If you’re like most Canadians, you probably dream about owning your own home. But what you might not have considered is how your credit score might have an impact on whether you can realize that dream.
The first thing financial experts suggest is that you get more involved with checking and monitoring your credit report. You might find things on your report that could hurt your ability to get approved for a mortgage, but if you’re regularly checking it, you could work on them ahead of time and save yourself a lot of disappointment.
It will also help the realtor that you choose to work with. Knowing your financial standing might save a lot of leg work and help your real estate professional show you homes within your budget.
So, first things first. You need to know something about credit scores and how they work in Canada.
Two major credit bureaus
There are two national credit bureaus in Canada: Equifax and TransUnion. They offer credit scores using a particular formula and the scores can be slightly different between the two bureaus.
However, there are some key components that make up a credit score:
- 35% of your total score is based on your payment history;
- 30% is the amount you owe versus your available credit (also known as your credit utilization);
- 15% of the score is for the length of your credit history;
- 10% is for the types of credit you use;
- 10% is for searching for and applying for new credit.
Your credit score can be impacted based on any of these components so they are all important to keep track of.
No cookie-cutter approach
Something important to know when you’re shopping around for a mortgage is that not all lenders use that same criteria when determining whether to approve or decline you. Different lenders might have different policies when determining risk.
A ‘good’ credit score is typically any score about 660, so you might not qualify for the best interest rates if your score is below this. If your score is below 600, you will be seen as a higher risk and might face higher interest rates as a result.
The score you’ll need
To put things into perspective, in 2019, you needed to have a minimum credit score of 640 to get approved for a mortgage from one of Canada’s leading banks. Other lenders, however, might go as low as 620. It stands to reason, that the higher your credit score is, the better.
If you’re seriously considering buying a home, you should be checking your credit report regularly — definitely at least six months to a year before going mortgage shopping.
Equifax states that credit scores range from 300-900. Within that range, 660-740 is deemed to be good and anything above 740 is excellent.
Managing your credit score
One way to improve your chances of getting a mortgage at the best interest rate is to manage your credit score. Here are some pointers:
Review your credit report at least once every year. You can get your report for free every year from Equifax and TransUnion.
If there are errors on your report, have them corrected. Get in touch with the credit bureaus if you take issue with something on your reports. They’ll investigate your queries.
Keep low balances on your credit cards. Keeping your balances below 30% of your credit limit is a good yardstick to go by. If you can go lower, that’s even better.
Only apply for credit when you need it. Applying for a lot of credit, like loans or credit cards, could be an indication that you’re a higher risk customer to lenders. Applying for credit will also be reflected on your credit report as a credit inquiry which could affect your credit score.
Pay balances off as quickly as you can. Pay off credit cards that carry the highest interest rates first. Don’t miss payments – remember your payment history makes up the biggest piece of your credit so could affect your score the most.
Reconsider closing credit card accounts. Closing accounts could affect the length of your credit history. Even if you don’t use a card, keep the account open — especially if it’s an older account. Closing an account might also impact your credit utilization ratio, which is something you don’t want to have happen.
The bottom line
With a little work, you can have a credit score that mortgage lenders look at favourably. Maintain low balances on your credit cards, pay the balances off if you can, don’t seek out new credit frequently, and make sure your payments are on time.
It’s also important to note that the entire mortgage process can take a while – you might need to get a mortgage pre-approval, then look for and find a home, get a final mortgage approval, and then wait to close on your new home. All together it could take three or more months. It is extremely important for you to maintain a good credit score during this time so nothing stands in the way of getting approved for a mortgage!