How to Rebuild Bad Credit to get a Mortgage.

FinanceMortgage & Debt

  • Author Steve Lemieux
  • Published September 28, 2009
  • Word count 1,201

How to Rebuild Bad Credit and Really Improve Scores to get a Mortgage  Millions and millions of consumers have less than perfect credit or bad credit and it can be very frustrating to acquire a mortgage. Credit has saturated our society and having low credit scores or poor creditcosts you money. Credit scores are the No. 1 determinant in a bank's or lender’s decision to approve or decline an application for credit. You might be approved for credit even though your scores are low or poor but you will definitely pay higher interest rates. The following steps are proven steps to begin rebuilding your credit:

 

Step 1: Preserve Old Positive Credit. Maintaining older credit gives you a long credit history. This is important and good because credit history constitutes 15% of your overall credit score.

 

Step 2: Don’t Transfer Balances. Transferring all your balances to one low interest rate card can and will probably lower your credit score. You may well get many offers for the best credit cards with low and even zero percent interest rates, but if you decide to transfer all of your balances to the one card then you run the risk of increasing your balance to limit ratio. A high balance to limit ratio on a respective account lowers your credit score.You should always try to maintain a balance less than thirty percent of your overall credit limit in order to have a good score. (Amount Owed is 30% of credit score). If you do choose to transfer balances to take advantage of tempting low rates, keep this fact in mind. Don’t over do it.

 

Step 3: Try Hard to Decrease Your Credit Card Balance. Make a real effort to pay down your credit cards and decrease your balances to thirty percent (30%) or less than your total credit limit. Your credit score will surely increase. The nice thing about this procedure is that it works whether it is a $5000 limit credit card or a $500 limit credit card and your credit score will directly improve. Definitely do not go over your credit limits. This hurts your credit score tremendously.

 

Step 4: Ask toGet a Credit Line Increase. In the alternative, if you do not have the cash on hand to pay down your credit card account, request a credit limit increase but don't spend it! Most credit card issuers can increase your limit without running a credit report. Make sure you question before you request the credit line increase if you do not want to produce inquiries.

 

Step 5: Know if the information is being reported by your Credit Card Companies. Make sure your credit card companies go ahead and report your limit and balance. Some may only report your balances and not your credit limits. Lenders who employ in this practice may actually be causing your credit score to lower. The credit bureau scoring system will plug in your highest balance as your credit limit and if you are currently at a high balance this can be harmful to your score. Capital One was infamous for this practice however; in August 2007, they decided to changed their policy and will also be reporting credit limits. This means that many clients who hold Capital One credit cards may see an improvement in their credit scores.

 

Step 6: Absolutely Pay obligations by the Due Date. You mustPay your debts by the due date. A late or missed payment can lower a good credit score by 100 points or more. It might not make sense but if you already have negative entries on your credit report adding more will not hurt you as much as if you don’t have any negative entries. Anyway, paying on time can and will raise your credit score. (Payment History is at least 35% of your total credit score)

 

Step 7: Call for a Deletion for Incorrect Collections and Pay off Real Collections. Collections usually destroy credit scores. If a mistake was made and you have a collection on your bureau not belonging to you, it hurts your total credit score. This happens sometimes if 2 people with the same name get mixed up or when some documentation is misplaced, lost or subject to a misunderstanding. When you pay off a collection or settle an outstanding debt your bureau will indicate a "paid collection" entry. Once paid the total credit score will be restored but please note this entry stays with you for 6 years at which time it "falls off" your credit bureau. You absolutely must Stay away from collections at all cost as even paid collections may have to be explained to future lenders, especially mortgage lenders. If they want to know what happened, you might have to explain the circumstances that led to the collection in writing.

 

Step 8: Go ahead and Apply for Easy Credit. There are many reputable companies that don’t require strict credit guidelines. These companies give credit to consumers with little to no credit history and poor or less than perfect credit. You might have to pay higher interests rates occasionally but if you pay on time and keep your balances to less than 30% of your available credit limit, you will build good credit. Look for credit at your local appliance, furniture or jewelry stores. Make sure to ask to see if they report to the credit bureaus.

 

Step 9: Get a Bank Loan or Investment loan Secured by a Savings Account. If you have $500 cash saved up go ahead and get a secured bank loan or investment loan. A lot of banks, lenders and credit unions do not access credit reports when you apply for a secured savings/chequing account or secured investment loan. However, they usually do report these loans to the major credit bureaus, Equifax and Trans union. Bank loans can rank high in credit scoring. But do not stop at just one secured loan. Once you get the first secured loan, take those funds, go to another bank and repeat the process. Now you have two bank loans that will report to the credit bureaus and this is significant to bettering your credit. Make absolutely sure these loans are little enough that you can afford making a minimum of two payments per secured loan earlier than the actual upcoming due dates. When the banks report to the credit bureaus they will show these payments and you will have established a good payment history within 30 days of obtaining the loans. You should always confirm with your loan officer that they do indeed report to the credit bureaus.

 

Step 10: Get a Secured Credit Card ASAP.Secured credit is an excellent option for those who cannot qualify for regular credit. Not only will you have the benefits of a regular credit card but you will also get a chance down the line to convert that secured credit card into a regular one. The same rules apply with a secured card in that you must absolutely pay your credit card bill on time and you should keep your balances low. When searching for a secured credit make sure the lender reports to at least the two major credit card agencies, Equifax and Trans union.

For further information on credit, secured credit

cards and mortgages

visit www.aaamortgage.ca  

Steve Lemieux has been an Edmonton Alberta mortgage broker for over a decade. Dual licensed in Alberta as a Real Estate Associate as well as a Mortgage Associate, he is committed to providing the best possible solutions for all his clients. www.aaamortgage.ca

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