How to Polish Your Credit Score for a Mortgage Application

Why is your credit score important?

A credit score is an important part of your mortgage application because it indicates how creditworthy you are to lenders. An excellent credit score represents a track record of good financial habits that show lenders you can manage credit responsibly. A bad credit score tells lenders that you have a tendency to mismanage your credit, which can happen as a result of various credit mistakes.

How is your credit score for a mortgage calculated?

In Canada, credit scores range from 300 to 900 points. The higher your score, the lower risk you represent to lenders. As a low-risk borrower, you will have a better chance of being approved and for getting a better rate.

Roughly credit scores above 660 are viewed as acceptable or low-risk. Scores above 725 are considered to be very good. Scores above 760 are considered excellent. Since a credit score is an important measure for various applications beyond a mortgage, it is a good idea to ensure you achieve and maintain a high score.

So, how are credit scores measured?

There are a number of factors that go into each credit score. Here are a few of the key measures:

Payment History

Checks whether payments have been made on time, or if a collection agency has ever been involved, or if there’s ever been a declaration of bankruptcy.

Credit Utilization

Keeping credit use below 30% will give a better score. Keeping credit use near the credit limit will lower the credit score.

Length of Credit History

Having a good credit history for a longer period of time will help give a higher score.

Number of Credit Score Requests

Every time an official credit report is pulled it’s considered as an application for another credit line and will count against your overall score.

Types of Credit

Successfully carrying various types of credit will help give a better overall credit standing.

How can you check your credit score in Canada?

There are a number of companies that will provide a free credit score. It is a good idea to regularly check your credit so that you can maintain a high standing or recoup a low standing. Some good credit report companies that offer a free score are Equifax or TransUnion.

How can you improve your credit?

Getting ahead and consistently managing your credit is the best way to ensure an approved mortgage application at a good rate. Here are some ways that you can improve and maintain your credit score to be in good standing. Follow these steps and you’ll be ready when it comes time to apply for a mortgage.

Make Payments on Time

The cornerstone habit for a good credit score is to always make payments on time. Each month you will receive a statement with a minimum payment and deadline. At the very least, always pay the minimum amount by the set date. It’s better, though, to pay your credit in full every month as soon as possible. Staying on top of your credit balance by paying as much as possible and soon as you can is one way to become a model borrower.

Maintain Optimal Utilization

This is especially important for people with small credit limits. The key here is to maintain a credit usage at 30% of the credit limit. For example, if the credit limit is $3,000, then maintaining a credit use at no more than $1,000 will help ensure a good standing score. Put another way, maxing out your credit card, even if it’s paid off consistently, can hinder your overall score. For example, one credit card at a $10,000 limit with $9,000 of credit is worse than having three credits at $10,000 limits with $3,000 of credit on each. Despite being the same total amount of credit, ensuring there is no more than a 30% credit limit utilization will keep a borrower in a better standing.

Don’t Open Too Many New Lines of Credit at Once

There are two types of credit inquiries, soft and hard. A soft inquiry is when you check your own credit by requesting a personal report. A hard inquiry is when a lender requests your credit report. Hard inquiries, especially if you are opening new lines of credit, can indicate financial troubles. Lenders will be hesitant to approve a mortgage loan if there are many hard inquiries or if several new lines of credit have been recently opened.

Understanding your credit score and practicing good financial habits are essential in your preparation for a mortgage application. Blaney Mortgage can help give you more information about credit scores and mortgage applications. For personalized assistance in your application process, book a complimentary 15-minute chat with me, Clayton Blaney.