Your credit score is one of the most important components of your mortgage application as it is one of the primary factors that lenders use to determine your creditworthiness.
It tells lenders how likely you are to pay your bills on time, as it reflects every credit card, loan payment and late payment you’ve ever made along with bankruptcies, collections or credit problem you’ve undergone.
With so much weighing on this tiny little number, it’s important to understand what it is, how it’s calculated and what you can do to manage it.
1. What is a Credit Score?
Canada’s two credit bureaus, Equifax and TransUnion, are independent companies that earn money from collecting information about your credit history.
Other businesses that utilize the services of these bureaus – meaning, they report to and collect information from them – include virtually every credit card company, loan entity, car leasing company, utility company, collection agencies and virtually anyone else you make payments to on a regular basis.
The bureaus monitor the activity on a regular basis and assign a ‘credit score’ to you. This number ranges from 300 to 900, although anything in the 700s is considered to be good. To qualify for a mortgage, you typically don’t want to be lower than 620, and definitely not lower than 600.
In general, the higher your score, the lower the risk you are of making late payments.
2. How is my score calculated?
While each credit bureau is different, both rely on similar algorithms to determine an individual score. Below is an approximate breakdown:
Payment History (35%): Your credit score will be higher if you pay your bills on time, as opposed to submitting late payments – or worse – not pay outstanding debts at all.
Current Debt (30%): Just because you’ve been approved for a $10,000 credit limit doesn’t mean you should obtain it! The more credit you use, the lower your score will drop. Both credit bureaus recommend keeping your credit card balance below 50% of your allotted limit, and ideally around 30%.
Length of Credit History (15%): The longer you’ve been proving yourself as a reliable borrower, the higher your score will be. Someone without a lengthy track record of paying back debts is likely to have a reduced credit score.
New Credit (10%): If you have a lot of companies viewing your credit report in a short period of time a red flag will go off at the credit bureau, and consequently lower your score. Regardless of what the reasons are, the bureaus see that activity as a sign of desperation.
Types of Credit (10%): Your credit score is partly calculated based on the types of credit and loans you have – such as credit cards, retail accounts, installment loans, mortgages, and consumer finance accounts. A healthy mix of these types of credit will ensure a healthy score.
3. How can I improve my Credit Score?
Keeping the above information in mind, the most important things you can do to improve your credit score are to pay your bills on time, keep credit card balances low, choose your credit wisely and keep an eye on your credit profile.
Jean-Guy Turcotte is an Accredited Mortgage Professional at Regional Mortgage and can be reached for appointments at 403-343-1125 texted to 403-391-2552 or emailed to firstname.lastname@example.org.