While it’s great to have a high credit score, there is a lot more to your credit bureau than just score. It’s possible that you could have a high score, yet still be declined for a mortgage based on credit.
The purpose of the credit bureau is to show the mortgage lender that you can be responsible with credit. As the score alone is not enough to satisfy them, they look at several other components as well. Let’s take a closer look at what else the lender will be reviewing in addition to your credit score:
Number of trade lines
A trade line can be defined as a credit card, line of credit, car payment, etc. Basically, any credit account that reports to the bureau. Ideally, you should have at least two trade lines. At least one of which should be revolving, meaning an account where you can access funds when needed, such as a credit card or line of credit.
While two trade lines are preferred, it’s still possible to get approved with only one. Some lenders may require you to provide alternative credit, such as 12 months of cell phone or utility bills, along with 12 months of bank statements to confirm consistency of timely payment.
It’s quite surprising, but mortgages do not count as trade lines, nor do cell phone accounts. Both will still report on your credit bureau, but they are not considered when assessing your suitability for mortgage approval… unless there are delinquencies.
Length of time each trade line has been established
Each trade line should ideally have at least one year history, however some lenders require two. The longer you’ve had a trade line open, the more positively it reflects on your score and the overall strength of your bureau. If you want to close any existing credit cards, it’s best to start with your newer accounts while leaving the older cards intact.
Limit on each revolving account
Credit cards or lines of credit should have a minimum limit of $1,500. If you can get a limit of $2,000 or $2,500, then all that much better. Anything with a limit under $1,000 will be considered insufficient. If you have two lines, both with limits of only $500, then qualification is an uphill climb, regardless of how high your score may be.
If you only have a single credit card with a small limit, your credit bureau does not contain enough ‘meat’ to convince the lender you’ll have the discipline to make your mortgage payments on time. This leads to your application being declined.
Date each revolving account was last used
Just as it’s important to periodically go to the gym to keep in shape, credit cards need to be used from time to time. A credit card that has been sitting dormant for over a year without any use may not be considered an active account by many lenders. You can however keep the credit card active by using it once or twice a year (if only the same could be said for going to the gym!) The dollar amount charged is irrelevant. You can charge $10 and then pay the $10 back immediately. That will be enough for it to report as recent usage to your credit bureau.
You should ideally have minimal missed payments, if any at all. In some cases, even a single missed payment, especially if it is recent, can be enough for a lender to decline you. Make sure you at least make your minimum payment.
Also, don’t be so afraid of inquiries on your bureau. As long as you aren’t having every creditor under the sun checking you out, a few checks here and there are not going to harm someone with decent credit. 5 or 6 a year isn’t going have much effect if you already have great credit. Also, the total number of inquiries within a 45 day window will only count as a single check, providing they are all for mortgage purposes. It doesn’t matter if it’s two, five, or ten…… it all counts as one. Each check to your credit will show on your bureau however, so the mortgage broker or bank will know that you have been shopping around, and which institutions you have applied with.
Paul Meredith has ranked in the top 75 mortgage brokers in Canada for the past three years. He is the author of the Amazon #1 best selling book, Beat the Bank – How To Win The Mortgage Game in Canada and is the exclusive mortgage broker on season two of TV’s Top Million Dollar Agent (Global, Slice TV, Rogers).