Why is your credit score so important?
Your credit score is sometimes referred to as your passport to buying a home. The majority of adults have a credit score, and should know how to maintain a high score. However, not everyone knows how a credit score can affect a future mortgage and interest rate.
There are different components that make up your credit score:
- Payment history: How often do you have a late payment? This accounts for 35% of your score.
- Credit utilization: How much of your available credit is being used? This accounts for 30% of your score.
- Length of credit history: The older your credits accounts are, the better. This accounts for 15% of your credit score.
- Types of credit used: Do you have a mixture of credit cards, car loans, and phone bills? This credit mix accounts to 10% of your score.
- Credit inquiries: When applying for credit, lenders do a hard pull on your credit, which shows as an inquiry. This is accounts for 10% of your credit score.
Canadians can review their credit report
Every year you should be reviewing your personal credit report to ensure that there are no errors and you haven’t been a victim of identity theft.
In Canada, you are able to get a free copy of your credit report as many times as you need, as long as the request is made in writing and you have asked for a printed copy to be delivered by mail. This request by the consumer is noted in the credit report as a ‘soft inquiry’, so it has no effect on their credit score.
The two reporting agencies active in the country are Equifax and TransUnion. According to Equifax’s ScorePower Report, Equifax Beacon scores range from 300 to 900. Trans Union Emperica scores also range from 300 and 900.
What does it have to do with your mortgage application?
Lenders take your credit score into consideration and use it to determine whether you are a high or low risk applicant.
Home purchasers with a strong credit score will be able to receive a better mortgage rate, even with higher debt service ratios. They can qualify for a mortgage with an “A Lender” aka The Bank. This also means that they will not require clients to pay a lender and broker fee. The lender pays all of these costs.
Home purchasers with a low credit score, will either have to reach out to a mortgage broker like myself or will have a higher mortgage interest rate an an “A Lender” if they qualify.
Did you know that your credit score can also impact your home insurance premium?
For those clients with weak and bruised credit, I can secure mortgage financing at an alternative lender, where the mortgage rate and down payment required will be higher. The long term goal here is to give the homeowners time to rebuild their credit so that in 1 to 2 years’ time, they can move to an “A lender” if they wish.
So, what are the drivers of a person’s credit score:
- Payment history
- Credit utilization
- Length of credit history
- Types of credit used
- Credit Inquiries
What if you don’t have credit cards or loans?
If you don’t have any credit cards or loans (for whatever reason), you can still build up or better your credit score. Your cell phone bill payment track record is on your credit report! We all have cell phones, so make sure to make that payment in full and on time!
If you have any questions about this topic, please reach out and we can work together on getting you mortgage ready!