Here in Canada, your credit score always matters — even when you are applying for a mortgage with an alternative lender or a private mortgage lender. It’s true they specialize in helping borrowers with damaged credit, but they still want to see signs of rehabilitation and repayment performance in the applicant’s track record. And the higher your score, the more favourable the terms of your mortgage will be. Which is what everybody wants!
“Maybe I missed it – but I was wondering if you had a blog post about fixing credit. Or could maybe write one about it. Here’s my situation. I’m 28 years old, and was given a credit card at 19 and basically had to use it to buy food, and ended up defaulting on it because just buying my basics were beyond my means.
So right now I’m paying off student loans for a degree I haven’t finished, and don’t want to. I plan on going back to school, but I think it’s important for me to save up my first year’s tuition in the bank and have the last student loan paid off completely. I have a plan to get that paid off – but my problem is my credit score.
I also know it’s going to be important for me to build my credit back up, from my screw ups with a credit card that I never should have had, and getting rid of this student loan stuff. I just picked up a cell phone on a monthly plan, before I always used pay as you go. So I know that will help with credit. Is there anything else I can do to build up my credit, so I can actually really start building the life that I want to have?
Also, I really like the blog, def. have it book marked now, and will be paying close attention.
Thanks for your note and your kind words of praise Sharon. I will help you through this but I need a bit more info. You say your credit report is bad – I’d like to see it – if you have a recent copy, perhaps you could scan and email to me to firstname.lastname@example.org.
For anyone who feels their credit is in need of repair, accessing a copy of your current credit history is an absolutely necessary first step. Where things go from there depends on its contents.
You can go to www.equifax.ca and order your credit report online – you create a profile a username and a password – store that info somewhere safe, because you will use it for life.
Answer some identifying questions, and then order your report – I advise you order “Score Power” since they will include your score – it will cost $23.95 and can only be charged to a Visa or MasterCard issued in your name.
Another way is to get their address from their website, send in two pieces of ID and a written request to get a free report by mail – takes a few weeks, and will not give you a score.
Yet another way is to go to their office in North York at Yonge and Finch.
I do strongly recommend you get your report – you gotta know what it is you are addressing. You will see what lenders see when they consider your credit application.
What I do know is paying your student loan without mishaps so far is a very good thing for your credit history, and to a small degree, a cell phone plan will contribute to your score.
If there is negative info in your report it must be in prior credit card usage as you hinted. Seeing that info will help me frame my response.
If your credit report is still not up to snuff in terms of being eligible for a normal credit card, I will likely advise you to arrange something called a “secured credit card”.
A card whose limit is secured by a deposit of your own money with the card issuer. (Sort of like a rent situation where you pay first and last month’s rent to protect the landlord)
Most, but not all, major chartered banks will offer their clients a secured credit card. If not in your case, other companies like www.capitalone.ca and www.hometrust.ca are two good companies who could be approached.
For anyone who feels their credit is in need of repair, accessing a copy of your current credit history is an absolutely necessary first step.
Here are some myths and tips that you may find helpful:
Ten Credit History Myths
Myth (1) Your credit score stays the same for a month at a time.
No, it can change daily and during the course of a day for that matter. It is a living breathing thing. People think this because when they access an online report they are told they can view it whenever they want for the next thirty days.
Myth (2) I always pay my credit balance in full, so I have an extremely high score.
No, because if your statement balance(s) are high relative to their limits, the high utilization percentage will drag down your score. Day to day that’s not a big deal, but if you are “prepping” your credit history say for a mortgage, you would be wise to pay the balance off a few times a month, or once – a few days prior to the next statement date.
Myth (3) Credit repair firms can eliminate negative, derogatory information from your credit history.
No that is not true. Unless the negative info is there in error, it must stay there for six years from the date of the last activity. (That is in Ontario; each province has its own limits)
Myth (4) Checking my credit score frequently will lower my score.
Not true, as long as you don’t ask a third party like a bank officer or mortgage agent to check. Personal inquiries by you are considered ‘soft inquiries’ and you can do this as often as you like. Some people even check every few days when they are waiting for an important update.
‘Hard inquiries’ will often lower your score – there is no hard and fast rule – depends on your overall profile. I have seen a personal inquiry make no difference, and another time a score dropped over 90 points!!!
