By Andreia Guariento
As a Mortgage Broker Specialist, I get a lot questions about how to improve credit score and the most popular question I always hear is “If I finance a car, will it help me build my credit history in Canada?”
A car loan is not going to do any more for your credit score than a standard credit card will. Car dealerships use this market strategy to sell us cars, especially for newcomers to Canada. It’s like we say in Minas Gerais/Brazil: “This is a sales pitch”. The truth is, you will end up signing a bad contract that traps you for years. A car is not an asset. It’s a liability and financing a car right when you arrive in Canada is a bad idea if you want to buy a house.
You are probably anxious to build your credit because you want to buy a house and stop wasting money on rent. Financing a car will sabotage and delay your plan of homeownership. The general rule is: For every $10,000.00 on car financing, it takes away $50,000.00 of eligibility for a mortgage. That could mean the difference between the house of your dreams and the house you have to settle for.
As an example: If your annual income is about $80,000.00 you could qualify for a mortgage amount between $450,000.00 to $500,000.00 (with 5% down payment) depending on other debts, property tax, and condo fee. However, if you purchased a vehicle and financed it for $30,000.00, your monthly payment would be about $500. Due to this car loan, you would only qualify now for $300,000.00 to $350,000.00.
If possible, purchase an older and more affordable vehicle. If it serves the purpose of getting you around, you don’t need more than that.
Also, don’t go seeking credit right when you are about to purchase your home. Stay away from dealerships as each of them will run your credit and the bank will get the impression that you are shopping for credit.
The bottom line is, to build your credit you can apply for as many credit cards as you’d like until you get the first one. Once you have been approved for the first card, congratulations, but be careful with more credit applications. You should use the card every month and pay ON TIME. After 6 months of activity on the card, you will qualify for other cards as well. Another super important thing is NOT to use more than 50% of the limit of the card. I know that it can be difficult when the limit is low but the moment your balance goes over 50% of the limit, your score starts to drop, and that is not good.
If you want to buy a house, don’t finance a car. At least not until your house keys are in your hands!
That it is, if you would like to suggest a topic for the next issue, send me an email at [email protected].
Andreia Brazil is a Mortgage Broker Specialist and licensed to work throughout Canada. Web: https://andreiabrazil.ca / Facebook: Andreia Brazil Mortgage Broker