If you’ve been thinking about buying your first home, it’s likely that you’ve come across the term “credit score” or “credit rating” more than once. A credit score is a three-digit number that is assigned to you by credit reporting agencies based on the information in your credit report. It is essentially a measurement of your ability to manage your credit and it gives lenders and authorized organizations a better idea of the risk associated with lending you money.
The higher your credit score is, the more likely you are to be approved for loans, credit products and other services. Today we will discuss what it means to have a good credit score and further explain some of the factors that affect your score both negatively and positively.
Credit Score Ranges in Canada
Credit scores in Canada are rated on a range from 300-900. Although, your score may vary depending on the company that is producing your report. There are two main credit bureaus in Canada, TransUnion and Equifax.
Each credit bureau has a proprietary way of calculating your credit score. This means they place different weights on the factors that play a role in your rating. Additionally, credit bureaus can have multiple calculation models available to lenders based on their unique needs. These models often differ based on where you go, so your scores can change slightly based on the lender who runs your report.
Below is an average range and ranking of Canadian Credit Scores:
|CREDIT RATING||AVERAGE SCORE|
Factors That Affect Your Credit Score
There are a variety of things that play a role in the calculation of your credit rating. Listed below are the 5 main contributing factors that go into calculating your score:
1. Payment History
Lenders want to know that they can count on you to make your payments on time and in full. Missing or late payments can have a negative impact on your credit score. Payments that are made on or before the due date are a very important ranking factor for your credit score.
2. Credit Utilization
If you use a lot of your available credit, lenders can see you as a greater risk, even if you’re making your payments on time. As a rule of thumb, you should try to keep your credit balances under 35% of your available credit. For example, if you have a credit card with a limit of $5,000 and a line of credit with a limit of $5,000, you have a total of $10,000 available in credit. This means you should try your best to keep your utilization under $3,500 to make the most of your score.
3. Length of Credit History
The longer you have a specific credit account (credit card, line of credit, etc.) open, the longer your credit history becomes. Try to keep your oldest accounts active, even if they are not in use on a regular basis (unless there are unwilling fees associated with keeping it open). If you have multiple credit accounts and are thinking about closing an account, consider closing the newest one.
4. New Credit & Inquiries
When you authorize lenders and other organizations to obtain a credit report from a credit bureau, it is recorded as an inquiry and can have a negative impact on your credit score. Only apply for credit products when you really need them and if you will be buying something that may require multiple inquiries such as a car loan or mortgage, try to consolidate inquiries to a 30-day period. Credit bureaus automatically calculate these as a single inquiry, and it will lessen the negative impact on your rating.
5. Types of Credit (Credit Mix)
Your credit score can be impacted if you only have one type of credit product. This is why it’s best to keep a healthy mix of credit in your portfolio. Different kinds of credit can include credit cards, car loans, lines of credit, etc. However, keep in mind that you don’t want to have too many credit products at the same time as it can negatively impact your score.
How Can I Improve My Credit Score?
Improving your credit score doesn’t happen overnight, and in fact, it can sometimes take years to clear your report of derogatory marks. However, through establishing good credit behaviours, you can improve your credit score in just several months. The tips below will help you take control of your credit health, begin building your score and help establish good habits for the future:
- Pay your bills on time
Make sure to pay your bills on time each and every month. Consider setting up automatic payments or creating a bill tracking system to help you keep track of your bills and payment dates. Paying your bills on time is one of the easiest ways to improve your credit score.
- Get your debt utilization under 35%
While again, this may not happen overnight, it’s important that you work hard to pay down your debts and maintain an overall credit utilization under the 35% mark. Consider putting together a budget and minimizing expenses until you have met your goals or accepting credit limit increases to balance out your portfolio.
- Check your credit score regularlyCredit scores are updated on a monthly basis and are available free through companies such as Credit Karma and Borrowell. Checking your credit score on a regular basis can really help you understand the impacts that your actions have on your rating and keep you invested in making improvements.
- Dispute any errors found on your credit reportIf you spot an error on your credit report, it’s important to act as soon as possible to avoid further issues. First, contact the financial institution or collections agency that reported the information. If they feel the information was reported correctly, your next step is to file a dispute with the credit bureau to have the information investigated and updated.
Are You Ready To Buy A Home In The Niagara Region?
If you want to learn more about your credit score, reach out to our team of real estate professionals today. We can recommend the best local mortgage agents and help you better understand the position you’re in and if you’re ready to buy a homeContact Davids & DeLaat today to get started in your home buying journey!