One of the largest roadblocks to getting a mortgage (or any other credit) with a lending institution, is low credit scores. Unfortunately, there is a lot of public misunderstanding about credit scores and how to manage them.

Contrary to what some people think, credit scores do not measure how much credit (debt) you have, but reflect your past performance in managing credit. Have you paid your bills in the past? Have you handled credit responsibly? If your history is good, you will likely be a good risk, with a high score. If not, your score will be low—can the lenders expect things to improve in the future?

There are several things that make up your credit score. The most important is past payment performance. Late payments are serious! You don’t need to pay off your entire bill every month, but be sure to pay the monthly minimum amount on time, every time. The more overdue, the more your score is affected. Liens and judgements against you are serious business. But the good news is that anything on your record is weighted by age; old ones carry less weight.

Another significant factor is your use of credit. Credit card balances higher than 50% of your available credit will affect your score negatively. It is better to have small balances on several cards than a large balance on a single card. However, carrying too many credit cards will also have a negative effect. Balances refer only to the amount you carry over from month to month; if you pay off the full amount every month, your credit score should not be negatively affected, regardless of the amount.

Smaller factors include credit history—the longer you have had accounts open, the better. Recently opened accounts will be seen more negatively, especially if it is perceived that one was opened to pay off another.

Inquiries to your credit score will also result in points being docked, because it is perceived that you are shopping for credit. Penalties are waived if you are making a personal inquiry of your own score.

Finally, some types of credit are considered more favourable than others. Traditional bank accounts, for example, score more favourably than finance company accounts.

Another misunderstanding is that a bankruptcy will prevent you from getting credit for a long time thereafter. Not so. You can begin rebuilding credit immediately after you have been discharged from bankruptcy. However, you will not be able to get a mortgage until at least two years after re-establishing credit. I heard of someone who thought they were not eligible for credit until seven years after bankruptcy, waited the seven years (without re-establishing credit), then learned the truth, and had to wait two more years while re-establishing their credit. It is important to begin re-establishing credit immediately after discharge.

Note that this applies only to single bankruptcies, however. Multiple bankruptcies will ruin your chances of getting credit for a very long time.