Hello. My name is Sean Cooper. I’m the millennial who bought a house in Toronto at age 27 and managed to pay it off in only three years. To celebrate, I threw a mortgage burning party where I literally lit my mortgage papers on fire (in a totally safe and non-pyromaniac way).
Hard work and an extremely frugal lifestyle were two driving factors that allowed me to burn through my mortgage at such an abnormally fast speed. But there was another major and comparatively painless contributor to my success:
I had good credit.
By taking the steps necessary to build up a good credit score, I shortened and simplified what can be a very long and stressful path toward becoming a homeowner.
How my credit score affected my mortgage
When I applied for my mortgage, my down payment of $170,000 was a financial strength, while my relatively low income was a weakness. The tipping point in qualifying me for the loan, and getting a great interest rate, was that I’d been unintentionally building up good credit for years prior.
I was a bit of an anomaly in University. Unlike a lot of my peers, who were always carrying balances on their credit cards, I followed one Golden Rule: I treated my credit cards the way I treated my cash, only making purchases I could pay off in full once my credit card statement came due. That way when I applied for a mortgage, I had no problem being approved (my parents didn’t even have to co-sign).
And that semi-accidental credit score paid off – literally. It widened the scope of lenders willing to work with me, and allowed me to shop around for the lowest interest rate I could possibly find.
Just how much can you save with a good credit score?
A 1% difference in interest may seem minimal, but don’t be fooled. If I’d paid off my mortgage over 25 years like most people, that 1% would have saved me an estimated $40,000 (seriously) in interest. That’s enough to buy two compact cars. Or 26,000 double-doubles from Timmy’s. Or a hyacinth macaw + 25 years of upkeep. However you spend it, it’s a nice little bundle of cash for simply using credit cards in a responsible manner.
Or if, like me, you don’t relish the idea of spending 1/3 of your life with a mortgage weighing down on you, you can take the loonies that you would have spent on interest and instead use them to pay your base mortgage off faster. Three years is a bit freakish, I know, but your mortgage needn’t last a quarter century.
A lower interest rate also means that more of the cash you toil for can be spent on getting a nicer house in a better neighborhood, rather than throwing it away on your bank’s exorbitant mortgage rates. My credit score pushed my home budget to $550,000, enough for a two-story house east of the Beach. I ultimately chose to spend less than that – $425,000 – and ended up with a nice, newly-renovated bungalow. Different people value different aspects of a home, but having a good credit score gives you more options to pick and choose what’s right for you.
How can you build up your credit score?
Some millennials have been spooked by the financial crisis and are choosing to steer clear of credit cards entirely. I understand that reluctance, but this is actually a colossal mistake, and can seriously impact millennials’ financial prospects. Lenders want to see that borrowers can handle credit cards before taking on bigger debts, like a mortgage or auto loan. And building a good credit score takes time. For that reason, it’s a good idea to start working on it long before you’re ready to buy a home.
The actual formula for coming up with your 3-digit credit score is a little complicated, but you don’t need to worry about how it’s calculated. The most important thing to know is how to maintain and improve it. Here are some tips that most people are unaware of:
- It’s better to pay the full balance on a credit card rather than the minimum balance. Why? Your credit utilization will be higher if you only pay the minimum, and high utilization can adversely affect your credit score.
- Don’t exceed the credit limit on your card. Aim to stay below 35% utilization.
- You’re entitled to a free copy of your credit report annually from the credit bureaus; so use it. Review your report at least six months before applying for a major loan, such as a mortgage, to avoid any surprises. That way you’ll have plenty of time to fix any errors that you may come across. I requested my credit report when I was preparing to apply for a mortgage, and I noticed that it listed an old cellphone contract that I had already closed and paid in full. I had the error corrected and it improved my score.
- Keep older credit cards open. I’ve kept my very first credit card from University, even though I don’t use it that often. Although your first instinct might be to close out older credit accounts, maintaining them can actually lengthen your credit history and keep your credit utilization low.
- Consider using an automated tool to evaluate your credit report. Some platforms, like MyMarble, will make customized suggestions of specific actions you can take to improve your score, down to the best day to make your payments.
How my credit score continues to affect my life now that I’m mortgage free
My mortgage is now paid off, but I’m an ambitious dreamer by nature. And my credit score is still linked to my ambitions.
Right now I live in the home I bought, and I’m considering buying an investment property. Unless I win the lottery (never a good fallback plan in my experience), I’ll need to borrow money from the bank in order to make this happen. By having a decent credit score, I can take out a home equity line of credit (HELOC) at a low interest rate. And a low interest rate makes a big difference in the carrying costs of my rental property. It can mean the difference between my property being cash flow positive and cash flow negative.
And today, credit scores are checked for more than just big loans:
- In cities with tight rental markets, like Toronto and Vancouver, many landlords will now check your credit score if you merely want to rent an apartment.
- Some insurance companies are now asking for permission to view your credit score. You’re under no obligation to share it, but if you refuse, you could face higher premiums or be denied coverage.
- Even employers are checking credit history to evaluate how responsible a prospective employee might be.
Basically, your credit score follows you throughout your life, and ignoring it won’t make it go away. But by taking the steps necessary to build it up, it can be a financial boost and not a burden. Just don’t forget these key Do’s and Don’ts:
- Don’t shun credit cards. You need them to open up your financial prospects for the future.
- Don’t forget the Golden Rule of credit cards: try not to carry a balance from month to month.
- Don’t rush into applying for a mortgage before you’ve whipped your credit score into shape.
- Even if it seems unrealistic, do keep the dream of homeownership in mind. It’s achievable. Trust me.