Preparing for Financing
Establishing good credit is key to starting on the right track...
Preparing to get financing…
If you fit into ONE of the following categories and are preparing to get financing for a new home purchase or renovation project, this article has valuable information that can help you out.
- I am new to Canada
- I have had a previous bankruptcy
- I have always dealt in CASH
- I am fresh out of school / college with no established credit
- I am newly single
In these specific instances it is likely that a check of your credit bureau (also know as a credit report) will reveal a beacon score reflecting the letters “N” or “R”. However, even if you have a very minimal credit history and an extremely high score, say in the 800s (termed a “forced score” in the industry), you will need to read this article and take action.
How do you check your own credit score?
Visit www.equifax.ca and order the POWER SCORE report for $23.95. (Note: We are not in any way associated with Equifax.)
What are the lenders thinking?
Lenders look at the credit bureau in the following way. First they start with the beacon score. In these economic times, if you do not have a numeric score but instead an “N” or an “R,” it is unlikely, but not impossible, that you will qualify for a mortgage.
On the other end of the scale, if you are only a few months into using your very first credit card, (and assuming you have no other consumer debt, such as a department store credit card, a car loan, etc.), you may have a very high—likely unrealistic—score. Over time, this score will correct itself, but in the meantime it could be another reason for a lender not to offer you credit.
So where do you start? How do you establish a good credit score while still keeping your options open?
STEP 1 – Establishing credit
One way is to apply for a pre-paid credit card, for example, the one from Home Trust (www.hometrust.ca). Once you complete the application form accompanied by a refundable $1,000 security deposit, Home Trust will send you a Visa card with a $1,000 credit limit.
Rationale: It may be easier to qualify for a credit card that you have to pay for instead of a “free” Visa or Mastercard.
STEP 2 – Use the credit card, but don’t abuse the credit card
Every month, use the card to purchase necessities such as groceries and gas, and every month pay it off, or at the very least make the minimum payment required. Repeat this process each month. DO NOT…
• Rack up debt
• Exceed the $1,000 credit limit
• Miss ANY of the regular monthly payments
Let me reiterate—I am not advocating you “rack up debt.” Simply use the card. Do not abuse the card.
Rationale: This type of credit card “reports” to your bureau each month. By this we mean it sends information to your bureau reflecting how you have managed your debt. It basically looks at if you are being responsible by making your payments on time. You can see that by using a credit card that reports every month, you are establishing a credit score far quicker than you would with a “free” card that may report only every 2–3 months.
So why not go out and finance the purchase of a car to establish credit?
Yes, this would certainly establish and contribute to a credit score, BUT “most” lenders would view this as a big fat liability. A $25,000 car is a $25,000 liability and in this case, it would negatively affect your ability to borrow money for the purchase of a home. Now, I said “most” lenders as there are some lenders who will view this more as a necessity rather than as a liability. However, if you truly want to get financing for your home or renovation project, you will want to keep your options open, so we would not recommend this as a means of establishing credit.
Final thoughts
After you finish reading this article, you may think, OK, this all sounds great, but I am not planning to apply for a mortgage anytime soon. While this may be true, your credit score, or lack thereof, will follow you. It only makes sense to prepare for the future by establishing a good credit rating as soon as possible.
Matthew P. Buxton
Matthew is an independent mortgage broker, a member of the Real Estate Council of Alberta and is the owner of Alberta Mortgage Solutions Inc. He can be reached at 403-836-2674. For FREE financing advice, visit his website at www.abmsi.ca
If you fit into ONE of the following categories and are preparing to get financing for a new home purchase or renovation project, this article has valuable information that can help you out.
- I am new to Canada
- I have had a previous bankruptcy
- I have always dealt in CASH
- I am fresh out of school / college with no established credit
- I am newly single
In these specific instances it is likely that a check of your credit bureau (also know as a credit report) will reveal a beacon score reflecting the letters “N” or “R”. However, even if you have a very minimal credit history and an extremely high score, say in the 800s (termed a “forced score” in the industry), you will need to read this article and take action.
How do you check your own credit score?
Visit www.equifax.ca and order the POWER SCORE report for $23.95. (Note: We are not in any way associated with Equifax.)
What are the lenders thinking?
Lenders look at the credit bureau in the following way. First they start with the beacon score. In these economic times, if you do not have a numeric score but instead an “N” or an “R,” it is unlikely, but not impossible, that you will qualify for a mortgage.
On the other end of the scale, if you are only a few months into using your very first credit card, (and assuming you have no other consumer debt, such as a department store credit card, a car loan, etc.), you may have a very high—likely unrealistic—score. Over time, this score will correct itself, but in the meantime it could be another reason for a lender not to offer you credit.
So where do you start? How do you establish a good credit score while still keeping your options open?
STEP 1 – Establishing credit
One way is to apply for a pre-paid credit card, for example, the one from Home Trust (www.hometrust.ca). Once you complete the application form accompanied by a refundable $1,000 security deposit, Home Trust will send you a Visa card with a $1,000 credit limit.
Rationale: It may be easier to qualify for a credit card that you have to pay for instead of a “free” Visa or Mastercard.
STEP 2 – Use the credit card, but don’t abuse the credit card
Every month, use the card to purchase necessities such as groceries and gas, and every month pay it off, or at the very least make the minimum payment required. Repeat this process each month. DO NOT…
• Rack up debt
• Exceed the $1,000 credit limit
• Miss ANY of the regular monthly payments
Let me reiterate—I am not advocating you “rack up debt.” Simply use the card. Do not abuse the card.
Rationale: This type of credit card “reports” to your bureau each month. By this we mean it sends information to your bureau reflecting how you have managed your debt. It basically looks at if you are being responsible by making your payments on time. You can see that by using a credit card that reports every month, you are establishing a credit score far quicker than you would with a “free” card that may report only every 2–3 months.
So why not go out and finance the purchase of a car to establish credit?
Yes, this would certainly establish and contribute to a credit score, BUT “most” lenders would view this as a big fat liability. A $25,000 car is a $25,000 liability and in this case, it would negatively affect your ability to borrow money for the purchase of a home. Now, I said “most” lenders as there are some lenders who will view this more as a necessity rather than as a liability. However, if you truly want to get financing for your home or renovation project, you will want to keep your options open, so we would not recommend this as a means of establishing credit.
Final thoughts
After you finish reading this article, you may think, OK, this all sounds great, but I am not planning to apply for a mortgage anytime soon. While this may be true, your credit score, or lack thereof, will follow you. It only makes sense to prepare for the future by establishing a good credit rating as soon as possible.
Matthew P. Buxton
Matthew is an independent mortgage broker, a member of the Real Estate Council of Alberta and is the owner of Alberta Mortgage Solutions Inc. He can be reached at 403-836-2674. For FREE financing advice, visit his website at www.abmsi.ca
