Credit Rating

By Marcia Luke

If you're wondering what your credit rating has to do with buying your home, let's just say a lot. Your credit rating allows you an advanced sum of money, in the form of credit cards, loans or mortgages, with a promise from you that you'll pay it back. What your credit rating does is tell lenders how good you are at keeping that promise based on your credit history with other lenders.

When applying for a mortgage to purchase your new home, your credit rating will be checked. Your rating isn't only about credit cards, it can also involve your phone hook-up, personal cheques you've cashed or written and even how you use debit cards. If your previous payments haven't been made or have been late than your credit rating will be less than excellent.

Credit bureaus collect credit information about consumers, generally selling it to other businesses, employers and insurance companies. They collect this information from forms you fill out when applying for credit or public records such as bankruptcies and foreclosures and from lenders or collection agencies.

Credit ratings are measured two different ways. One is the FICO score, a number between 300 and 850 that indicates how reliable your credit rating is at a given time, the higher the better. You can also be rated on a scale from zero to nine. Zero is the equivalent to no credit, meaning you don't have a loan or credit card on which to base a rating. One is the best possible credit rating, a symbol that you pay everything on time, while nine is considered bad debt and/or uncollectible loans or money owing. That numeric ranking will be preceded by an "R" or "I" for revolving credit (credit cards) or instalment credit (car payments or mortgages), depending on what type of payments you are making. Your credit score is based on your credit history, but can also be affected by how much money you currently owe, the length of time you have been using credit, types of credit you have available and how many times or ways you have pursued credit. A good credit rating means that you have been paying off your debts quickly, maintaining low levels of indebtedness, hold a long credit history and refrain from constantly applying for more credit.

You can check your credit rating for free if you have been turned down for a loan or if you are unemployed, planning to apply for a job within 60 days, receiving welfare or believe that your report contains errors as a result of fraud. Start with organizations like Equifax Canada,TransUnion Canada and Northern Credit Bureaus to learn about your own credit rating. You should most certainly check your credit rating before applying for a loan or mortgage to see what lenders will be looking at. This way you can remedy any problems beforehand, minimizing your chance of being denied.

What does a poor credit rating mean for you? Because you are considered high risk, a risk premium must be added to your loan or mortgage. You will end up paying more interest for the same loan as someone with a good credit rating. If your credit history is extremely poor, then you won't be able to borrow money at all. Bankruptcies can be removed from your record after 10 years and most other marks on your credit history can be removed after seven years. Be vigilant in following up on these, as it is very important these don't remain a part of your credit history after the appropriate time. Keep on top of any bad credit to avoid extra hassle when trying to correct the situation.

Although it takes some time and effort, contesting errors on your file is well worth the work. The mistake will usually be corrected and your credit rating changed accordingly. If you don't follow up then you'll have to work long and hard at repairing a bad credit history that was not your fault to begin with.

So what's the bottom line? Though it's never too late, if you want the house of your dreams it's good to give it some advance thought so that your responsibility and credibility can be working towards it now.