Financing is the biggest factor when purchasing a new home. There are several considerations that lenders take into account before extending credit,and your credit score is one of them. A credit score, also known as a Beacon Score, is the numeric value credit reporting bureaus place on a consumers credit-worthiness. The numbers range from 300 - 900, and the higher your credit score, the more financing options you have available to you; 750 and above is considered the optimal range.
Your credit score affects your ability to get financing and it also affects your interest rate. Lenders look at several things when deciding to extend credit, including:
- Your payment history
- Your current debt
- Your ability to afford a loan plus the monthly interest with your current income to debt ratio.
Where Does My Credit Score Come From?
Lenders don't rely entirely on your Score for financing, but your credit history does give them an idea of how you'll manage your finances in the future and how much of a credit risk you are now.
Your credit score is accumulation of several factors:
- Your payment history, including any late payments, bankruptcies, and wage attachments; these make up 35% of your total score.
- Your current amount of credit, which makes up an additional 30%.
- The length of time you've had credit, including how long individual accounts have been open; 15% of your score.
- New credit inquiries, including any new credit accounts you've opened and the number of inquiries from potential creditors; 10%.
- Types of credit accounts, such as loans, credit cards, and unsecured credit lines; this accounts for another 10% of your overall score.
You can get more information on the numbers behind your numbers by looking at this credit score breakdown.
Most major creditors, like banks, stores, and mortgage brokerages, report your credit history to one of two reporting agencies: Equifax Canada and Transunion Canada. When you apply for new credit, your potential lender requests your credit history from one or both of these agencies. Consumers' credit histories are ranked and then a total score is calculated to provide an accumulative score. That final score is the number that lenders look at before deciding whether or not to extend credit.
Your credit score isn't available to the general public and not all businesses that extend credit report their customers' payment histories to a credit bureau. Consumers can request a copy of their credit report from both bureaus. It's a good idea to do so once a year as a matter of routine in order to find any inconsistencies or false information and correct them.
Can I Improve My Credit Score?
There are a number of factors that influence your credit score. Some things, such as bankruptcies, will remain on your credit report until the legal time limit removes them. Focus on controlling or eliminating the factors you can improve to raise your score to optimal levels. If your score needs help, begin at least one year before applying for home financing.
Here are some things you can do right now to help improve your chances of getting a mortgage:
- Don't apply for new lines of credit. Unless you're trying to establish a credit history in order to create a Beacon score, the less businesses you have checking your credit, the better. If you're opening a line of credit to establish a credit history, stick to one secured and one unsecured line and make timely payments.
- Keep low balances on revolving charge accounts and don't open any new non-revolving accounts. Non-revolving accounts are those that don't roll-over the balance and must be paid in full at the end of each month. Potential lenders also look at the length of time you've had the accounts.
- Completely pay off small loans and credit cards with low balances as soon as possible and don't incur any new debt. Never make only the minimum monthly payment on revolving charge accounts, like credit cards and merchant cards.
- Reduce the amount of your balance to original loan amount on any outstanding installment loans. If you can afford it, make extra payments each month in order to pay them down faster.
Though your credit score isn't the only factor used in gauging your credit-worthiness, it does play a large role in helping lenders assess the risk of giving you money. Your credit score changes regularly. A smart consumer checks their score regularly and takes the necessary steps to improve it.
If you're planning on buying or building within the next year or so, now is a good time to look at your credit score and make improvements so you can get the best interest rate and terms on your mortgage in the future.