Credit Mastery: Elevate Your Score for a Mortgage Advantage
Securing a mortgage is a pivotal step in achieving the dream of homeownership. One key factor that can significantly impact your ability to secure a mortgage, and at a favorable rate, is your credit score. In this blog post, we’ll go over actionable tips to boost your credit score, ensuring you’re better positioned to make your homeownership dreams a reality.
How is credit score determined?
Credit score (as determined by Equifax) is made up of the following 5 components:
Payment History: 35%
Credit Utilization: 30%
Types of Credit: 15%
New Credit Inquiries: 10-13%
Length of Credit History: 5-7%
How Can You Improve Your Credit Score?
Paying off Outstanding Balances:
One of the foundational steps towards improving your credit score is to diligently manage your outstanding balances. Treat your credit card like a debit card—pay off the full balance each month, on time. This responsible financial behavior not only demonstrates your creditworthiness but also builds a positive credit history.
Utilize Credit Wisely:
A golden rule in credit management is to avoid utilizing too much of your available credit. Aim to use no more than 30% of your credit limit. For example, if you have a credit card with a $1,000 limit, try to keep your balance below $300. This practice shows lenders that you’re responsible and not overextending yourself financially.
Consider Accepting Credit Limit Increases:
When your credit card company offers to increase your credit limit, it’s generally advisable to accept, even if you don’t see an immediate need for the extra credit. This can have a positive impact on your credit utilization ratio, which is a key component of your credit score.
Build Credit with a Secured Credit Card
If you don't qualify for a credit card, it can be worth looking into a secured credit card. With these secured credit cards, banks generally require a security deposit equivalent to the balance for a specific term. The funds are usually released after the borrower has demonstrated a good track record of paying off the credit card.
Maintain Older Credit Lines:
The age of your credit accounts is another important factor that lenders consider. If you have an older credit card that you don’t use frequently, consider keeping it active. Making small purchases and promptly paying them off can help demonstrate a long history of responsible credit use. It is beneficial to have a two-year history of credit lines.
Minimize Credit Checks:
Frequent credit inquiries can sometimes have a negative effect on your credit score. Be cautious about requesting too many new credit applications, as this can signal to lenders that you may be taking on too much debt. Prioritize quality over quantity when it comes to credit checks.
Mortgage credit checks generally do not have as significant of an impact on your credit score compared to other checks, such as those for credit cards. In a typical mortgage application, the mortgage broker will likely check your credit report. Once submitted to a lender, they may also conduct their own credit check. These two checks serve the same purpose, and depending on the timeframe, they are usually grouped together as one inquiry, minimizing the impact on your credit score, which would be minimal. However, if you apply for credit cards at multiple financial institutions, that could have a more significant impact on your score.
Apply for a Monthly Phone Plan
If you're currently on a prepaid phone plan, consider switching to an (affordable) monthly plan. This change can positively impact your credit report, serving as a great opportunity to build your credit score as long as you pay it off in full at the end of each month.
Diversify Your Credit Portfolio:
Having a mix of different types of credit can positively impact your credit score. This might include a credit card, a line of credit, an installment loan (like a car loan), and regular bills like your phone bill. Demonstrating that you can manage various forms of credit responsibly showcases your financial stability. Note: taking on additional credit before a mortgage application is not reccomended, as it can negatively affect your application, especially with car loans.
In conclusion, while it’s possible to secure a mortgage with a lower credit score, it often comes at the cost of a higher interest rate. For newcomers to Canada, establishing a credit history early on is crucial, as it provides lenders with valuable insights into your financial responsibility. By following these actionable steps to boost your credit score, you’ll not only increase your chances of securing a mortgage but also position yourself for more favorable terms and rates. Remember, your path to homeownership starts with a solid foundation of financial responsibility.
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