If you're thinking about buying a home, debt consolidation, or refinancing it is important to understand what your credit score is and how you can manage or improve it. Your credit score is one of the key factors banks and lenders look at to evaluate your creditworthiness making it one of the most important parts of your mortgage application – it helps to determine what rates you qualify for and possibly your overall application. It tells possible lenders if you're likely to pay your bills responsibly and on time because it reflects every debt, credit card, loan payment, and late payment you've made in the past including bankruptcies or past credit problems.
1. What is a Credit Score?
Canada's two primary credit bureaus are TransUnion and Equifax, these are independent companies who collect information about your credit history. The businesses that utilize credit bureaus (reporting to and collecting information from them) include credit card companies, banks, loan entities (student or otherwise), car leasing companies, debtors, utility companies, collection agencies and pretty much anyone else you pay money to on a regular basis – with the exception of your mortgage. Mortgage payments are not reflected on your credit report.
The bureaus monitor your activity on a regular basis and assign a credit score to you. This number ranges from 300 to 900, although anything in the 700s or higher is considered to be good. To qualify for credit, 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 probability that you will not pay your bills on time or default on a debt.
2. How is my Credit Score Calculated?
Both Credit Bureaus use similar algorithms to determine an individual's score.
Payment History (approx 35%): Your credit score will be higher if you pay your bills on time, as opposed to submitting late payments or not paying outstanding debts at all. If you have a poor payment history (you've missed a payment, declared bankruptcy or had a debt that went into collections) this will negatively affect your credit score. The more time that passes since you've paid the outstanding debt or declared bankruptcy, the less heavily this delinquency will be weighed.
Current Debt (approx 30%): Just because you've been approved for a $10,000 credit limit doesn't mean you should use it all! The more credit you use, the lower your score will drop. TransUnion recommends keeping your credit card balance below 50% of your allotted limit, and ideally around 30%. If you're someone who relies on a credit card, it might be better to implement some spending discipline rather than asking your credit card company to drop your $10,000 limit to $500.
Length of Credit History (approx 15%): The longer you've been proving yourself as reliable, the higher your score will be. Someone without a lengthy track record of paying back debts is likely to have a lower credit score.
Types of Credit (approx 10%): Your credit score is partially calculated on the types of credit and loans you have including loans, credit cards, retail accounts, mortgages, and finance accounts - a healthy range of all of these types will boost your score.
New Credit (approx 10%): If you have a lot of companies viewing your credit report in a short period of time (ie: landlords, credit card applications or mortgage brokers) an alert may go off at the credit bureau and possibly lower your score. Regardless of what the reasons are the bureaus see that activity as a sign of financial desperation – meaning you're in trouble and looking for a way out of it. Try to avoid applying for every credit card application that comes your way.
3. How can I improve my Credit Score?
The most important thing you can do is to pay your bills on time. Set up automatic payments for all of your regular bills, many credit card companies also have an option that allows you to automatically pay your minimum balance each month.
Don't max out your cards. If you have a big purchase to make, consider applying for a lower–interest line of credit or home equity line of credit if you are a home owner.
Choose your credit options wisely. While it may be exciting inthe moemnt to receive 100,000 AirMiles or a new gadget just for applying for a new credit card, it's not worth the negative impact unnecessary credit (and credit applications) can cause to your credit score. Try to limit new credit applications to those you actually need.
Keep an eye on your credit score and account with Equifax and Transunion. Make sure there are no errors or fraudsters using your identity. Equifax (www.equifax.ca) and TransUnion (www.TransUnion.ca) allow you to order your credit profile once a year at no charge - we recommend ordering one from each company as they may feature different information.
Be patient and stick with it, it can take a while to see the results of your credit improving work but if you follow the above steps on a consistent basis you'll be qualifying for a great mortgage rate in no time!
If you are thinking about buying a home, refinancing, or debt consolidation and you’re worried about your credit score please visit our website: Calgary Mortgage Broker and fill out the quick mortgage application on the home for a free consultation on your options. If you are a Realtor in Canada and you have a client who is concerned about getting approved please contact us at http://www.larryarnason.com/contact We work with hundreds of banks and lenders in Canada that offer options for individuals and families with low credit challenges or who are in the process of improving their credit scores.
~ Larry Arnason, Mortgage Broker and Specialist - Axiom