What’s a Credit Score?
Your credit score is a number between 300-900, depending on the scoring model. The higher your credit score, the more likely you’ll be approved for financial products (at better rates) in the future. So how do the credit bureaus calculate these scores, anyway?
Credit bureaus use the following factors in credit score calculation:
- Payment history (35%) – Your payment history is how good you are at paying your bills on time. This is the most important factor that goes into your credit score.
- Credit utilization (30%) – Your credit utilization is how much available credit you’re using. To figure out your credit utilization ratio, add all the balances of your accounts. Then add the credit limits. Divide the total balance by the total credit limit and multiply by 100. Voila – you have your credit utilization ratio!
- Age of credit history (15%) – The age of your oldest account matters because lenders like to see that you’re responsible. It’s beneficial to have a long history of paying your bills on time.
- Credit inquiries (10%) – A credit inquiry is when a bank or lender makes an inquiry about your credit to determine your creditworthiness. This is called a hard inquiry which can slightly negatively affect your score. A soft inquiry, on the other hand, is when you check your score yourself using a tool like your bank. Soft inquiries don’t affect your credit score.
- Total number of accounts (10%)– Having too few or too many accounts open can affect your credit score. If you have a lot of accounts, it might be beneficial to consider closing ones you don’t use anymore.
- Public records/derogatory marks – Bankruptcies and derogatory marks can have a serious impact on your credit score. Do your best to avoid them.
As long as you’ve been paying those credit card and cell phone bills on time, your credit score should be in the fair to good range.
How high does my credit score need to be to get a mortgage in Canada?
Generally speaking, traditional mortgage lenders would like to see your credit score be at least 650. If you have a credit score of 750+, great work! You have an excellent credit score. If you have a good to excellent credit score, the credit bureau is essentially telling mortgage lenders there’s a low chance you’ll default on your payments since you have a good history of paying your bills on time.
If you have a below average credit score, it’s still possible to qualify for a mortgage. But, you’ll likely be approved by alternative mortgage lender who will charge higher interest. All the more reason to work to improve your credit score!
How do I improve my credit score?
Here are four things you can do to improve your credit score before you go looking for a mortgage.
- Credit utilization
Creditors look at the amount of credit you have available and the amount you have used. Keeping the balance on your card low looks good on your credit report and to anyone checking your credit.
Try to keep your credit utilization below 30%. This means if you have a credit card with a limit of $3,000, then you should keep the balance below $1,000.
Bonus tip: raising your credit limit (while may seem counterintuitive) can help you keep utilization low since you’re increasing your available credit, creating a more favourable ratio.
- Pay your bills on time!
Paying your bills on time – every time – is one of the best things you can do to improve your credit score. This shows any potential lender that you ’re financially responsible. Creditors have different grace periods, so it’s important to make sure you pay all bills by their due date.
Delinquent accounts can have a negative impact on your credit score. If you have any past due accounts, try to pay off the oldest ones first.
Bonus tip: add your household bill due dates to your calendar on your phone so you can’t miss them.
- Pay off your credit cards
According to Equifax, the average Canadian has about $22,837 of debt, with much of it being carried on credit cards at a whopping 19.9% interest rate! You can prevent your account from being charged this interest if you pay it off each month, which will save you money.
Unexpected events can happen, and you might not be able to pay your credit card bill in full each month. However, whenever possible you should try to pay it off as quickly as you can.
- Get a secured credit card
In the event that you don’t qualify for a traditional credit card, you can apply for a secured card to help you rebuild your credit score. With secured cards, you need to deposit funds onto your card before you can use it
Bonus tip: Secured cards act like prepaid cards, but your payments are reported to the credit bureaus so your credit score should improve over time.
Should I improve my credit score before applying for a mortgage?
Improving your Canadian credit score is never a bad idea – but it’s especially important if you’re gearing up for a major life purchase! Mortgage lenders will see that you have a good history of making your payments on time and the interest rate they offer you should reflect that.