It is important to obtain an up-to-date credit report to verify that you are in a suitable position to buy a home.

Credit scores range between 300 and 900, with scores above 680 (nowadays, 720) considered desirable for obtaining a mortgage. Credit scores are calculated using information in your credit report , including your payment history; the amount of debt you have; and the length of your credit history. Credit scores help lenders, and other creditors determine if you’re suitable to get a loan. There are a lot of factors that can affect your score and some are written below. When it comes to determining if a lender will extend a loan is dependent on these factors and over-all history, not just the score.

The main factors involved in calculating a credit score are:

Your payment history (35%)
Your used credit vs. your available credit (30%)
The length of your credit history (15%)
Public records (10%)
Number of inquiries into your credit file (10%)

1. Your payment history. Did you pay your credit card obligations on time? If they were late, then how late? Did you miss a payment? How many times? Bankruptcy filing, consumer proposal, liens, and collection activity also impact your history. Your credit history will also detail how many of your credit accounts are delinquent (not paid on time or missed) in relation to all of your accounts on file. For example, if you have 10 credit accounts (known as “tradelines” in the credit industry), and you’ve had a late payment in 5 of those accounts, that ratio may impact your credit score.

2. Your used credit vs. your available credit. How much you owe? If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits. For example, if your credit limit is $10,000, how much of this have you used up? When you used up more than 50% of your limit, your score begins to decline.

3. The length of your credit history. In general, the longer you have had accounts opened, the better. In general, lenders want to see that you have a handle on your financing and debt repayment over a long period of time.  New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.

4. Public records. Those who have a prior history of bankruptcy, or have had collection issues or other derogatory public records may be considered risky. The presence of these events may have a significant negative impact on a credit score.

5. Number of inquiries into your credit file. Every time a new financial account is to be created with an institution or company for the purpose of saving or borrowing, an inquiry is being made to your account. If you are applying for a car loan or car lease, a deferred loan (“Don’t Pay Until … loans”), most likely than not, an inquiry will be sent to check your file. This is called “hard hit” and affects your score. These requests are logged on and goes to your inquiry history. So, if you’re shopping for a car loan and you went to 5 lenders, there will be 5 “hard hits” in that short period of time. From time to time, institutions make a “soft” inquiry on your file to offer you a loan or pre-approved credit cards. These, as well as your personal inquiry do not affect your score.

Generally, it’s desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example. If you pay all of them promptly, it will show that you are a responsible and low-risk borrower and the chance of extending you a mortgage is higher. If you always pay your goods or services using your debit card, and you have no credit lines, chances are, when it’s time to getting a mortgage, you will not have a “credit history” and this can cause your application to get denied. If you are thinking of buying a home and need help re-building your credit, contact us with Subject: Help Rebuild My Credit.