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Top Tips to Get The Best Credit When You Need It

March 18, 2014

Excited about a big ticket purchase in your future?

home_buyingMaybe a new car, your first home or a much needed kitchen renovation?

If you’re young, chances are pretty good that you’ll need to finance a large portion of your purchase. When it comes to needing a loan, most people know that the lower their interest rate is, the less they will pay and the faster they will become debt free. However, we may be blissfully unaware of the state of our credit and it’s impact on this new loan.

Do you know how good a credit risk you are? Will lenders loan you money at their most attractive and competitive interest rates?

Jack can’t believe he’s turning thirty. Seems like yesterday that he graduated from university and got his first real job. Eight years and three jobs later, Jack has his heart set on buying his first condo. While Jack has managed to save a decent 20% down payment, he was a little surprised after visiting his friendly banker. Turns out that Jack’s credit history was mediocre at best and now he’s faced with a higher than expected interest rate on his proposed mortgage.

Looking back over his twenties, Jack realizes he enjoyed a pretty good life. He worked hard on his career but not so hard on his money. Because Jack earned a decent salary, he felt entitled to treat himself to luxuries he never had while in school…a new car, 3 big vacations to Europe, Asia and Brazil and regular dinners and drinks out with friends. Often putting his purchases on one of his credit cards, he was not usually prompt at paying them off. Jack is quick to point out what he would do differently if he could relive his twenties again. “I would pay more attention to my finances and be discriminating about where/how I spent money.” admits Jack. Like many people, Jack was lazy when it came to paying his bills and never thought twice about what it meant for his future.

Getting your credit in order can shave hundreds or thousands off the ultimate sticker price of a big ticket item. The catch is you need to start paying attention to your credit VERY EARLY. Ideally, many years before your big purchase. From the moment you get your first credit card or begin paying bills in your name, your credit history clock starts ticking. Likely, you may just be entering university and completely oblivious to your new found financial responsibilities. High school prepares you well for further education but it does little to help you manage your new world of personal finances.

Here are 5 factors that impact your credit worthiness together with tips to help you build the best credit rating possible.

1) Payment history– Build your credit history early. Apply for a few credit cards, use them and pay your bills in full and on time each month. If you can’t pay in full, at least pay the minimum amount. Even a payment that is one day late can negatively impact your credit rating.

2) Use of available credit– Lenders like you to have credit but don’t want you using too much of it. A good rule of thumb is to use <35% of your available credit. Also, limit the number of times you apply for credit in a short period of time. This could indicate that you have money problems.

3) Length of credit history– Lenders prefer a long, consistent and clean track record of paying your bills. Negative information (like short or missed payments) about loans, credit cards, bank accounts and NSF cheques can remain on your credit report for 6-7 years. Therefore, mistakes you make when you’re 20 stay on your record until you’re 27! Note that your credit history also includes telecom accounts (i.e. cell phone, internet).

4) # of credit inquiries– The more inquiries from others requesting your credit report, the more wary a lender becomes- it can be a sign that you are living beyond your means.

5) Types of credit– Have a mix of credit types (i.e. mortgage, line of credit, credit card) but don’t go overboard. Be careful about cancelling older cards and applying for new ones. This can also indicate to lenders that you are having financial difficulties. Keep an older credit card or account open and use it periodically.

For more information on credit reports and scores, please read this excellent article on the FCAC’s website entitled Understanding Your Credit Report and Credit Score

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