Improve your CREDIT SCORE in 3 – 6 months!


Understanding the Credit Score

 As most of rent to own tenant applicants have poor credit with blips in the past, it is important to understand how the score is created and key factors that are measured.  This is so we can recommend improvements so you can qualify for a mortgage at the end of the rent to own term.

Remember your goal is to get the score from where it is now to over 620 to qualify for a mortgage and with a few easy steps, we can achieve that in the time it takes on a Rent to Own Agreement.  However, it’s important that you start to action on these steps immediately.  Any delay could result in a delay in you owning the property yourself and being able to qualify for a mortgage.

 Scores are calculated based on five key areas.  Below is a chart for your reference and then below I have highlight the areas that we need to address on your own credit bureau;

FACTOR

WEIGHT

POINTS

Payment HistoryBankruptcies, late payments, past due accounts and wage attachments, collections, judgements

35%

315

Amounts OwedAmount owed on accounts, proportion of balance to total credit limit

30%

270

Length of Credit HistoryTime since accounts opened, time since account activity

15%

135

New CreditNumber of recent inquiries, number of recently opened accounts

10%

90

Types of CreditNumber of various types of accounts (credit cards, retail cards, mortgage, line of credit, loans etc.)

10%

90

POTENTIAL TOTALS

100%

900

Rent to Own Application and Credit Score Improvement

Rent to Own Application

Payment History

Payment history accounts for about 35% of your credit score.   This will include payment history on such items as bankruptcies, late payments, past due accounts and wage attachments, collections, judgements, etc.

It makes sense that this would be a top factor; since someone with a long history is of never missing a payment is likely to continue to be a safe person to lend money to.

If you do have negative marks on your credit score, three factors will determine the size of the deduction to your credit score:

  1. Time Since The Event – how long ago did you miss a payment? If it was a long time ago, and you have a good payment history since that time, it will not affect your score very much. Whereas a recent missed payment will cost more against your credit scoring.
  2. Number of Missed Payments – obviously matters. One missed payment in ten years of good history won’t matter very much, but the more missed payments in your history, the more risky you are seen to be and this will be reflected in a lower debt score.
  3. How Bad Was The Blunder? – being late or missing one credit card payment is a small deduction.  If you defaulted on a payment or it went to collections, this has a very negative affect on your credit rating.

If there are no active accounts, then you may also need to get some new credit accounts such as obtaining a secured credit card and one other loan or small line of credit to rebuild the credit score up over the next year and beyond.  The best way to start is to apply for a Secured Credit Card where they require a $500 deposit that is basically put into a GIC in your name and then in return you are issued a credit card with a limit of $500.  IF you default on the credit card payments, they can then cease the GIC for re-payment.  However, after one year, if you have made your payments on time and kept the credit card in good standing, you are given the GIC back and they release their right to access it.    This is the easiest and cheapest way to obtain new credit history as the major banks and lenders are unlikely to assist you at this time.

 Amounts Owed

It’s important to keep the balances outstanding to less than 75% of the available credit limit that you have.  If more than 75% of your credit limit is used each month, then your score actually drops.  We recommend that any credit card you are issued or have (secured or unsecured), you keep the balance owed in relation to the credit limit below 75% to increase your score.  For example, if you have a credit card with a limit of $500 don’t allow the balance to go over $375 (75% of $500) at any one time.

 Length of Credit History

This metric accounts for about 15% of your credit score, with favorable weight going to those who have had credit for the longest time. The reasoning behind using time as a credit score factor is because in time it is easier to establish patterns of behavior.

Even if someone has never had a credit incident (a late payment for example) but they have only had a credit card or loan for a short period of time, they may not have encountered any of the critical life events that can cause major stress.

Credit statistics show that people with the highest ratings for example, have not missed a payment even when they have lost their job or been ill for extended periods.

 New Credit

The number of recent inquiries impact your score negatively if you have too many.

 Acceptable Limits: Less than 4 to 6 enquiries in the last 12 months is within acceptable limits; however we recommend you continue to limit the number of people that pull your credit bureau in the future.

Unacceptable Limits: More than 6 enquiries in the last 12 months are above an acceptable number and will impact the score negatively.  We do not suggest you allow anyone else to pull a credit bureau on you unless it is absolutely vital.

Credit Score

Rent to Own program Credit Improvement

Types of Credit

There are two major types of credit: revolving and installment.

Installment loans are items like car loans and mortgages. Revolving are credit cards and the like where even if you pay them in full, you still retain the credit to use it again. Generally credit cards are seen as higher quality revolving credit, than department store cards. And mortgages are seen has higher quality installment credit as they are more difficult to obtain in Canada, however mortgages may not appear on your credit bureau at all depending on the lender and type of mortgage you have.  The type of credit you are using represents about 10% of your score, and a higher score is given to people with a blend of credit from various sources. This is seen as a reflection of trust, due to each credit card or loan being seen as an endorsement from a different company.

I hope this gives you good information about your credit score and how to improve it. Please give me a call and we can discuss how you can improve your personal credit score.

Tags: ,