Credit Basics

Credit Basics

What Lenders Want to See with Your Credit

The purpose of a credit report is so lenders can see your credit history. Underwriters at the banks and other lending institutions review your credit history and decide if they will lend to you. Your credit bureau is looked at when you’re applying for any loan, lease, credit card, or any other form of credit.

To qualify for the best mortgage rates, lenders want to see:

  • 2 revolving credit trades (credit cards or lines of credit)
  • With limits above $2500
  • 2 years of history of using them
  • Consistently paid on time
  • Balances well below their limits

If you are new to Canada there are programs for those who have not yet established Canadian Credit.

For everyone else, if you don't have credit established yet, a co-signer is still an option.

Credit Score

Your credit history is more important not the actual credit score. If you have only a small loan or one credit card with a low limit your credit would be considered thin.

Credit "Thickness"

Credit thickness refers to the number of “trades” on your credit bureau. A credit card, loan, or line of credit are all considered credit trades. You want at least 2 revolving trades. More on trades below.

Credit trade types

There are two credit trade types: Installment and revolving.

Installment Credit Trades

These have a fixed payment amount that comes out of your account automatically. Examples: personal loans, auto loans, and student loans.

Revolving Credit Trades

These require you to make a payment yourself, on time, every month. Examples: Credit Cards and Lines of Credit.

Revolving credit trades are important and you should have at least two. Two credit cards are best.

If your credit limits are currently less than $2500, call and ask for them to be increased.

Ideal credit History for ‘A’ lenders

Here is a more detailed breakdown of what lenders want to see when looking at your credit bureau.

2 revolving credit trades (credit cards or lines of credit).

- If you only have one credit card, apply for a second credit card or line of credit.
- If you have been bankrupt in the past get a secured credit card (see re-establishing credit section below).

With limits above $2500.

- Ask your bank for your credit limit to be increased if less than $2500.
- Usually they will accept your request instantly.
- Otherwise, contact your credit card provider every few months and ask for them to increase it.
- Getting your bank to increase your limit above $2500 is usually not a problem.

2 years of history of using them

- Just having the credit cards is not enough.
- You must use them.
- If you prefer paying with cash, make a decision to use the credit card at least once a month.
- Some people like to use their credit card only to buy gas for example.

Consistently paid on time

- Don't be late to make your payment!
- Make at least the minimum payment.
- Ideally, you pay the credit card off in full every month.
- When you pay in full there is no interest cost to you. There are only interest charges if you carry a balance.
- If you are not set up with online banking: get it set up!
- A good way to ensure you’re never late is to go into your online banking and make a payment every 2 weeks or when you get paid.
- Remember that credit cards have very high interest rates and you don’t want to get trapped in credit card debt. Don’t buy anything you can’t afford.

Balances well below the limits

- If you do carry a balance on your credit card or line of credit make sure you never go over your limit!
- Ideally, you don’t ever want to be too close to your limit either. It will hurt your credit if you are continually carrying a balance month to month and that balance is riding the limit or over the limit.

Establishing Credit as an Aspiring Homeowner

Start by getting two credit cards. Get one from wherever you currently bank. Get another from another bank of your choice. You can also apply for a credit card online.

Next, start using your credit cards at least once a month. Don’t get out of control.

A good way to make sure you don’t get into credit card debt is to pay them off immediately upon using them with your mobile phone app. Do this instead of waiting until the end of the month while getting used to using your new credit cards.

Continue to use your credit cards regularly and pay them off on time every month.

When you apply for your credit cards ask for limits of $2500 or more.

If they only approve you for a $1000 limit to start that is okay. Every three months call the bank and ask for them to increase your limit.

NOTE: Exceptions can be made when your credit is less than ideal but your application is strong in other areas like income or assets. Contact us and we will tell you what is possible.

What if I have bad credit?

If you have bad credit because you have collections on your bureau, lots of late payments, etc. you may not be a candidate for ‘A’ lending. Thankful there are still other options for you.

Subprime (or ‘B’ ) lenders offer more flexibility for qualifying with higher rates. We can place your mortgage using one of these lenders whether you are purchasing or need to refinance to consolidate bad debt.

Once you have re-established your credit using the method above, we can refinance the mortgage and switch you to an A lender so you can enjoy the best rates. This is often done at renewal time.

A cosigner can also be an option to strengthen your mortgage application and qualify for ‘A’ lending.

Bankruptcy and Consumer Proposals

If you are currently considering doing a bankruptcy or consumer proposal this is what you need to know:

A bankruptcy will wipe out all your debt. With consumer proposals, on the other hand, the company facilitating it will negotiate on your behalf to reduce your debt significantly. For example, if you have $50K debt, with the consumer proposal you may only need to pay $20K over a 3 to 5 year payment plan.

For mortgage lending, a bankruptcy and a consumer proposal are considered the same. And they need to be discharged for 2 years and credit re-established before you can get a mortgage again.

Choosing bankruptcy will allow you to re-establish credit faster because you can have your bankruptcy discharged after 1 year and then immediately begin re-establishing credit. With the consumer proposal, you can’t begin to re-establish credit until it has been paid off, which often takes 3-5 years.

Re-establishing credit

After a bankruptcy, it’s possible to be creditworthy enough to get a mortgage within 3 years if you do everything right.

Reestablishing your credit after a bankruptcy:

  1. After 1 year, have the bankruptcy discharged. This is not done automatically you need to do it.
  2. Immediately apply for two secured credit cards. Home Trust is one bank that can offer secured credit cards. Ask your bank for the other. You will need to give cash as a security. Most likely you will get a credit card with a $1000 limit and need to put between $1000 and $2000 down as a security.
  3. Use your credit cards regularly and pay off on time for two years.
  4. After 1 or 2 years you can ask to have the security amount returned to you and your credit limit increased.
  5. If they won't do it, continue to ask every 3 months until your security amount has been returned and your credit limits to be above $2500 for each.
  6. After two years have passed you can now qualify for mortgage financing.

If you haven't had a bankruptcy and just need to improve your credit:

  1. Never miss any payments for credit cards, loans, and even cell phone bills.
  2. Pay any past collections and have them removed from your credit bureau (I can help with getting them removed).
  3. If you only have one credit card get a second one.
  4. Have limits increased to at least $2500.

Contact us if you have any questions.