Sorting Fact From Fiction When it Comes to Your Credit Report
Credit is one of three components it takes to get a mortgage and is much like your financial report card. Many people know they need credit to get a mortgage but they don’t know what their score is, what it means, how their credit is reported and why we use it. There are many myths that currently surround credit bureaus that we want to help clarify – after all – how can you make sure you have great credit when you don’t have all the information!
Your credit report is a history of how consistently you pay your financial obligations. The report is created when you first borrow money or apply for credit. There are many misconceptions about what actually reports or shows up on your credit report.
Let’s start with what actually reports to your credit bureau:
-Credit Cards / Retail Cards (Ex. Visa Card / HSBC or Canadian Tire Card)
-Lines of Credit: Secure & Unsecure
-Personal Loans / Student Loans (Ex. Car loans, Business loans)
-Consumer Proposals / Bankruptcy
-NEW – Cell Phone Contracts and Accounts
What is NOT reported on your credit bureau:
-Utilities (Hydro / Water etc)
-MORTGAGES – A secure line of credit will show up but not the actual mortgage
-Credit Cards where you are the secondary applicant (Ex. Your spouse adds you to their credit card – since you are not the primary card holder it only shows up on their report – not yours)
-Bank Accounts / Savings / Investments
Sorting Fact from Fiction:
Fiction: The more money you make, the better your credit score will fare.
Fact: Your income has nothing to do with your credit score. It’s not reported to the credit bureaus or listed on your credit report. Your current and previous employers are listed on the report as well.
Fiction: Once you’ve paid a past-due debt, it will drop off of your credit report.
Fact: Late payments and other negative information remain on your credit report for seven years from the date of the initial late payment. One late payment on your cell phone bill or credit card will show up on the report. Bankruptcies typically stick around for 10 years from the bankruptcy filing date. While that black mark may continue to soil your credit report, however, its effect on your credit score will lessen over time.
Fiction: Practicing a cash-only / no credit policy will help your credit score.
Fact: Having good credit is a function of having credit available to you and using it responsibly. If you don’t have or use credit, you may have no credit history at all and if you do, your credit score won’t be as good as someone who consistently demonstrates responsible use of credit over time. The best example you have probably heard us use before is if you attend school but never hand in a report or project how will the teacher grade you?
Fiction: Pulling your credit report will lower your credit score.
Fact: Pulling your credit report might lower your score by one or two points which is NEVER the difference between getting you approved or not. Shopping around for a mortgage, car loan or credit cards and pulling your bureau multiple times WILL lower your score however. That’s the great thing about using us to shop for your mortgage – we pull your bureau once and use it for all our lenders while if you shop yourself to multiple banks each bank will be an inquiry and can affect your score.
Fiction: My bankruptcy is in the past it shouldn’t have anything to do with my ability to carry a mortgage or buy a home.
Fact: How you do anything is how you do everything. Your credit report shows your prior bankruptcy or consumer proposal because it looks at how you have handled debt in the past. When lenders / banks are deciding to loan you money to buy a home they want to know that you can afford the payments and make them on time. Essentially they are asking if you couldn’t handle having X amount of debt how will you handle a mortgage?
Fiction: Closing your accounts will help your score.
Fact: Closing accounts typically won’t help your score and could possibly dent it. The results can shorten your credit history eventually and leave you with a smaller amount of available credit, both of which can harm your efforts to build better credit. The length of credit history shows how seasoned of a borrower you are, so the more positive experience you have, the better. Having more available credit helps to keep your utilization rate low. The utilization rate is how much available credit a borrower uses; the lower the percentage, the better.
Fiction: Opening numerous accounts will help improve your score.
Fact: Some consumers with credit problems believe opening many accounts will be proof that they can handle credit. Actually, it has the opposite effect. What lenders will see is a boatload of new, hard inquiries on your credit report. Those inquiries will deduct from your credit score, while lenders will worry that you’re in dire financial straits and desperately need access to credit to make ends meet.
Building and maintaining good credit is a mix of science and art. While hopefully this has helped to shed some light onto the myths that surround your credit bureau but you will have to wait until next week for more detail on HOW to build and maintain good credit.