March is Credit Education Month in Canada, and understanding your credit is one of your biggest allies in buying a home, especially your first one. The lower your score, the bigger risk you are in the eyes of mortgage lenders, so it’s important to understand how your credit works and how you can improve it.
To start off, you should know what your credit score is sitting at, and you can get a free report at either Equifax or TransUnion. A good credit score starts at 650 or higher, which puts you in range to get a mortgage, although some lenders have special programs for those under that number (best to talk to a mortgage broker to be sure). If you’re sitting at less than 650 (or 700, really), you should be taking steps to improve your credit.
To improve your credit in preparation for home buying, here’s the five factors that determine your credit score:
- Your payment history: this involves when you pay your bills, any late or missed payments, and debts that may have been sent to a collection agency. It’s important to keep in mind that the later your payments, the bigger the impact on your credit score, so ensure you pay bills on time.
- Available credit: to figure this out, you simply add up the credit limits of all your credit products (credit cards, lines of credits, loans), then define how much of your available credit you actually use. Using a large percentage of your available credit, makes you seem like a bigger risk to a lender. Some experts say keeping 80-90% of your credit available, is the best practice.
- Lifespan of credit: this takes into account how long you’ve had each credit product, the longer you’ve had an account open and been using it, the better your credit score is because you’ve had time to build credit. Your credit score might be lower if you have new credit cards, or close older accounts.
- Number of inquiries: every time your credit report is requested, it’s counted as an inquiry, and numerous inquiries will count against your credit score. Because your credit report will usually only be requested when you are applying for credit products, be careful about how many debts you have.
- Types of credit: your credit score can be affected if you only have one type of credit product, such as one credit card. Different types of credit will actually serve to benefit you: credit card, auto loans, lines of credit, etc.
It’s important to be aware of what helps and hurts your score. Your payment history, debts, how much credit you use, the length of your credit history, the number of new credit accounts you take on or inquire about, and the mix of credit types in your name all inform your score. White recommends ordering a copy of your score (from consumer credit reporting agencies Equifax or Transunion) once a year; not only to keep yourself in check, but as a protective measure. [Genworth Financial]
It’s best practice to check your credit report each year, this will also give you an idea of how things are going year-to-year. Both Equifax and Transunion have monitoring programs you can sign up for that will alert you when changes are made to your credit score. If you’re interested in how to file complaints or errors, check the Financial Consumer Agency of Canada website.