Credit Scoring

Your credit score is an important factor in determining the type of mortgage you may qualify for. Lenders use credit scores to measure a clients ability to repay borrowed funds and determine their creditworthiness. To a lender, a high credit score usually indicates that the individual is responsible with their credit and are likely to repay their mortgage on time as opposed to someone with a low score. Credit is not the only factor to determine an approval for financing; however, it is a significant factor and should be considered by each client before they begin the financing process.

What is a Credit Score?

A credit score is a value that is determined based on your credit history. When a credit product such as a credit card, a loan or a line of credit is opened, their activity gets reported to a credit bureau. The credit bureau then weighs an individuals credit history and assigns a score based on certain criteria. Credit scores can range from 300 to 800 however most scores are between 600 to 750.

How are Credit Scores Calculated?

There are five factors used to determine your credit score:

  1. Payment history This is the most crucial factor to determining a score. The credit bureau reports your payment history and serves as an indicator to lenders as to the type of borrower you are. Mortgage lenders want assurance that the mortgage gets repaid on schedule. Even one late payment can be very detrimental to a credit score.
  2. Debt level This is based on how much debt you have accrued in comparison to how much you are authorized to borrow. This provides lenders with an indication as to how you manage your credit. Maximizing your credit cards negatively impacts your score, it is best to keep credit balances as low as possible (below 70% of your limit if possible).
  3. Length of credit history Indicates how long you have had certain credit accounts. Mortgage lenders generally like to see a minimum of two credit products reporting on the bureau for at least two years. The longer a credit account is open with perfect repay history, the better it is for your score.
  4. Type of credit Refers to the type of credit accounts you have. Having an excessive amount of revolving credit (credit cards, lines of credit) can be a negative. It is preferable to have a mix of revolving credit and fixed payment loans.
  5. Inquiries for new creditApplying for new credit accounts in a short time frame can hurt your score. It is better to have a few credit products and to use them responsibly then it is to have an excessive amount of credit. One of the advantages of using the services of a Canadian Mortgage Experts Mortgage Professional is that an inquiry is done only once. However, if you were to apply at different banks for a mortgage, your credit will be checked multiple times which canl lead to your score decreasing.

Factors that Affect your Credit Score

There are many factors that will negatively impact your credit score such as:

  • Late payments (even small amounts)
  • Excessive credit inquiries
  • Bankruptcies
  • Collection items from overdue or unpaid debt
  • Short length of credit history (less than 2 years)
  • Credit accounts extended to maximum limits
  • Too much revolving credit
  • Numerous credit accounts opened in quick succession

Improving your Credit Score

If you have been told that you are in need of credit repair or are just wanting to know how to raise your score, follow these steps:

  1. Pay your bills on time Make sure that you pay at least the minimum payment before the due date. One late payment can adversely affect your score. A skipped payment can reduce your credit score by 100 points so avoid this at all times.
  2. Keep your credit balances low When using credit cards or types of revolving credit either pay off the amount owing at the end of the month or keep the balance as low as possible. Do not max out your credit cards as this will negatively impact your score. As a guideline, try keeping a 30% cushion between your limit and the outstanding balance.
  3. Avoid asking for more credit Applying for a new credit card will lower your score, so only get a new card if it is absolutely necessary. When you receive junk mail that says you're pre-approved for a new card, throw it away. Again, opening this type of credit will impact your credit score. Maintain a healthy balance between revolving credit and fixed payment loans if possible. An excessive amount of revolving credit can be viewed as potential to borrow more funds then necessary.
  4. Do not go “cash only” – Do not close your current credit cards thinking this will help your score. Remember, you need to have credit in order to build credit. Maintain a healthy balance of credit and use it within reason.

Basically, be responsible with your current credit by following the steps above and you will see a positive impact on your score in as little as six months. You can keep track of your own credit score by visiting: http://www.equifax.com/home/en_ca. There, you can order a copy of your credit report and it will not impact your score. This would be a good thing to do every six months so you can monitor your progress.

Credit Scores and Mortgage Rates

Your credit score can potentially dictate the interest rate you receive when applying for a mortgage. An individual with excellent credit will have many more options in regards to the type of mortgage they may want as opposed to one who has a low credit rating. In most cases, lower credit score consumers will be quoted rates that will be higher than normal rates, due to the lender perceiving more risk in lending to them. The difference between having a high credit score as opposed to a low one can potentially saving you thousands of dollars in the long run on your mortgage. That is why it is very important for an individual looking to buy or refinance a home to consult your Canadian Mortgage Experts Mortgage Professional and have them review your credit. If your credit is on the low side, a step-by-step plan can be put in place for you to follow that will ensure your score gets to where it needs to be in order for you to get the best rates.

What if I can't get credit?

Through Home Trust you can access a cash secured Visa, where you send them $2,000 and they hold it for you and issue you a Visa with a $2,000 limit. This is a great way to get your credit started or restarted. Visit our Cash Secured Credit page for more details.

More Information

Use the links below to obtain additional information on what a credit history and credit score are, why it's important to check your credit report, how to obtain a copy of your credit report and how you can improve your credit score if necessary.

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