Please note there may well be a hard inquiry on your credit history even if you did not apply for credit. Examples include:
- Prospective employers sometimes check your credit history
- If you open a new checking account, there is an excellent chance your credit will be checked
- If you open a securities trading account – even just a cash account and not a margin account, your credit history will usually be accessed
- If you wish to rent an apartment, many landlords will request your credit history
- Some property and auto insurers check credit history too
Myth (5) If I enter into a debt management or debt settlement plan, this will not adversely affect my credit history – and is a big plus versus consumer proposals.
Not true – in fact, a debt settlement plan will look worse for the first year or so as most if not all of your payments are going towards your settlement firm’s fees and NOT to your creditors.
Myth (6) Bankruptcy is a terrible thing to do, it creates a stigma and will stop you from ever leading a normal life again. It’ll destroy your credit history forever.
Not true – it’s a wonderful way to get a second chance and to do things right the second time around. And in Ontario, it falls off your credit report six years after your discharge.
Myth (7) I cannot get a mortgage till at least six years after I complete a bankruptcy or consumer proposal.
Not true – every case is unique, and many people have a mortgage within a couple of years of completion (some much sooner) In fact, recently we arranged a five-year mortgage for a client at 3.85% who completed a consumer proposal one year ago.
And another couple completed their bankruptcies five years ago, and that fact and the negative payment history attached to those debts is still on their credit reports. Nevertheless, we are about to close a new five-year closed mortgage at best rates with an “A lender”.
Myth (8) I can keep an unused credit card if I enter into a personal bankruptcy. This will help rebuild my credit
No, all credit (used or not) must be forfeited when you declare bankruptcy.
It can be different if you are entering a consumer proposal. In my experience, if you have an unused credit card, and you do not owe the card issuer for any other loan product, you can make the argument that card issuer is not a creditor, and thus you need not relinquish that card at the time you enter a consumer proposal.
Not everyone agrees with this though. One trustee wrote to me “All credit card accounts are part of a proposal and as such cannot be kept and used. The only exceptions are third party cards (for example, an employer-issued credit card) that the third party gives permission to keep, and also prepaid credit cards.”
Myth (9) My credit history will not be affected by my spouse’s bankruptcy or consumer proposal.
Technically that is true, but if you have joint debt, then it is quite possible derogatory information will seep into your spouse’s credit history. Best to deal with such things in advance; try to pay off joint debt before you take such a step.
Myth (10) I have to wait till I complete my consumer proposal before I can apply for a new credit card.
Not true, in fact, if you can afford it, you should apply for a secured credit card within a few weeks of your proposal being accepted by your creditors.
I have read and analyzed thousands of such reports in my time. Any of my readers may ask me for a free consultation to review their personal report for assessment and feedback. Submit a request here.
10 Tips to Keep Your Credit Score in Top Shape
Here’s how you can maximize your credit score and have your credit report in tip-top shape all the time:
- Keep your balances as low as possible relative to their limits. In a perfect world, you would always report zero balances even though you are using your cards regularly
- Use your credit cards like debit cards with benefits. Only use them if you can afford to pay off the balance each month. Enjoy their rewards programs, travel benefits etc.
- Exercise your cards regularly, and get in the habit of making multiple payments each month
- You may have one or two preferred use cards, which is fine, but do try to use every available credit facility every few months, no matter how minor the usage
- If you wish to dispute a charge on your credit card, first pay it – you will always get a refund you deserve
- Co-signing a financial product, even a cell phone contract, is like handing control of your credit history over to another person. Are you sure that is what you want to do?
- Make sure you have the “right stuff” – if you only have one $300 secured credit card you are not going to be able to get a mortgage when you need one. If you are not sure, please Ask Ross
- Try to keep new inquiries to as few as possible. Allow people access to your report with great reluctance – don’t be loose
- Make a note of all the credit facilities you have which may have annual fees or balance protection coverage – especially if you don’t use them, you might incur late payment charges and go into late payment status if you don’t realize you have charges on your statement.
- Create an online profile at equifax.ca and monitor your credit history once or twice a year to nip errors and problems in the bud. Order a paid copy, including your score, whenever you need one. The current price is $23.95. Online reports are far easier to read than versions you will receive by mail or in person.
Why Everyone Needs to Have a Good Credit Score
No one ever regrets increasing their credit score. Those who tell you it’s not important are either misinformed or not being honest.
