A credit report document with a high credit score, sitting on a desk with a pen and keyboard

Building Your Credit Score

Matthew Jackson Mortgage Tips

As you go through the process of buying a home, you will be hearing a lot about credit scores. If your credit score is something you’ve never really paid much attention to, you’re going to have to change that! 

In this blog post, I’ll be focusing on what most banks want to see for credit when you’re applying for a mortgage loan. I’ll also discuss how to build that credit if you don’t currently have any. 

 

What is a credit score?

A credit score is a numerical expression based on an analysis of a person’s credit files. It represents the credit worthiness of an individual. The score is one way that banks, credit card companies and other institutions assess the likelihood that you will be able to pay off any debts you accumulate.

A score is generally between 300 and 900. It’s calculated using the information in your credit report, including your payment history, the amount of debt you have and the length of your credit history.

closeup of hand holding fanned out credit cards, in reference to building your credit score

Although credit scoring models vary, credit scores from 660 to 724 are considered good. 725 to 759 are considered very good and 760 and up are considered excellent. 

The higher the credit score, the more lenders are confident in your ability to repay a debt. 

 

What banks want to see

In most cases, the banks will want you to have two sources of credit, established for two years or more. When I say credit sources, what I mean is at least one credit card and either a loan or line of credit. 

That is what the banks prefer, with the credit card having a limit of $2,500 if you have had it for 2 years or more. If less than two years, banks want to see your limit at $5,000 or higher. There are exceptions where you do not have to have a credit card, but the banks prefer you to have one so they can see you are able to manage a voluntary and variable payment. Whenever your credit card company offers you a credit increase, it’s important that you take it. Accepting the credit limit will allow your credit score to improve because your debt ratio grows smaller with the amount of credit you have available. If you continue to pay it off monthly. 

If you don’t have a credit card but you have shown a long history of having a line of credit and a loan or several loans with a great repayment history, this normally works too.

Banks will want your credit score to be between 620-650 or above when getting approved for a mortgage. But, it’s recommended to have 680 or above when applying for a mortgage. They will also put into consideration whether you have any collections in your name. 

 

Payments and missed payments

While electricity bills, cell phone plans and your internet service don’t improve your credit, they can damage it if you don’t make payments on time or miss payments. It can also significantly damage your credit if you miss a payment or two on your credit card, even if there is only a small balance. The same goes for loans or your line of credit.

Keeping balances on your credit card or line of credit isn’t a bad thing, depending on how high the balance is. Keeping a high balance on your credit card or line of credit will lower your credit score. 

For example, if you had a card for $700 and the balance was always around $600, that would lower your credit score. It would be the same if it were a $10,000 credit card and your balance was always near $10,000 or even $8000. The best practice is to use it and keep the balance below 50% or pay it off each month.

 

When to check your credit score

You can check your credit score through a number of online softwares. This is known as a “soft check” and will not damage your score. The score will not be the exact one that a “hard check” will give you through a bank or a mortgage broker, but it will give you an idea of where your credit is at.

Ways to get started on building your credit score

There are many different ways to start building your credit. Each one is important and should be considered when planning to build your credit.

  1. Get a credit card.
  2. Pay all of your bills on time, every time.
  3. If you have to leave a balance on your card, keep it well below the limit.
  4. Keep credit card accounts open. Closing an account could negatively affect your credit score while you’re trying to build your credit and get approved for a mortgage.

Reach out to me with any questions

The long and short of what the banks want to see is that you are able to manage your credit and not be late on payments.

I hope this information helps you with building your credit score. If you have any more questions about credit, I’m happy to answer them. Please give me a call or fill out the form below

 


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