Buying a property: the importance of a good credit score

We all know that when it comes time to buy a home, it’s important to have a good credit history, but what does that entail? This article will help you understand how credit ratings are used, the importance of a good score, as well as various ways to improve your score in order to obtain a more advantageous mortgage.

What is a credit score?

Your credit score or rating is a number that tells lenders about your ability to repay a loan based on your credit history[1]. This figure is calculated by credit rating agencies such as Equifax and TransUnion Canada based on information provided by creditors.

A credit score can vary between 300 and 900.  A score equal to or greater than 760 is considered excellent.  A score between 700 and 759 is also very good.  However, a score below 560 is considered low [2]. In other words, the higher your credit score, the greater your chances that a financial institution will grant you a mortgage with favourable terms[3]. 

How do I find out what my credit score is?

You can request a free copy of your credit report from Equifax or TransUnion Canada. Also, some financial institutions such as Desjardins, Royal Bank and CIBC can provide you with this information[4].

What credit score do you need to buy a house?

You don’t have to have a perfect record to get a mortgage.  According to Manulife Bank, a credit score between 600 and 700 is sufficient to meet the requirements of a mortgage application[5]. If your score is lower, a mortgage broker can help you figure out how to raise it.

Mortgage creditors use your credit score to determine the risk they will be taking if they grant you a loan. They want to make sure that you will be able to repay the borrowed money. Your score could also influence your mortgage rates and terms[6].

What factors influence my score?

To understand how your score works and how to improve it, it is important to know which factors are considered when determining your credit rating[7]:

1. Payment history (35%)
2. Amounts owed against your credit limit (30%)
3. Length of credit history (15%) 
4. New credit applications (10%)
5. Number of creditors (10%)

How can you improve your credit score?

1. Is your score too low to buy a house? The following tips will help you improve your financial reputation[8] ^,[9]:
2. Make a budget and stick to it
3. Pay your credit cards in full
4. Pay bills, credit cards and line of credit on time
5. Keep an eye on your authorized limit. Do not use all your available credit.
6. Keep your old accounts open to maintain a credit history
7. Check your credit report and make sure it is free of errors
8. Have only one credit card
9. Take out different types of loans
10. Avoid applying for too many loans
11. Demonstrate your financial stability

As a rule, it is recommended being prudent with credit such as using less than 35% of your available credit[10] . It’s better to have a higher limit and use less of it rather than having a lower limit and maxing it out.

How long does it take to raise your credit score?

At a minimum, it could take a few months. It takes about a year for your credit report to improve significantly[11]. In the meantime, consult with a mortgage broker who will help guide you towards financing products adapted to your situation.