The concept of a “credit score” or “credit rating” can be confusing for anyone, especially those preparing to purchase their first home. It’s important to know how your credit score might impact your mortgage rate, but also, what you can do to improve your score before you start looking to get a mortgage.
What is my credit score?
Credit scores are determined by credit bureaus: companies that collect credit information and provide it to banks, credit card providers, and other companies upon request. In Canada, there are two credit bureaus — Equifax and TransUnion. They collect and manage the credit information of Canadians, and give credit reports for Canadian financial institutions.
Your credit score will be a three-digit number, between 300 and 900. The higher your score, the better. How this is determined isn’t actually public knowledge; credit bureaus guard their methods for figuring out your score. Credit bureaus will track your previous credit history and your current credit situation, and certain factors will increase or decrease your score, even if you won’t know precisely by how much.
Your credit score will go up if you maintain a good credit history, by having a credit card and using it regularly, while also ensuring you make regular payments. Your score will go down if you have a lot of debt, you regularly miss payments, or you have any record of bankruptcy.
How can I see my credit report? Do I have to pay for it?
Both Canadian credit bureaus will try to sell your credit information to you online, but you can apply for a free credit report from them, once a year.
Not only will see your credit score, but you can also make sure the information collected by the bureaus is accurate (which may not be the case if you’ve been targeted by identity thieves).
How does my score affect my mortgage rate?
The quick answer to this is simple: the higher your score, the better your rate.
Lenders will request a credit report when you are applying for your mortgage. They use the report and your score to set your rate.
A lower score will tell lenders that lending you money might be more of a risk for them, and as a result, they’ll set a higher mortgage rate to compensate for that risk.
On the other hand, a higher score will make lenders more confident in your ability to make regular payments, and as such they will be willing to give you a lower rate. You’ll want to make sure your score is as high as it can be before you apply for a mortgage.
How can I improve my credit score?
The first step is to establish credit, if you haven’t already. The easiest way to do this is by getting a credit card, using it regularly, and paying off any balance. The longer you have a credit card, the longer your credit history, and the better your score.
What about if you already have a credit card? According to the Financial Consumer Agency of Canada (FCAC), having more than one source of credit will improve your score, like a line of credit from a bank, or even a car loan.
The FCAC advises that if you aren’t paying off the balance of your credit card every month, you should at least be making the minimum required payment. If you have an issue with a payment, contacting your bank or lender may help, as they may give an extension on the payment due date.
The FCAC also recommends not using more that 35% of your available credit at any given time, and not applying for credit too often, as this will show up on your report and discourage lenders from providing funds, or a good rate. Helpfully, your own credit report requests do not impact your score.
If you want more details, visit the Debt and Borrowing page on the FCAC website, where you’ll find a lot of helpful resources on the subjects of debt, credit, mortgages, and more.
The information presented in this post was sourced from the Financial Consumer Agency of Canada and is for learning purposes only. It is not intended as financial advice.