So is there a difference?
Are you debt free and never had to get any credit?
This is going to effect you when you are looking to borrow money for a home, unless you can pay cash that is.
Ironically having no credit can actually be worse than having a bruised credit rating.
Let me explain.
Having a report that does not show any history of borrowing and repaying back loans or credits cards means the lender has no way of knowing how or if you will pay back a loan, credit line, credit card or mortgage. In essence they will need to guess if you will be an acceptable risk. Unfortunately most lenders do not want to do a lot of guess work when it comes to lending money and will probably decline the deal or request a co-signer (even this option is no guarantee).
Bad credit will actually give the lender an idea of what type of risk you are. It will provide them with the information they require in order to grant a mortgage. From this information they may determine you are an acceptable risk but may charge a higher rate of interest or more money down. So it may cost this client more money but they have a much better chance at an approval. Also at the time of this writing we have lenders who will take on high risk clients but they do require some history of credit repayment.
So basically you have a better chance of getting an approval with poor credit than you do with zero credit.
So what do you need to do to get credit?
You need to plan ahead if you do not have credit or have very little credit. Every great project starts with a solid foundation/plan and building credit is no different.
Building Credit When You Have None
You should be set up with a bank account showing deposits/withdrawals etc. This will give you some credibility when you go to apply for a credit card. If you are showing you can handle your checking/savings account responsibly you will have a higher success rate of being approved for a credit card. Apply for the credit card at the bank and start using it. If they only give you a limit of 1k or less your goal is to prove to them you are responsible enough to handle a higher credit limit. You should be aiming for at least $1500 as a credit limit. Make sure you do not go over 80% of the maximum credit limit on your card. You should use the card on a consistent basis BUT (this is important) ensure you have the funds to pay your balance in full each month. So start a budget now. So for example if you normally spend $400 on groceries each month then set the $400 aside and use the credit card. When you get the bill pay it off in full.
Now that you have the foundation go get a RRSP loan. See what you can afford for a monthly payment over a 12 month period and then apply for a loan that would generate this amount of payment. If we use 2k with a 5% interest rate over 12 months the payment is around 172/mth. The great thing about this strategy is getting a refund when you file your taxes PLUS you are starting a retirement fund early. (also as a 1st time home buyer you can use an RRSP for a down payment). Remember you do not need a lot of credit BUT you do need proof of good repayment history. You should also check your own credit at least once a year. The 2 major reporting agencies are Equifax and Trans Union. You should pay the small fee to get the report that will give you the most detailed information along with your credit score.
Repairing A Bad Credit Score
A bad credit score is not ideal. Even if you can manage a larger down payment you will still be paying more as your rate will be higher. Before you look to purchase a home you need to take control of your current credit situation. Depending on how bad your credit is you will have options.
1 If it is just sloppiness because you are juggling too many credit cards etc then maybe a consolidation loan will alleviate this issue. Look to get all your unsecured credit cards etc into one payment. Do not cancel the cards. Destroy all but one and pay the loan down as quick as possible. Use the one major credit card for emergencies or small purchases. Your score and credit worthiness should increase within 6-12 months as long as you make all payments on time.
2 If your credit is more than just sloppiness then you need to take control and get things in order now. The first thing you need to do is get all your accounts current and up to date. You then need to concentrate on paying down the balances starting with the higher rate credit lines first while maintaining the payments on your other credit lines etc. Once you are in a position you can then look to consolidate into one easy to manage payment or continue until all your credit lines are paid.
3 If you are really behind you may need to look to a credit counselling service to help you manage your credit. This way will effect your credit BUT it is the start you may need to get your credit back to where it needs to be.
As with no credit you also need to check your credit at least once a year to ensure there are no errors and your report is being recorded correctly. It is going to take some time to improve a poor credit rating but the time and effort are well worth it. By getting your credit to where it needs to be you will be able to qualify for lower rates which will save you money and provide you with a lower mortgage payment.
While I realize there are still lenders in the market that will look at no credit applications and poor credit applications you are normally going to get a higher rate or be required to put a large sum of money down. You need to give yourself options and the one way to do this is to have a good credit rating. This way you are in control. Without options you are open to what the lender wants to give. Don’t put yourself in this position.
Give me a call and we can discuss your situation. We can help you come up with a plan on how to get credit or repair what you have. This will put you on your way to owning a home.
Eric Gall is the owner of Avanti Mortgages (operating as a mortgage specialist for TMG – The Mortgage Group Atlantic). If you are purchasing, refinancing or renewing your mortgage contact Eric or check out his website and apply online.
