How to deal with less than perfect
credit on the fly!
Summertime is time for vacations. You tend to slow down a bit and have more time on your hands which makes it also a perfect time for cleaning up your less than perfect credit and planning ahead.
I am not going to make this issue too long, just a few points which will save you a lot of time and aggravation and of course
hundreds if not thousands of dollars on your mortgage!
Credit scoring has an enormous impact on your financial picture. It can mean the difference between getting a good interest rate on your mortgage loan, or whether you even qualify at all. It is therefore imperative to be well-versed on the factors that influence your credit score, and have the ability to take simple, yet very important steps to clean up your credit. The purpose of this newsletter is to put you on the right path to obtaining a better loan at some point in the future.
We all know that good credit translates into lower rates for consumers and you need to know how to work the system to your advantage, and have a plan in place to get a better deal when things don’t immediately fall into place for you.
The Five Factors
What the credit scoring model seeks to quantify is how likely you are to pay off your debt without being more than 90 days late on a payment at any time in the future. Credit scores can range between 300 and 850. The higher your score is, the less likely you are to default on your loan. Only one out of approximately 1,300 people has a credit score of 800. These
are clients who walk away with the best interest rates. On the other hand, one of eight prospective home buyers are faced with the scenario that they may not qualify for the loan they want because they have a
lower score, between 500 and 600.
Here is a simple chart to give you the tiering structure and what it means
to the lender.
|You are at the top of the best rates and terms offered to you. |
|Excellent score. You are a very desirable borrower. |
|Good Credit. You should be in good shape to buy. |
|Ok credit. Don't look for other exceptions. |
|Borderline. Ok if everything else is wrong. |
|Weak. The rest of your life must be perfect. |
|Difficult. Needs some work, or a special program. |
|Below 600 ||Trouble! Try to fix up your credit immediatelly! |
Your credit score comprises five factors and I listed these below in order of importance, just as lender will see it:
Payment History: 35% Impact. Paying debt on time and in full has a positive impact however late payments, judgments and charge-offs have a negative impact. Missing a high payment has a more severe impact than missing a low payment.
Outstanding Credit Balances: 30% Impact. The ratio marking the
difference between your outstanding balance and your available credit is
important here. Ideally, you should keep your balance below 10 percent of your available credit limit.
Credit History: 15% Impact. This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area.
Type of Credit: 10% Impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards only.
Inquiries: 10% Impact. This quantifies the number of inquiries that have been made on your credit history within a six month period. Each hard inquiry can cost from two to 50 points on a credit score but the maximum number of inquiries that will reduce the score is 10. Eleven or
more inquiries in a six-month period will have no further impact on your credit score.
One thing that is important to remember is that the computer is not taking any personal factors into consideration when it calculates your score. When lenders run your credit report, it is simply today’s snapshot of your credit profile. This can fluctuate dramatically within the course of a week, depending on your own activities. Be aware of this when you go out on a shopping spree. You need to make sure you are not creating a negative impact on your score while the lender is reviewing it.
Also, please remember that some lenders are compiling a Tri-Merge Credit Report and these three scoring systems can vary in their results. This combines the scores provided by Fair-Issiac (FICO), with the score generated by TransUnion (empirica) and the Beacon Score produced by
Equifax. The lender is going to look at the middle score and throw out the other two.
Typically, a person with a bad credit is in this position because they lack structure in their life. There are, of course, causes where health has been a factor, or perhaps there’s been a layoff or fluctuation in employment, but for the most part, there are individuals who lack the discipline to pay their bills on time or curb their spending. My job is to provide them with a simple roadmap to get back on the right track.
Now, let’s get into some examples that will help you deal with less than
perfect credit scores on the fly.
Let’s say you have a credit score of 664. You have a concentration of credit card debt on one card; let’s say $17,000 on a card with a $20,000 limit. At the same time, you have four or five additional credit cards, all with a zero balance. My advice to you is to spread the debt over the
cards that you have available to work with. This changes the ratio of debt to available credit and can cause the credit score to pierce through that magical threshold on our chart above, and put you in the 680-699 category of having good credit.
