What You Need to Know About Credit

A credit bureau is an organization or company that collects information about you -- particularly information that covers the way you handle or manage credit. You could say that they’re "watchdogs" who determine your overall credit worthiness.



Credit bureaus obtain information about your from a variety of sources, including (but not limited to) court judgments and bankruptcy records, and even from you, too. For example, when you apply for a car loan with a bank, or fill out a credit card form in a department store, the credit bureau automatically gets a hold of that piece of information and adds it to "your file."



In Canada, the three largest credit bureaus are Trans Union, Equifax and Experian. Each of them collect and maintain credit information on you (whether you know this or not), and store that information in a giant database. Each credit bureau issues a credit report containing and you have the right your report at no cost once a year. You can see it more frequerntly than this if you wish, but a fee will be involved.



Credit Scores



It is customary for credit bureaus to use the following criteria to calculate your credit score:



• History: what were these payments, were they made on time, etc.?

• Amounts owing: this includes who you owe these amounts to

• Length of your credit history: this indicates how long you’ve maintained credit

• Frequency of new credit: this shows the times you’ve applied for new credit and how you handle them

• Type of credit: this shows what kinds of credits you applied for or currently have (car loans, credit cards, furniture or appliance financing, etc)



Credit Reports and Mortgage Prospects



When you apply for a mortgage, a potential lender looks at three fundamental factors:



1. income

2. the amount of your down payment

3. your credit report (and specifically, your credit score)



Most people know about the first two, but the third one is a surprise. Yes, as we’ve discussed, the credit report/score is a major factor that lenders take into consideration. And that means, if your credit report is good, you’ll most likely be able to borrow money to purchase property. On the other hand, if your credit report has some serious "dings" on it, then you may not be approved – or you may not get the best rates, options and terms. A less-than-great credit score may also oblige you to provide a lender with security (collateral) before a mortgage is offered.



Also, it’s interesting to note that while your credit score determines whether or not you get approved for a mortgage, your mortgage payments are NOT used to calculate your credit score.



In light of the above, you can easily see it’s essential to take your credit report very seriously – because it tells lenders and other financial institutions how credit-worthy you are; and in particular, it tells potential lenders what rates and options to offer you when you apply for a mortgage. Also keep in mind that your credit score is re-calculated continuously. This means that your credit report for last month may be different from this month’s report, or the next.



Repairing Your Credit Score



Here are five ways to repair your credit score:



1. Start by getting a copy of your credit report. This is the only way you will know that "something’s not right." When you get your report, go over it carefully. Make a list of errors in your report. Any inaccurate information will affect your credit score. Keep records of your payments so you have something to show when the time comes for you to dispute your credit score.



2. Call the credit bureau and say you want to dispute your credit report. If they have a dispute form online, use it to dispute any erroneous information. You can also initiate a dispute in writing. Send them a letter indicating what it is you want to dispute and clearly outline the circumstances. Make sure that you submit proof. The more evidence you submit, the better and faster the credit bureau can investigate.



3. While you wait for the credit bureau’s response, stop incurring new debt. Pay cash for your purchases and avoid the temptation to use your credit cards.



4. Settle all delinquent accounts. Remember that your payment history constitutes a significant percentage of your credit score.



5. Reduce your debt-to-income ratio. If your debt level is disproportionately higher than what you earn monthly, lenders tend to look at that as a red flag. They may conclude that you can’t afford the mortgage payments. If possible, try to bring your debt level to 12% of your income. For example, if you make $3,000 a month, your monthly debt payments should generally not exceed $360.00. When you do get approved for a mortgage loan, your debt-to-income ratio will go up significantly, but try to keep all debt and mortgage payments at 43% of your income. So taking the same figure of $3,000 a month, your debt and mortgage payments should generally not exceed $1,290.00 a month.



By reducing your debt-to-income ratio, you increase your chances of getting approved for a mortgage loan. If you’re strapped for cash, make an inventory of your assets starting with the largest one and see if you can sell them. For example, if you own a BMW, you may want to sell it for a less expensive car. If you have an art collection, consider selling all or part of them so you can pay off your debts.



If you feel you need financial help, consider talking to a financial planner for guidance. He or she may recommend loan consolidation strategies that may help ease your debt burden.



Be patient. Your credit report wasn’t built in a day so repairing your credit score will take awhile. Load up on personal discipline and resolve not to incur any new debt while you wait for your credit report to be cleaned up.



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ABOUT THE AUTHOR:



Zack Ashan -- a.k.a. "The Mortgage Guru" -- is a licensed Mortgage Broker based in the Greater Toronto Area. Zack's personal mission is to help as many people as possible WIN the mortgage game, by providing them with clear, honest and valuable advice. Learn more about Zack and pick up his groundbreaking book "The Insider's Guide to WINNING the Mortgage Game" at http://www.mortgage-guru.ca.