Tuesday, September 23, 2008

Credit history affects ability to borrow

The ongoing credit issues have caused mortgage lenders to review their lending criteria, and they have become stricter allowing fewer approvals on an exception basis. The credit bureau report is a very important tool used by lenders.

Most clients have a strong credit history but there are always a few situations, either due to illness, previous unemployment or marital issues where a responsible borrower experiences a credit score drop below the lender's minimum. Credit scores change daily. A weak score can be improved within a few months (& the opposite is true also....scores can drop 75 points or more within a few months if credit is overuse or abused).

Many factors affect credit scores - I hope you find the information below helpful in understanding the score & how it can change. Also, I've included some tips for those who are starting to establish credit.

If you need a mortgage contact, please let me know.



Credit Bureau – Credit Score

        • Often referred to as a beacon score
        • Score indicates credit worthiness
        • Score is a statistical formula that indicates to lender the statistical probability of delinquency
        • range from 300 – 900

Scores range from 300 – 900 & is determined by:

        • 35% - payment history
        • 30% - amount owed
        • 15% - length of time on file
        • 10% - new credit (how new account is handled)
        • 10% - type of credit (bank credit cards, store cc, installment loans)

How to improve score?:

        • Pay all bills on time – no matter how small the payment
        • Keep account balance below 75% of credit limit
        • Avoid applying for credit unless needed
        • Too many inquiries – lenders will interpret as financial difficulty
        • Score can be improved significantly over a few months if these tips are followed.

What causes a score to drop?:

        • Late payment – can cost 30 – 75 points
        • Maxing out on credit cards – can drop score by 50 – 100 points

For Mortgages:

        • Scores under 580 – Prime lenders not interested – will need to look at alternate (B lenders)….higher interest rates & fees
        • Prime lenders prefer scores of 600 + ….will consider between those around 580 & higher but really need to understand cause of low score (may require guarantor/insurance – case by case).
        • 680 – considered a strong score – qualify for 100% financing, no income verification etc.

TIPS for New Borrowers – late teens/young adults should establish credit:

        • Apply for credit card – major bank
        • Pay on-time monthly
        • Apply for an installment loan – shows ability to repay fixed amount on monthly basis. Make it small loan – can be secured by a GIC – keep it outstanding for full term (ie: 12 months)
        • Avoid numerous credit cards – ie: retail stores.

Your rights with the Credit Bureau:

        • View your bureau report (on-line or by post)
        • Advise them of incorrect information (will be investigated)
        • In event of identity theft or lost/stolen wallet they will add line to bureau to alert credit grantors to be extra cautious of verifying identity.

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