If you’re in the market for buying a house and realized you need professional tips on improving your credit score, this article will help you. The goal is to improve your credit score over a short period of time and better enable you to obtain a mortgage from a lender.
Did you know…
There is a strong correlation between being buying or leasing a home and the kind of credit score you have. Many people don’t realize the dramatic effect a credit rating can have on their ability to secure a mortgage or be approved for a lease. Some people don’t even know what their credit score is in the first place!
With that in mind, we’ve put together 5 important tips to help you boost your credit score so you can get the mortgage you need at the best possible price and terms.
1. Be Aware of What Your Current Credit Score Is
In Canada, credit scores can range from anywhere between 300 (poor) to 900 (excellent). Your credit score helps lenders assess how likely you are to pay your bills and your loans on time. The higher your score, the more likely you are to get approved for loans and credit. The lower your score, the less likely you’ll be able to secure credit and it will definitely make it harder to get a mortgage.
Your credit may also be checked when applying to lease a property. Landlords like to do credit checks on potential renters because they like to see that you’ll be responsible enough to pay rent on time.
According to Equifax—which is one of the largest credit rating bureaus in Canada—a credit score of 660-712 is considered fair while a credit score of 713-740 is considered “good to very good”. If your score is above 740, you’re in the excellent range. Simply put, the higher your score, the better your rating.
Equifax and Transunion are two private companies that assess people’s credit ratings. To do this they look at public information from banks, collection agencies and credit card companies. They also look at your history of paying bills on time (like utility bills, cell phone bills, loan payments etc.). If you would like a copy of your credit report, you can request a free copy every 12 months from Equifax and Transunion and there will be no impact on your credit score.
PROFESSIONAL TIP: Don’t request a credit report too often. Believe it or not, if you or a lender request a copy of your credit report multiple times a year, this can lower your score.
2. Determine if There Are Any Errors on Your Credit Report
Periodic reviews of your credit report are a good idea too. By reviewing your report you’re able to see if everything is accurate, if anyone has taken out loans or credit in your name or if you have any outstanding debts you need to take care of.
If you believe there is a mistake on your credit report, you can write a letter to Equifax and/or Transunion explaining the error. You will need to send them any supporting documents you have to prove your claim, and ask that they correct or remove the error from your file.
You should also write to the company making the charges, or write to the relevant debt collector that reported the incorrect information. Simply explain to them the error and ask to be copied on any documents sent to credit reporting agencies. Be sure to continually follow-up to ensure that the error has been resolved from all sides.
3. Aim to Pay All Your Bills on Time
You would be surprised at how much a late payment will affect your credit rating. Everything from cell phone bills, cable and internet bills, credit card bills and more will all play into the score you receive, and if you’re late even once, your score will be changed.
Try to pay your bills on time and in-full in order to maintain a good repayment history. This is the best way to boost your credit score and you’ll save on late-payment fees and interest payments. You may even consider pre-authorized payments from your bank so every bill gets paid automatically from your bank account.
If you can’t pay the full bill, at least try to meet the minimum payment. And if you absolutely can’t make any repayment whatsoever, contact the lender to potentially work out different payment terms.
One of the best ways to ensure that your bills are paid on time is buy not over-spending on your credit cards and just buying what you need and can afford. If you’re constantly behind in your bills and racking up your credit card with late payments, your credit rating will reflect this behaviour.
4. Use Your Credit Wisely
In addition to paying your bills on time, credit bureaus also look at your history of using credit. If you’ve had a credit card for a long time, and have managed it responsibly, this will work in your favour.
Don’t apply for credit or switch credit cards too often. Opening several credit cards all at once will lower the average age of your accounts and that pushes down your score. On the other hand, closing credit card accounts lowers your total available credit – so keep credit cards open even if you’re not using them.
Try not to get into the habit of “stealing from Peter to pay Paul”. In other words, don’t use your credit cards to keep your balances from increasing. Transfer balances from high-interest credit cards to lower-interest cards, and speak to your bank for what options are available for consolidating this debt.
5. Don’t Use All of the Credit Available to You
Be aware of your debt-to-credit ratio (also known as your utilization ratio). This is the amount of debt you have vs. the amount credit limit available to you. The Government of Canada recommends a ratio of 35% or less on credit cards, loans and lines of credit.
Anything higher than 35% may indicate that you’re a higher-risk borrower. Lenders see borrowers who use a lot of their available credit as a greater risk. For example, if you have a couple of credit cards that allow you a $20,000 credit limit, and you have $14,000 of debt on those cards, your debt-to-credit ratio would be 70% – something that may look risky to future lenders.
Being aware of this ratio is crucial and keeping it low is another key step towards improving your overall credit rating.
Utilizing all of these tips will work together to improve your credit score but it does take a bit of time. If you really commit to taking control of your credit and your debt load, you will surely see your score begin to climb. And this improvement will pay off ten-fold when it comes time to apply for a mortgage on your next home, or when you’re applying for a lease on a great rental property.
For more information on different types of lenders, check out our blog on The Basic Steps To Getting Pre-Approved For a Mortgage where you’ll learn about the various types of mortgages, how brokers work and about the private lenders that may be able to help with your next home purchase.