What does it take for your mortgage application to be accepted? Some will answer that the bank will necessarily take into account your income, the credit history and your ability to give the down payment. Of course, these three elements are the main factors that will influence the decision of the bank. But, other things are also to be considered. Among them, your credit card.
Your credit card can be either a help or a nuisance to your mortgage application depending on your use of it.
Everyone is aware that late payments or lack of payment will affect your credit history negatively. Obvious, is not it? However, this is not the purpose of this article. Let’s talk about the lesser-known dangers of the credit card.
1. Apply for a new credit card just before the mortgage
Whenever you apply for a new credit card, a thorough investigation of your file is conducted. The results are recorded in your file and, usually in Canada, these data are valid for three years from the opening of the file.
Why should you worry about investigations of your credit history? Just because they affect your credit score.
So, be careful not to apply for new credit cards the months before your mortgage application. Even if the results of the investigation are available for three years, their impact is greater on your credit score during the first six months. As time progresses, the impact of these results on your credit score decreases.
2. Use a large percentage of your credit limit
What percentage of your credit limit do you use? Despite its mundane appearance, this question is of great importance because the percentage used also affects your credit score. By using too large a percentage, you are hurting your credit history.
Because the client risk assessment formula is secret, no one can say for sure what percentage is too much. But the majority agree that it’s best to never use more than 20 or 30% of your credit limit. For example, if your Visa card has a limit of $ 10,000, then you should never go over $ 2,000 or $ 3,000.
Even if you can repay your entire limit each month, you should still pay attention. Why are you asking? Because the creditors will take the amount on your monthly bill, that is to say before the payment is made.
So, if you plan to apply for a mortgage, do not use your credit card too much.
3. Do not use your credit cards enough
Often, we have several credit cards that we have accumulated over the years, but we only use one of them regularly.
If one of your accounts remains inactive for a long period of time, creditors will stop sending reports to credit agencies. It does not seem too serious at first sight. But it is suspected that the formula of your credit score counts different active and inactive accounts differently.
It is better to take out your old credit cards at least once every three or four months. Even a simple inexpensive purchase (a cup of coffee for example) will maintain the account of the active card.
The good news is that if you manage your cards the right way, they can help you greatly in your mortgage application. Here are some advantages of a good use of cards:
1. A diversity of credit is important
In order to get a high credit score, it is best to have a mix of different accounts. What does that mean? This means that you can not only have loans or only credit cards in your report. Banks like to see a variety of accounts. This demonstrates that you know how to handle different types of credit.
Accounts are divided into two types of categories:
- Installment loan www.lescoloniesdevacances.com/boosting-your-credit-score-a-step-at-any-given-time: just about all loans fall into this category (loan for the purchase of a car, student loan, mortgage, etc.)
- Permanent credit: this is an account that does not have a fixed number of payments, that is to say, that the amount of money is reusable as and when repayment. Credit cards are in this category.
In order to have a better credit history, it is better to have accounts that fall into both categories.
2. There is no interest when the payment is made in full
The great advantage of credit cards is that they allow you to increase the number of your accounts, without having to pay interest you pay your credit card on time (unlike a loan for which there will always be interests).
In short, when used wisely, credit cards are the most effective way to achieve a high credit score .
3. Credit cards allow you to repair your credit history
With a bad credit history, you could not have a mortgage or another loan. However, you may have another credit card.
If your credit score is not good enough, then consider applying for a secured credit card. To obtain such a card, you will have to make a deposit. If you make a deposit of $ 1,000, you will have a credit limit of $ 1,000. As you ensure the risk of making a deposit, banks tend to approve this type of credit regardless of your financial situation.