Your credit score plays a crucial role in your ability to secure a mortgage and improving it before applying can save you thousands of dollars in interest over the life of your loan. In Ontario, lenders rely heavily on your credit score to assess the risk of lending to you, and a higher score can give you access to better mortgage rates and terms. If you’re planning to apply for a mortgage, here’s how you can improve your credit score and increase your chances of approval.
Understanding Credit Scores and How They Your Mortgage
Your credit score is a three-digit number that represents your creditworthiness. It’s calculated based on your credit history, including how you’ve managed debt and made payments in the past. In Canada, credit scores typically range from 300 to 900, with higher scores indicating better credit health.
Here’s a quick breakdown of credit score ranges:
- Excellent: 760 and above
- Very Good: 725 to 759
- Good: 660 to 724
- Fair: 560 to 659
- Poor: 300 to 559
Most lenders prefer a score of at least 680 to qualify for a prime mortgage. If your score falls below that, you may still qualify for a mortgage, but you may be limited to alternative or private lenders and face higher interest rates.
The good news is that your credit score isn’t set in stone, and with the right strategies, you can improve it over time. Here are the steps you can take to boost your credit score before applying for a mortgage.
Step 1: Check Your Credit Report for Errors
The first step in improving your credit score is to review your credit report for any errors or inaccuracies. Mistakes on your credit report can unfairly lower your score, so it’s essential to catch and correct them as soon as possible.
You can request a free copy of your credit report from the two major credit bureaus in Canada: Equifax and TransUnion. When reviewing your report, look for the following:
- Incorrect personal information: Ensure that your name, address, and Social Insurance Number (SIN) are accurate.
- Accounts that don’t belong to you: Sometimes, accounts belonging to someone else may appear on your report due to a clerical error.
- Late payments that were actually on time: If you see a late payment marked on your report that you know was paid on time, dispute it with the credit bureau.
- Closed accounts reported as open: Make sure that any accounts you’ve closed are accurately reflected on your report.
If you find any errors, you can file a dispute with the credit bureau to have the information corrected. This can result in an immediate improvement to your credit score.
Step 2: Pay Down Existing Debts
One of the most significant factors influencing your credit score is your credit utilization ratio, which is the amount of credit you’re using compared to your total credit limit. The general rule of thumb is to keep your credit utilization below 30%. For example, if you have a total credit limit of $10,000, you should aim to keep your balance below $3,000.
Paying down your existing debts is one of the quickest ways to improve your credit score. Focus on reducing the balances on your credit cards, lines of credit, and any other revolving credit accounts. Not only will this lower your credit utilization, but it will also show lenders that you’re responsible with managing credit.
If you have multiple debts, consider using the snowball or avalanche method to pay them off:
Snowball method: Focus on paying o your smallest debt first, while making minimum payments on the rest. Once the smallest debt is paid off, move on to the next smallest, and so on. This method provides quick wins and motivation.
Avalanche method: Focus on paying o the debt with the highest interest rate first, while making minimum payments on the rest. Once the highest-interest debt is paid off, move on to the next highest. This method saves you the most money in interest over time.
Whichever method you choose, reducing your debt load will have a positive impact on your credit score and your overall financial health.
Step 3: Make All Payments on Time
Your payment history is the single most important factor in your credit score, accounting for about 35% of your score. Late or missed payments can significantly damage your credit, so it’s crucial to make all payments on time.
If you’ve struggled with missed payments in the past, here’s how to stay on track moving forward:
- Set up automatic payments: Many lenders and service providers allow you to set up automatic payments so that you never miss a due date. Just be sure to monitor your account to ensure sufficient funds are available.
- Create payment reminders: If you prefer more control over when payments are made, set up reminders on your phone or calendar a few days before each bill is due.
- Prioritize essential payments: If you’re dealing with financial hardship, prioritize paying your mortgage, rent, utilities, and other essential bills first. Contact your creditors to negotiate payment arrangements if needed.
Making consistent, on-time payments over several months can help repair past damage to your credit score and demonstrate responsible financial behavior to lenders.
Step 4: Avoid Applying for New Credit
Each time you apply for new credit, such as a credit card, loan, or line of credit, the lender will perform a hard inquiry on your credit report. While one or two inquiries may have a minimal impact, multiple inquiries within a short period can lower your credit score.
If you’re planning to apply for a mortgage in the near future, it’s best to avoid applying for any new credit. Focus on managing your existing accounts and paying down your balances rather than taking on additional debt.
If you do need to apply for credit, such as a car loan or personal loan, try to do so well before your mortgage application. This allows time for your credit score to recover from any temporary dips caused by the hard inquiry.
Step 5: Keep Old Credit Accounts Open
The length of your credit history is another factor that impacts your credit score. Generally, the longer you’ve had credit accounts open, the better it is for your score. Closing old accounts can shorten your credit history and reduce your overall credit limit, which can negatively affect your score.
If you have old credit cards or lines of credit that you’re not using, it’s usually a good idea to keep them open, even if you don’t plan to use them regularly. However, be mindful of any annual fees associated with these accounts. If the fees are too high, you may decide to close the account, but be aware that this could have a slight negative impact on your credit score.
Step 6: Consider a Secured Credit Card
If you’re struggling with poor credit or limited credit history, a secured credit card can be an effective way to rebuild your credit. Unlike a traditional credit card, a secured card requires you to provide a security deposit, which acts as your credit limit. By using the card responsibly and making payments on time, you can gradually improve your credit score.
Secured credit cards are often easier to qualify for, even if you have a low credit score. Just be sure to choose a card that reports your payment activity to the credit bureaus, as this is what helps build your credit history.
Improving Your Credit Score Takes Time and Patience
Remember, improving your credit score is a marathon, not a sprint. With consistency and discipline, you’ll be well on your way to achieving your homeownership goals. If you’re unsure where to start or need personalized advice, consider speaking with a mortgage professional who can guide you through the process and help you create a plan tailored to your situation.
