The Ultimate Guide to Your Credit Score in Canada
When you’re getting ready to buy a home, it’s more important than ever to pay careful attention to your credit score. Banks use this measurement of “creditworthiness” to determine the interest rates on your mortgage and whether or not they’ll even loan you money.
If you feel like you don’t know much about your credit score, you’re not alone. Fortunately, it’s fairly easy to pick up the basics. We’ll tell you all the things you need to know about your credit score.
How Credit Score Is Determined
In Canada, we have two companies that monitor credit and assign credit scores: Equifax and TransUnion. Any time you have credit — including loans, credit cards, and even things like utility bills — the companies you work with report to these agencies. The agencies plug this information into their proprietary formulas to come up with a credit score. The higher the score, the easier it is for you to get the credit you need.
There are five things that the credit bureaus are looking at. Here’s a list, along with a percentage that shows how much the bureau weighs this information:
- How often you pay bills on time (35 percent)
How much you owe and what percentage of available credit you’re using (30 percent)
- How long you’ve had the accounts open (15 percent)
- Whether or not you’ve been applying for a lot of new credit (10 percent)
- Whether you have a mix of fixed and revolving credit (10 percent)
Clearly, the first two items are by far the most important. Fortunately, those are also the two things that you have the most control over.
What’s a “Good” Credit Score?
Credit scores range from a low of 300 to a high of 900, though it’s relatively rare to see anyone with a score at either end of the extremes. In general, the average credit score is around 600. If you have a score in this range, you’ll probably be able to qualify for loans and credit cards, but you’ll be offered high interest rates. 680 is the score you’ll need for a “very good” credit rating. This is the benchmark score insurers (and some lenders as well) use for mortgage qualifications amounts. With credit scores less than 680, your mortgage qualification amount might be impacted (reduced). Debt servicing ratio guidelines are tighter for credit scores less that 680. Usually, 750 is the score you’ll need for “excellent” credit. With a score of 750 or higher, you’re more likely to qualify for the rates you usually see advertised.
However, it’s important to note that each lender sets its own tiers for qualifying for different rates. If you’re on the cusp, you might get a much lower interest rate from a lender that has a generous cutoff. That’s why it’s always good to shop around.
What if You Have a Bad Credit Score?
Your credit score determines interest rates, which in turn affects how much you’ll be able to borrow. If your score is low, you may have a hard time getting a mortgage that’s enough to buy the home you want. Fortunately, you can work to improve your score, and even small changes should start showing immediate improvements.
First, make sure that you’re making minimum payments on time. If you’re forgetful, it can be helpful to set up automatic payments so that you don’t have to think about it. If you’re worried about not having enough money in your account, you should plan to make your payments on payday. Since these on-time payments count as 35 percent of your credit score, doing this will make a big difference.
You’ll also want to focus on paying down your debt to decrease your debt ratio. This counts for 30 percent of the score, and getting rid of debt will increase your score. Eliminating your debt can also increase the amount a bank will loan you for your mortgage.
Keep doing these two things consistently. Negative marks on your credit — such as late payments — drop off your account after only six years, though bankruptcy takes seven years to disappear after discharge. If you stay focused on keeping your debt low and paying bills on time, you’ll eventually have a credit report that looks as though you’ve always been perfect.
Staying on Top of Your Credit Report
While our tips so far will help you improve your credit score, there’s one more thing that you need to watch out for: errors. Sometimes, credit scores are artificially low because there’s been a mistake in the reporting process. If this is true for you, simply fixing the mistake will mean a big increase in your score.
You can request copies of your credit report from each of the credit bureaus. You’re entitled to one free report each year. Note that these reports only show things like how much you owe and whether or not you’ve been making your payments on time. It will not show your actual credit score. Even without the score, though, you can look for and fix any mistakes.
You don’t want to have any problems financing the home of your dreams, so it’s smart to start thinking about your credit score. The earlier you start taking responsibility, the better your score will be when it’s time to buy a home.