When you are applying for a mortgage, or in fact, any type of loan, one of the ways the financial institution studying your application assesses your credit worthiness is by checking your credit history and the credit rating. Despite the importance lenders place on individual credit scores, it is surprising how many people have no idea about their personal credit rating and are unaware of the factors that affect their credit rating.
In Canada, the consumer reporting agencies typically consulted by financial institutions to review credit ratings are Equalfax and MarkUnion. These agencies collect consumer credit history from various credit institutions, as well as details of other credit incidents, such as bankruptcies and charges.
When you apply for credit, the lender contacts these organizations to view your credit history and uses this information to determine the potential risk of non-payment that you represent as a borrower. The following categories are usually assessed to determine your credit rating.
Payment habits
As you would expect, track record is considered an important indicator of future behavior and for this reason, it is one of the most used weighting factors to determine your credit rating. If your payment habits on time leave something to be desired, you can expect this fact to be factored into your credit rating.
Use of credit
Closely related to payment habits is the use of your credit; this category tracks the portion of your available credit that you tend to use. For example, if you pay only the minimum amounts on your credit cards and let your balances accumulate near your credit limit, you will get a low score for this category.
Types of Credit
There are many types of credit that can appear on your credit report, and the impact each type of credit has on your credit rating varies. The types of debts that really affect your rating include personal loans and car loans, lines of credit and credit cards.
Surprisingly, student loans and mortgages have very little impact on your rating, although the details of these loans may be included in your credit report. Even if your credit rating is very good, be aware that nothing prevents the lender from deciding that you represent a greater risk because of the failure to make payments on a student loan or on a mortgage.
Repeated credit requests
Having many credit applications can have a negative effect on your credit rating. Similar to using credit, having multiple sources of credit available, even if the balances are zero, will be considered as potential debt by the financial institution, which can result in a lower rating.
No established credit
Finally, the lack of established credit can also affect your rating. It is not necessarily your fault, but without a positive credit management history, it is difficult for a lender to make an informed decision regarding your ability to manage debt.
To establish your credit history, consider applying for a credit card, even if it has a very low limit. Use the card to create a transaction history, but be sure to pay off the balance every month. This will help you build your credit history and demonstrate that you are a responsible borrower.