Another thing to take into consideration in a case like this is the percentage that each of the five factors weigh in on your resulting credit score.
Let’s say you have a high credit (the maximum debt allowance on all
cards, combined) of $20,000. You have one card that is used for business purposes that is pushing the limit. Get two new cards, each with a $5,000 limit, and once again, spread the debt out over the credit
leaving a 30 percent margin of available credit on all the cards. Yes, this will affect the factor of credit history, but this specific factor only affects your overall score by 15 percent. The big difference once again, is the resulting impact on the credit balance factor, which has a 30 percent influence on the overall score and can cause the overall calculations to pierce through the next level on our chart.
Keep your credit card accounts open. Don’t close any existing credit card accounts, even if they are at a zero balance. Some people think they are doing themselves a favor by having fewer cards, and they lose
out on the credit history factor. Even if you don’t have good rate on those old credit cards, you are rewarded for having the long-term credit history.
These are just a few examples of what you can do while you are in the loan process. If you were turned down, don’t be disappointed. Monitor your credit score often to turn this situation around. I check my own credit score quarterly and you should too. Use the tips found in this
newsletter and your score will be over 720 in no time at all.
Remember… a new debt will temporarily drop the score, but once the first payment registers as “paid”, the score will begin to go up again.
If you don’t qualify for even a small personal loan at your own bank why
not try CitiFinancial. CitiFinancial provides fast, convenient personal loans to help consolidate and pay off your bills. Yes, their rates are higher, but you should be able to get 5K or 10K without much trouble
and it may help you to get a better deal down the road.
More than 90% of my own clients didn’t have a perfect credit when they first applied for a mortgage with me, but because I work with them on ongoing basis, providing them with debt consolidation home loans, second mortgages or new first mortgages, they are all in much better shape today.
Some required private mortgage funds to pay off their bad debt first and others started with a secured credit card to re-establish their credit.
Speaking about a secured credit card…
Currently there are only two companies in Canada offering a secured credit card -Capital One and Home Trust.
Problem with Capital One is that they start you with a very small deposit which is not
taken seriously by mortgage lenders. If you already have Capital One Secured MC, you’ll need to get Home Trust Secured VISA as well.
Home Trust Company is a federally regulated trust company that is licensed to conduct business across Canada. Home Trust Company is also a deposit taking institution and is covered by the Canada
Deposit Insurance Corporation (CDIC). That means your deposit is fully insured. Home
Trust is 100% owned by Home Capital Group and is a publicly traded company on the Toronto Stock Exchange under HCG.B.
Home Trust Company's head offices are located in the financial district of Toronto with branches in Vancouver, Calgary, Toronto, Hamilton and St. Catharines.
A secured card with Home Trust will allow you to build or rebuild a solid credit history in about 12 months.
The fact that it is a Visa card means that you can use it at over 450,000 merchant
locations in Canada and over 24,000,000 locations worldwide. Cash advances are
available at over 620,000 ATMs displaying the Visa logo worldwide. With a Visa card, you can make reservations, shop online, rent a car and make purchases by telephone.
Almost everybody who applies for a Home Trust Secured VISA is approved. Current
approval rate is approximately 95%. If your application is declined, Home Trust will return your security deposit to you (checks are not cashed until the application is approved).
If you have never applied for credit in Canada, you probably do not have a credit file under your name at the credit bureau. If that is the case, then you may be required to provide documents that verify your address, date of birth or Social Insurance Number (a copy of your driver's license, a copy of a current bill, or a copy of your health card/SIN card).
Click here to apply for a Home Trust Secured VISA
Tell Me What You Think
I'd love to hear what you think of this issue. And of course, if you have any suggestions for upcoming issues that you'd like to share with me, please send those too!
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"Your Mortgage Consultant....For Life!"
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An independent broker associated with the VERICO Mortgage Brokers Network and a member of the Canadian Institute of Mortgage Brokers and Lenders. Copyright NotaPennyDown.com 2006. All rights reserved.