Credit scores can be defined as a comprehensive representation of your financial history. Your lenders can evaluate your creditworthiness through your credit score.
Your credit score directly influences your approvals for financial assistance such as mortgages, loans, and even upgraded credit cards. A higher credit score highlights your credibility to pay back your debts on time. Therefore, credit scores serve as an indicator of assurance for Canadian lenders.
The article here does a good job of covering what a good credit score is and how it affects your loan options. A high credit score also makes you eligible for more beneficial terms, e.g., premium rewards, lower interest rates, and offers on credit cards. A lower credit score indicates more risks to the lenders. Therefore, your interest rates are substantially higher to compensate for the risk.
What Is A Good Credit Score For Loans And Mortgages?
A credit score is represented by a 3-digit number shared by credit bureaus (Equifax and TransUnion) to lenders and others for evaluating your creditworthiness. Lenders can include mortgage companies, insurance providers, banks, credit unions, utility providers, and in some instances, potential employers/ employment institutions.
In Canada, your credit score can be defined within a range of bad to excellent. Starting from
300, your credit score can go up to 900.
Canadian Credit Score System (Lowest To Highest)
300 – 599: Poor credit score, difficulty in acquiring financial assistance.
600 – 649: Fair credit score, your options to find a good loan or mortgage company is limited
If your credit score ranges between 300-649, you have significant room for improvement. Use our credit score enhancement tips to improve your ranking.
650 – 719: Good credit score with better options. However, interest rates can be moderately high if below 713.
720 – 799: Very Good credit score
800 – 900: Excellent credit score.
When your credit score ranges between 720 to 900, your options and favorability to acquire financial assistance significantly increase. You’re eligible for premium benefits and lower interest rates.
Understanding Credit Score Calculation
The credit score is calculated based on your spending history, repayment patterns, credit activities, etc.
- Payment history: This contributes to 35% of your credit score and is the most crucial credit score factor.
- The amount owed: This contributes to 30% of your credit score.
- Length of credit history: The longer your credit history is, the better your credit score. 15% of your credit score depends on this component.
- New credit history: Contributes to 10% of your credit score. This history includes new accounts, inquiries, etc.
- Credit types: The various credit accounts you’ve opened up contribute to the remaining 10% of your credit score.
4 Ways To Increase Your Credit Score
A good credit score opens up numerous opportunities for you to secure financial assistance. You can get offers from various financial institutions, compare the interest rates and choose the best schemes. Here are four ways to increase your credit score.
Make Timely Bill Payments
With payment history contributing 35% of your credit score, making timely payments is one of the easiest ways to pull up your score.
Consistent on-time bill payments serve as a demonstration to potential creditors and loan agencies that you’re responsible with your finances. This instills the trust that you’ll repay the loan on time.
Although certain credit systems offer grace periods, paying your bill on time avoids reporting to the credit bureau. Pay your oldest bills first.
To avoid missing payment due dates, you can do the following:
- Set bill payment alerts
- Automate your bill payments
Keep The Credit Utilization On The Lower End
A second-most important factor that affects your credit score is credit utilization, contributing to 30% of your credit score. Credit utilization can be defined as the amount of credit you’ve used up compared to the total credit limit available to you.
It is recommended that you keep your credit utilization below 30%. Overusing your credit gives these impressions to your lenders:
- urgently seeking credit to repay other financial debts
- trying to live beyond your means by overspending
Here are two ways you can reduce your credit utilization:
- Try paying more than the specified minimum payment value on your credit card.
- Minimize the use of your credit card to maintain the 30% limit.
Increase Your Credit Limit Whenever You Get The Chance
Seems contradictory to the previous explanation? Not really, if you’re cautious about using your credit. When you keep your credit utilization amount the same but increase your total limit, you’ll reduce your credit utilization.
However, you mustn’t get tempted by the increased upper credit limit and start over-spending.
Reduce Your Credit Applications
A hard credit inquiry (hard pull or hard check) can be defined as a credit inquiry that happens when a potential financial assistance agency checks your credit report prior to approving your application.
A hard credit inquiry can cause a temporary adverse impact on your score and may be visible on your credit reports for a maximum of 3 years.
A soft credit inquiry (soft pull or soft check) happens when you check your own credit score through free score checker services. Soft pulls don’t harm your credit score.
Can You Get A Mortgage With A Bad Credit Score?
If you have a bad credit score, you can still apply for mortgages. There are two ways to do it:
- Make a large down payment: You can prove your creditworthiness by making a significant down payment (20% or more). Your chances of finding a good mortgage lender increase, and you can even enjoy low-interest rates.
- Find a co-signer: Another method is getting a trusted co-signer. This can be beneficial if you’re unable to accumulate funds for a large down payment. The co-signer needs to have a good credit score and a financially stable background.
Improving your credit score is always the best solution to attract lower interest rates, especially if you’re planning to purchase a home or anything significant. However, improving your credit score isn’t an overnight process. It might take weeks to months for your credit score to show improvement.
Finding a good mortgage broker can make your journey to securing financial assistance easier. Even with a bad credit score, you can buy your dream home or car.