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What is Credit? How to Repair it… Credit Repair

Your credit is one of the most important things that a lender looks at when evaluating you and your application for a mortgage. To many people this is an unfair examination of factors that are often beyond your control. While this might be true, it is also true that some people manage to maintain perfect credit through all sorts of life’s obstacles. How do they do it? That is what this report is going to outline in specific detail. By the end of reading this report, you will have a detailed action plan that you can put into practice to begin to rebuild your credit immediately.

Note, this is not an overnight process. Building good credit takes times. Sadly, destroying it can be done virtually overnight. If you have already written an offer on a house and are trying to find a way to quickly shoot up your credit score, I’ll be honest with you: it isn’t possible. However, if you want to get your credit in shape so that in 6 months to a year from now you are well positioned to purchase a home and continue building a solid credit history, then you are the target audience for this brief write up.

WHAT IS A CREDIT ‘SCORE?’
There are really two elements to your credit. There is the score (called a ‘Beacon Score’ in Canada and a ‘FICO Score’ in the U.S.), and then there are the ‘Trade lines.’ Let’s address each in turn:

Beacon Score
Your Beacon Score or ‘Credit Score’ is the first thing that a lender looks at. It is a mathematically derived number that takes into account the number of accounts that you have, the length of time they have existed, the amount owing, the percentage of the credit limit being used, and any collections / judgments against you. The theoretically score ranges from 300 (low) to 900 (high). However, rarely are people below 480 unless they are in the midst of a financial crisis, and rarely are people above 820 just due to the way the formula works.

Most people with decent credit have a score of around 680. This is a solid score that gets you access to virtually EVERY lending program at full discounts.

There is NO fast way to boost your credit score. Each month, the different creditors you have report the current status of your loan / credit card / account. They report randomly and at varying days of the month. If you happen to be in arrears on the day they report, then you will show as a late payment even if it is only one day late! This system is in place to prevent people from manipulating the credit score. There is no one you can contact to boost it quickly, and there is no trick that will run it up fast. Credit, like a personal reputation, takes a lot of time and effort to build, but only a single mistake to harm.

Trade Lines
These are the individual accounts that you have. For example, if you have a card with MBNA Mastercard, the credit report shows the authorized limit, the amount of debt outstanding, your monthly payment, how long you have had the account, and if you have been late on payments at any time in the last 5 years. Five years! That is a long time that stuff will remain on your bureau. It will also show how many times you have been 30, 60, or 90 days late on your payments in the last 5 years.

Each account has a separate trade line that reports ALL of the above information. There are a few items that do not report to the credit bureau companies at this time. They are: mortgages on residential properties with a bank (credit unions DO report), loans in your business name, some auto or equipment lease companies, and some savings and loan companies.

How Do You View Your Credit
There are two credit reporting agencies in Canada and three in the United States. The most commonly used agency in Canada is Equifax. They can be found at www.equifax.ca and you can order a report instantly online for around $20. This is something that you should do periodically to make sure that nothing incorrect is reporting or that any errors are cleared up. Errors do occur! Not surprisingly, they are usually not in your favour. You can also get a copy of your credit bureau for free, once per year, by phoning Equifax and leaving a message (it is a hokey system but personal experience has shown that it does work).

Once you have your credit bureau, review it for inconsistencies. If you find that someone says you missed a payment but you think you did not, then the onus is on you to prove that you made the payment on time. Simply calling to complain is not only futile, it is not possible. If you have requested a copy of your bureau from Equifax, a number will appear on the report that you are to call for any corrections. This number is not a public number and it varies depending on what area you are living in. You can only get this number once you have gotten your credit bureau report sent to you.

Note: A lender will NOT accept a copy of the credit bureau that you give to them. They will insist that they pull their own copy directly from the credit bureau to avoid any possible fraud or manipulations (they DO occur frequently).

Inquiries and Credit Seeking

Most people are unaware that the more times people/companies look at your credit, the more it hurts you. The only exception to this rule is when YOU look at your bureau as this process does not have a derogatory effect.

