Your credit score is crucial to your financial health, as it measures your creditworthiness. It determines how much money you can borrow, the interest rate you'll pay, and the associated fees. Your credit score is derived from your credit report, which includes your payment history, outstanding debt, length of credit history, types of credit used, and frequency of credit applications.
In Canada and the U.S., most lenders use the FICO credit score system, which ranges from 300 to 900. The higher your credit score, the more favorable your borrowing terms.
For instance, with a credit score of 750 or higher, you can secure a mortgage with a low-interest rate and a small down payment. Lower interest rates translate to lower monthly payments, potentially saving you thousands of dollars over the life of your mortgage. Conversely, a credit score below 600 can make it challenging to get mortgage approval, often requiring a larger down payment and resulting in higher interest rates. Higher interest rates mean higher monthly payments, making it harder to manage your mortgage and other expenses.
Defaulting on a loan severely impacts your credit score. It indicates you failed to repay the loan as agreed and can remain on your credit report for up to seven years, significantly reducing your score and making future credit approval difficult.
Payment history is the most significant factor in determining your credit score. Late and missed payments considerably lower your score. The longer you delay payments, the more it negatively affects your score. Even one late payment can have a substantial impact.
Credit utilization is the ratio of outstanding credit card balances to credit limits. A high credit utilization ratio suggests you are overextended and may struggle to make payments. Keeping your credit utilization below 30% is ideal for maintaining a good credit score.
Applying for credit results in a hard inquiry on your credit report. Too many hard inquiries in a short period can lower your credit score, indicating you are actively seeking credit and might be at a higher risk of default.
Closing credit accounts can negatively impact your credit score, especially if you have a long credit history. Lenders prefer to see a lengthy credit history and effective management of multiple accounts. Closing an account reduces the average age of your accounts, potentially harming your score.
1. Pay your bills on time every month.
2. Keep your credit card balances below 30% of your credit limit.
3. Avoid applying for too much credit. Only apply when necessary.
4. Opt for credit products with lower interest rates that you are likely to be approved for, such as personal loans.
5. Regularly check your credit report for errors and dispute any inaccuracies.
6. Build a long credit history. If you're new to credit, consider a secured credit card. Regular payments on a secured card can help build your credit history and improve your score.
1. Obtain a copy of your credit report.
Request a free copy of your credit report from Equifax or TransUnion in Canada. Review it carefully to identify errors or inaccuracies and dispute them if necessary.
2. Pay down your debts.
While timely debt payments build your credit score, high debt limits your borrowing capacity. Work on reducing your credit card balances and other debts to improve your credit utilization ratio and overall score.
3. Budget to pay your bills on time.
Prioritize paying your bills on time each month. Create a monthly budget using a budgeting app or a spreadsheet to manage your expenses effectively.
4. Seek professional help.
If you're struggling to rebuild your credit score, consider consulting a credit counselor or financial advisor. They can help you develop a plan to improve your score, manage your debts, and create a budget.
Improving your credit score takes time and effort, but it's worth it to secure the best terms for your mortgage and other financial products.