Love it or hate it, credit is a big part of purchasing a home.
Let me start by answering all of your credit questions, right out of the gate. You ready? The answer to all of your credit questions is, “it depends”. If you ask me any question, I’ll likely answer you with “it depends” and then continue asking you a full series of other questions before providing a comprehensive answer.
However, there are some very basic credit rules that I recommend you understand so you can borrow ridiculously cheap money. This is the low hanging fruit from the credit tree.
Chad’s Credit Rules (for life):
- Have credit.
- Understand credit.
- Manage credit.
Chad’s Credit Rule #1: Have Credit.
The best time to start my credit history is 10 years ago. The second best time to start my credit history is TODAY.
Rule number one is actually having active credit. This means having a credit card or personal line of credit registered in my name. This credit tradeline can be joint or individual – but I need to ensure the credit is reported on my credit report.
Let’s chat about cancelling credit …
I hear two common kinds of stories from clients who cancel their credit. One story is people canceling their credit cards or lines of credit for seemingly good reason. This may be due to change of personal banking, or harmonizing family banking/credit. Or they simply do not use credit out of preference and cancel their credit card(s).
The second common story I hear is people cancelling their credit when they get pissed off with a credit card company and knee-jerk cancel the credit card.
Know this …Even if I have a beautiful credit history, but no active credit, that becomes a real problem when qualifying for a Mortgage.
One piece of advice is either don’t ever cancel a credit card or cancel a credit card wisely. If it’s not a huge deal, just retain a active credit card but keep it dormant. If there is no annual fee, that’s ok to just have it sit there dormant.
If I absolutely must cancel a credit card, ensure I have at least one (ideally two) other credit card(s) or personal line(s) of credit that are active.
This is what I mean by “cancelling wisely”. If I only have one active credit card, and I go to a different bank to get a new credit card, I want to have that new credit card active for 24 months before cancelling the other credit card. It takes two years to establish the new credit card with enough history to lend me money (at least for a Mortgage. Auto loans are a different animal).
Side note: being a “card holder” of a spouse’s credit card IS NOT THE SAME as having my own credit card. A card holder simply gets to spend money, but does not get any of the benefit when the loans are paid back on time. If I am setting up a joint credit card, it’s good to know the difference between joint and card holder.
Chad’s Credit Rule #2: Understanding Credit.
Again, let’s take care of the low hanging fruit together …
Understand that I need to make my payments on time. Missed payments happen. Past due payments happen. I’ve personally missed a credit card payment and made a payment past my due date.
Not many people are perfect in this realm of life. Ok, missed payments happen, but WHEN they happen is important to understand …
In the months leading up to applying for a Mortgage I need to be hypersensitive to diligently managing my credit. A recent missed payment is significantly more detrimental to my credit than a missed payment years ago.
Here is another piece of low hanging fruit to understand about credit …
The more space between my credit balance (how much I owe) and the limit of my credit card the better! This is called “credit utilization”. Ideally I have a low credit utilization ratio which means a low balance relative to my limit.
I’m also giving you permission to increase the limit of your credit card(s). If credit is extended to you, take it. The minimum credit limit, on a credit card, Mortgage lenders are looking for is $2,500. However, there is no harm in having a $15,000 or $25,000 limit on a credit card.
Mortgage lenders think of credit limits like this …“this other credit agency knows this person and has been dealing with them for years and extended them a personal credit limit of $20,000. They must be creditworthy”.
(I’m sure this is exactly what the Mortgage underwriter is thinking, LOL)
Don’t be fearful of increasing the limit of your credit card. This leads to the next rule …
Chad’s Credit Rule #3: Manage Credit.
As mentioned, things happen in life that lead to bad credit happenings. For some this might mean an isolated missed payment. For others, that might mean bankruptcy.
In 99% of all past credit blemishes, it does not mean people are living a life sentence living in the credit penalty box (well, a double bankruptcy might be the 1%). The Mortgage lenders are more interested in recent credit history, or what happens after my credit blemish. Credit history matters. But recent credit history is critical.
Some of the best credit reports I’ve seen are from clients who spend less than their incomes can support (told you this is the low hanging fruit). This helps them make their payments on time and have low credit card balances relative to their limits.
I encourage people to always make at least the minimum credit card payment, on time.
Conclusion:
I graduated from Western Canada High School. I took College courses at MRU. I graduated with a commerce degree from the Sobey’s school of business at Saint Mary’s University. And I did not learn about credit at any of these institutions.
I hope this has been a helpful review of the credit fundamentals. Or a bit of extra fundamental credit information for you to make good decisions.
If you have any credit questions, and want to test the “it depends” answer theory of mine, connect with me :-).
Talk soon,
Chad Moore
403-809-5447
chad@canadamortgagedirect.com
