it again? Here are some of the biggest factors.
Collections and judgements
Collections are unpaid debts you owe, while judgements are basically an order to make repayments. You may have to negotiate with the lender directly, or work through a separate company to make repayments. Collections and judgements certainly decrease your score, as they show you struggle with taking on debt.
Bankruptcies and consumer proposals
The word bankruptcy strikes an ominous tone with most borrowers, and while it’s not the end of the world, it’s certainly not desirable. Both bankruptcy and consumer proposals are debt solution strategies that stem from carrying more debt than you can manage. Bankruptcy often means surrendering your assets to clear your debt, while consumer proposals are a bit more of a negotiation. Consumer proposals allow you to work with the lender to determine a longer payback schedule, or to pay part of what you owe. In both cases, your credit score will suffer as a result of these financial troubles.
Your credit utilization is a big part of your score. As we mentioned earlier, your credit utilization should ideally be around 30 per cent of your limit. This is enough to give lenders an idea of your spending habits, but not so much that you’re constantly stretching your limits. If you always use 95 per cent of your limit, for example, or exceed it, this could lower your score. While using too little credit won’t lower your score, it also won’t help increase it. Without trackable spending patterns, your score cannot rise.
Your payment history looks at how well you have made your previous payments. Do you consistently pay on time, and pay more than the minimum? Or, are your payments chronically late and below the minimum amount? Late or missed payments can lower your credit score. You will need to prioritize making timely payments, even if it’s only the minimum, to raise your score.
Credit inquiries or credit checks don’t always impact your credit score, but it depends on the type of check. Soft credit checks will not impact your score. These aren’t associated with requests for credit or financing, and they are typically done as part of a background check. For example, employers or landlords might want to see your credit, and bank companies may also look at your background before offering you specific credit products.
On the other hand, hard checks will impact your credit score. Applying for a mortgage, or new credit cards, means running a check specifically to see if you’re eligible for borrowing money. The more hard checks, the more money it appears you’re looking to borrow and the more debt you’re looking at. These checks can knock your score down a bit, and prevent lenders from approving them if they think there are too many.
Your credit mix is the mix of credit types you hold, from mortgages to credit cards and loans. In terms of your credit score, lenders like to see you have successfully managed several forms of credit. Closing credit card accounts may hurt your score a bit, as it could affect your debt service ratios. It’s not a bad idea to keep unused accounts open and use them occasionally just to maintain your credit usage and mix.
Watch out for those student loans and phone bills
Student loans and cell phone bills are two of the biggest offenders for lowering your score. Many of us carry student loan debts, and almost all of us have cell phones, yet it’s still fairly common for these payments to affect our credit. It’s not so much that having these debts themselves is the issue, but late or missed payments on them can be. Since these are monthly payments, the chances of missing one can be high without proper planning and attention. This is when automated payments can come in handy to ensure you don’t unnecessarily miss a payment!
Your credit score is made of several factors, and there are lots of ways for your score to either rise or fall. Prioritize making payments on time, and finding the right amount of usage to build your credit without going overboard. If you need guidance on securing a mortgage with lower credit, you can reach out to a mortgage broker to learn about your options.
If you have questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.