Buying a property: the importance of a good credit score
We all know that when it comes time to buy a home, it’s important to have a good credit history, but what does that entail? This article will help you understand how credit ratings are used, the importance of a good score, as well as various ways to improve your score in order to obtain a more advantageous mortgage.
What is a credit score?
Your credit score or rating is a number that tells lenders about your ability to repay a loan based on your credit history[1]. This figure is calculated by credit rating agencies such as Equifax and TransUnion Canada based on information provided by creditors.
A credit score can vary between 300 and 900. A score equal to or greater than 760 is considered excellent. A score between 700 and 759 is also very good. However, a score below 560 is considered low [2]. In other words, the higher your credit score, the greater your chances that a financial institution will grant you a mortgage with favourable terms[3].
How do I find out what my credit score is?
You can request a free copy of your credit report from Equifax or TransUnion Canada. Also, some financial institutions such as Desjardins, Royal Bank and
CIBC can provide you with this information[4].
What credit score do you need to buy a house?
You don’t have to have a perfect record to get a mortgage. According to Manulife Bank, a credit score between 600 and 700 is sufficient to meet the requirements of a mortgage application[5]. If your score is lower, a mortgage broker can help you figure out how to raise it.
Mortgage creditors use your credit score to determine the risk they will be taking if they grant you a loan. They want to make sure that you will be able to repay the borrowed money. Your score could also influence your mortgage rates and terms[6].
What factors influence my score?
To understand how your score works and how to improve it, it is important to know which factors are considered when determining your credit rating[7]:
- Payment history (35%)
- Amounts owed against your credit limit (30%)
- Length of credit history (15%)
- New credit applications (10%)
- Number of creditors (10%)
How can you improve your credit score?
- Is your score too low to buy a house? The following tips will help you improve your financial reputation[8] ,[9]:
- Make a budget and stick to it
- Pay your credit cards in full
- Pay bills, credit cards and line of credit on time
- Keep an eye on your authorized limit. Do not use all your available credit.
- Keep your old accounts open to maintain a credit history
- Check your credit report and make sure it is free of errors
- Have only one credit card
- Take out different types of loans
- Avoid applying for too many loans
- Demonstrate your financial stability
As a rule, it is recommended being prudent with credit such as using less than 35% of your available credit[10] . It’s better to have a higher limit and use less of it rather than having a lower limit and maxing it out.
How long does it take to raise your credit score?
At a minimum, it could take a few months. It takes about a year for your credit report to improve significantly[11]. In the meantime, consult with a mortgage broker who will help guide you towards financing products adapted to your situation.