But, I suppose you might never need a decent credit history if:
- You plan to live your whole life in your parents’ home or with friends and other relatives
- You never plan to lease or finance a car
- You don’t care about how much you pay for insurance
- You don’t ever plan to buy a cell phone on a ttwo-yearplan
- You don’t ever want to use a personal credit card
- You don’t plan to rent a car or check into a nice hotel
- You have no designs on home ownership
For the rest of us — probably 99% of the general population — having a healthy personal credit history is essential to our well-being. Especially if we might want to lease a car, rent an apartment, own a cell phone or even own a home one day.
And if we do own a home, we had better do the best we can to maintain (or improve) our personal credit history, since mortgage lenders are watching very (very) carefully.
We all know that credit is a cornerstone of the mortgage application when buying a house. It’s right up there with income and employment, our integrity and the specific property we want to buy. In other words, once you are a homeowner, you must always care about your personal credit history.
Do not neglect it.
Here are some additional benefits to having great credit:
- Your bank may offer you credit limit increases without you having to ask = no inquiry!
- Your bank may offer you an unsecured line of credit at their best rate and terms – personal overdrafts too.
- Mortgage lenders look for ways to say yes, not no, to your application.
- You have an excellent chance of obtaining the lowest possible mortgage interest rates.
- Potential landlords welcome you as a tenant with open arms.
- Car leases and loans become non-stressful exercises.
- Occasionally your credit card issuer will offer you balance transfer promotions at very low interest rates.
- New cell phone deals and low property insurance rates are ‘par for the course’.
- You will be considered a good guarantor for your kids if or when they need a helpful parental hand.
- You’ve always got a conversation starter in awkward social settings.
Some Case Studies…
To illustrate why you should increase your credit score as much as you can, I will share a few recent examples we came across.
Case Study 1: Not enough credit history
Jake and his wife really want to buy their first home and have saved enough for a 5% down payment. He makes very good money as a heavy equipment mechanic.
But he does not own a personal credit card. He got into trouble with a card ten years ago. He paid it off, closed the card forever, and swore them off.
He has had a car loan the past year and a half. But that’s it.
The result: Jake does not qualify for a mortgage now. He needs a CMHC insured mortgage, and they require a personal credit history at least two years old, with two credit facilities ideally.
Case Study 2: Sloppy repayment history
Jerome and his wife own a million dollar home west of Toronto and have accumulated a sizeable amount of debt. Jerome wants to refinance their mortgage and use the low interest rate to consolidate everything into one single payment.
The problem is he has a history of missing credit card and loan payments. In fact, he missed several as recently as four months ago. His personal credit score is only 595.
Result – no “A” lender wants to grant this mortgage. He can choose to take a private second mortgage for a year, planning to consolidate both mortgages after a year of responsible credit management.
Or he can break his current mortgage and put it all together with a “B” lender. He is looking at a mortgage rate of around 4.5% and a lender fee of 1% of the mortgage amount.
Had he been less cavalier about paying his debts on time, he would not be in this mess.
Case Study 3: Consumer proposal – no re-established credit
James and his wife completed a joint consumer proposal eighteen months ago. They have been saving for a house and have a decent down payment.
The problem is they waited too long to begin rebuilding their personal credit histories. They both got a Capital One credit card with $500 limits earlier this year.
They thought that simply completing their proposals on time would rebuild their credit history. They did not understand the importance of NEW credit.
The result being they are probably (still) one to two years away from home ownership. And they both really should get a second credit card.
Case Study 4: Consumer proposal – with re-established credit
Jerry completed his consumer proposal in May of 2017. At the time, his credit score had fallen to only 545. He asked us to help rebuild his personal credit history, so we helped him get two new credit cards and also cleaned up reporting errors in his Equifax report.
We checked in with him six months later to confirm he was staying on track. One year after he paid off his consumer proposal, Jerry wanted to refinance his first mortgage to 80% of the value of his home.
The result was we submitted his application along with his fresh credit report showing a score of 721 – Wowza! And… he was quickly approved for a one year mortgage at 3.79%.
Jerry is a happy camper. In one year, Jerry’s personal credit score jumped from 545 to 721!
Please, please, please do not neglect your personal credit history!
Rather, optimize it as much as you possibly can. It could save you many thousands of dollars in the future and help you live the life you are working so very hard for.
I should also mention, at Ross Taylor & Associates, we are credit history experts, with fifteen years’ experience reviewing, rebuilding and restoring personal credit histories to a pretty glorious state. If you need help rebuilding your credit, get in touch today!