Why? You may ask. Every time someone (a bank, credit card company, cell phone company, or anyone else) looks at your credit, it is recorded on your credit as to what date, and who pulled your credit to look at it. If a bank sees that you had our credit pulled at another bank, but doesn’t see a corresponding ‘trade line’ that shows what you got loaned to you, they wonder what happened. Did you get declined? Did you get the loan and it is not showing up? Are you trying to get the loan from multiple people? Are you in dire financial straights and need a loan? They don’t know for certain. The only thing that they do know is that you are seeking credit for one reason or another. As more and more and more people look at your bureau, not only does it look suspicious to the lenders, but it lowers your Beacon Score!!! Each inquiry doesn’t lower it by much, but when taken as a whole, 30 applications in a 3 month period of time can be very harmful to your credit and will raise all sorts of ‘red flags’ to the lender.

Some people make every payment on time, all their life, and then find out their credit score is low because of all the applications they put out there but never followed through on.

Does this situation sound familiar? You walk into a mall, or at a hockey game, and a young person approaches you with a ‘Free gift if you will apply for this mastercard.’ You think that there is no harm because you don’t really intend on taking the credit card, but you do intend on taking the gift. You walk away, and ignore all their mail and phone calls and think you have gotten something for nothing. What you don’t know is that they have pulled your credit and left their mark on it. Every loan you apply for, for at least the next two years, will now be influenced by that simple inquiry. Bottom line: don’t take the gift.

I Have Lots of Credit, Use it Well, but My Score is Low. Why?
There are a couple of other things that lower your score aside from credit seeking (or the appearance of credit seeking). The first one is having too many active accounts. Even if you manage them all well, the fact that you have 3 Visa cards, 4 Mastercards, 2 American Express cards, a car loan, boat loan, Sears card, etc… all combine to make it look like you could get into financial difficulty because you could run up your debt level. Having too much credit can result in lenders wanting you to close out some accounts before they will approve your mortgage and this leads to hassle and trouble later on.

Another thing that may lower your score is owing as much, more, or close to the authorized limit. For example, if you have a credit card with a limit of $5,000, and you owe $4,000 or more on that card, it will have a slightly harmful effect on your score because you are close to the limit and it appears you don’t have the funds to pay it off. If you are AT the limit, the effect is even stronger. If you are slightly over your limit, then the effect is very harsh. Even if you never miss a payment, but at the end of the month the interest is added to the card (and you apply for a mortgage before paying it down), the score will be lowered as it appears that you are exceeding the authorized limit. These rules may not appear fair, but it is the way that credit is calculated in Canada and there are no ways around it.

Ok, I Want to Fix My Credit Now. What Can I Do?
If you have had some troubles in the past, and you want to better your score for a future mortgage or home purchase, there are several things you can do to bolster your score. They are:

1. Do not apply for any other debt. Each inquiry hurts your score, remember?
2. Pay down your balances to below 50% of the authorized limit. The lower the better.
3. Do not miss any payments. Sounds simple? It is the most common reason for bad credit for obvious reasons
4. Keep your addresses on file updated with lenders if you move
5. Do not move around a lot as this looks dicey to lenders even if justified
6. Pay your parking and traffic violation tickets. They can end up at collections and ultimately on your credit which will lower your score substantially.
7. Clear up old debts and get it ‘in writing’ that it is paid in full. Keep this proof on file!!
8. Pull your credit once a year to review it and make sure it is up to date
9. Contact Equifax immediately if something is wrong and get proof in writing that it is fixed.
10. Close unused and unwanted / unneeded accounts

How Long Will It Take to Raise My Score?
Credit, like your personal reputation, is built up over time. Usually the credit bureau is behind by about 1 to 2 months. If it shows that you are in arrears on, say, your credit card, and you make a payment, it may not be reflected for 4 to 6 weeks. Credit is not instant, and you cannot make quick repairs. You can expect repairs to take 6 months to 2 years depending on how severe the credit problems were. There is no fast way to fix it other than continuing to use your accounts and continuing to pay them off in full as soon as you can.

What if I Have a Bankruptcy In My Past?
This is a complicated area of borrowing. You may still be eligible for fully discounted rates, even if you are a past bankrupt. Please request my other report: Past Bankruptcy for specific programs and advice pertaining to credit repair in this unique financial situation. Contact me directly if you are in this situation.

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