The best way to get a better mortgage is improving your credit score. When a bank analyzes your application for a mortgage, they assess the risks of loaning money to you. They base that decision largely on your credit score. Your credit score, available through agencies like Equifax is determined by your history with credit. Your payments are reported by creditors like your utilities, your phone provider, credit card companies, and car loan providers. Every time you forget to pay a bill or let a balance carry on your credit card, your credit score suffers.
That’s not to say that you shouldn’t use credit at all. A thin credit history can be as bad for your mortgage application as a low credit score. But it’s important to use credit wisely and build your credit score if you want to save on your mortgage with a lower interest rate. Mortgage experts agree that committing a larger down payment and understanding what kind of mortgage you need (variable vs. fixed rate, open vs. closed term) are the best ways to save money on your mortgage, you will also need a better credit score to get a better interest rate.
How to Avoid Creating Debt
#1 Stop Overspending – This is the first step in using credit wisely. If you don’t have the money to pay for it now, don’t buy it. Borrowing money is best reserved for major purchases like a car, a home, or a business loan, not consumer goods like electronics, clothes, or vacations.
#2 Don’t Miss Payments – Whether it’s a utility or a credit card bill, missing payments costs money. Late fees on utility bills and interest payments on credit cards will make your debt larger and they will count against your credit score. When you apply for a mortgage, a low credit score will only continue to cost you.
#3 Avoid Overdraft Fees – Overdraft protection pays for a cheque when you don’t have the money in your account. The cheque’s recipient gets their money, but it’s going to cost you a lot. Banks have notoriously high overdraft fees that add up very quickly.
#4 Rebuilding Your Credit – If you’re already deep in debt, it’s not too late. You can rebuild your credit from insolvency and get financial help to avoid debt in the future. Start by visiting a trustee in bankruptcy, or as they are nowknown, a Licensed Insolvency Trustee. In the Greater Toronto Area, trustees in bankruptcy like David Sklar & Associates can help you through bankruptcy or the consumer proposal process. With their credit counselling, you can learn how to use credit wisely and repair your credit score.
Just because you’ve been insolvent before and gone through the consumer proposal process or bankruptcy doesn’t mean you won’t be able to get a good rate on your mortgage in the future. It may require patience and self-discipline, but with the help of trustees in bankruptcy like David Sklar & Associates, you can start to rebuild your credit.
Once you start avoiding debt, you will be able to start saving. Retirement savings, saving for a down payment, and creating an emergency saving fund will all help you avoid debt in the future and put yourself in a stronger financial situation.