Everyone knows that having good credit is important. But here’s something you probably didn’t know—your credit score plays a significant role in determining whether you will be approved for a mortgage and can obtain a good, competitive interest rate.
One of the first steps you should take when deciding to buy a home is to ensure that your credit history and score are intact. Maintaining good credit history is right up there with planning to use your RRSP to buy your first home. Be in the know on where you stand and ensure you fix any inaccuracies. Be proactive—determine whether there are any discrepancies in your credit report and get them fixed as soon as possible.
Now, you’re probably wondering what the specific factors are that impact your credit history and score. Here are some key factors:
Payment History:
- This is as simple as paying your bills on time. Every late payment aids in bringing your score down drastically.
Collection Accounts:
- If you’ve ever had an account go into collections, this will have a negative impact on your credit history. If you’ve paid it off, try to work with the debt collection agency to have it removed from your report.
Available Credit vs. Borrowed Amount (Utilization):
- Do you max out your credit cards on a monthly basis? This is a sign of poor money handling and it shows that you consistently rely on credit.
- Always try to keep your balance below 30% of your available credit (i.e if you have a credit card with a limit of $5000, keep your balance at $1500 or less)
Length of Credit History:
- Remember that very first credit card you got when you started working? Or in your first year of university/college? For most of us, that’s usually when we start to establish credit. The longer your credit history, the better it reflects and improves your score.
- Do not close that first credit card you got! Even if it has a high interest rate, you’ve paid it all off or you simply have no need for it anymore. Lock it up in your drawer and don’t use it — just don’t cancel that card. If you close that account, your length of credit history becomes shorter and that may not be in your best interest.
Types of Accounts (Revolving vs. Installments):
- There are two types of accounts: revolving and installment. A revolving account is where interest is charged on the unpaid balance (i.e. Credit card, Line of Credit, etc.). An installment account is a type of credit where the consumer repays a fixed amount in equal payments (i.e. car loans)
- Lenders favour installment accounts over revolving accounts.
- It is in your best interest to have different types of accounts as it shows that you can manage a mix of credit accounts.
Credit Inquiries:
- Have you been shopping more than usual? It’s tempting to apply for that credit card that promises 20% off – keep in mind that when you apply for new credit cards including department store cards, the lenders pull your credit report. Each of these inquiries impacts your score negatively.
- Don’t need it? Then don’t get it. Period.
- Always, ensure you are keeping a tab on your credit score and ensure you are making every attempt to monitor it to make improvements to maintain or increase your score.
Remember, your credit score can be a powerful tool for you to negotiate favourable interest rates and terms. If you’ve got “not-so-good” credit, it can be the deal breaker.
You are able to pull a credit report for free once a year, but this does not include the credit score. A detailed report which includes the credit score costs approximately $24. I recommend pulling your report at least once to see where you stand — if it’s low, work on building and repairing your credit and pull it again to monitor. In Canada, you can obtain a credit report at Equifax Canada.
Be Smart – Plan Ahead – Be Creditworthy!
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