How can you build your credit score?
If you are hoping to buy a home, your credit score will play a huge role in your success in the market. It is a big indicator of your financial health, and lenders rely on it to determine your creditworthiness as a potential borrower. Your credit can make all the difference as a home buyer, leading you towards more or less favourable rates and products. Of course, it takes time and effort to build up and maintain strong credit. If you’re unsure where to start, here are some basic tips to help you begin!
Why does your credit score matter for homeownership?
First, let’s review why your credit score really matters when you are purchasing a home. If homeownership is on your radar, your credit should also be top of mind. The higher your score, the more reliable you will appear to lenders, and they will have more confidence in your potential as a borrower. This means that with a higher score, you are more likely to qualify for lower rates or better products, which can save you thousands of dollars over the life of your mortgage. Higher scores will also increase your competitiveness in the market, as more lenders are likely to be willing to finance a mortgage. Finally, your borrowing power is likely to be higher with a strong credit score, allowing you to explore a wider range of homes and prices.
Understand how your score is calculated
In order to build your credit score, you need a strong understanding of how it is calculated. In Canada, credit scores can range from 300 to 900. Scores above 650 are usually considered good, with higher scores being viewed even more favourably. There are several factors that influence your score, including your payment history, credit utilization, credit mix, and credit history length. Your payment history is all about whether you pay your bills on time and in full. Missed or late payments can damage your credit, so timely payments are essential. Your credit utilization focuses on how much of your credit you use each month. We will review this in more detail below, but a good rule of thumb is to keep your usage below 40 per cent. Your credit mix examines the types of credit you have. It can be helpful to have a range of credit types, such as credit cards, lines of credit, and loans, which help diversify your profile. Finally, your history length is also significant. The longer you have been building credit, the more history and context lenders have to examine when considering you as a borrower.
Do not apply for unnecessary credit
When possible, it’s best to avoid applying for new credit if you don’t need to. This is true for a couple of reasons. First, new credit applications often include what is called a hard inquiry, which temporarily lowers your score as potential lenders examine your creditworthiness. This is because hard credit checks indicate you are applying for credit and are theoretically a higher risk as a borrower. Hard inquiries are normal, but if you have too many in a short period of time, this sends the message that you are heavily relying on credit.
The other reason to limit credit applications is the more credit you have, the more likely you are to spend. It’s very easy to spend money when you have loans or lines of credit, but this can come back to bite you once it’s time to pay them back. Try to minimize the amount of credit you apply for!
Maintain a good utilization rate
Your credit utilization ratio compares the amount of credit you use versus what you have available. If you have a monthly credit limit of $5000, for example, and you tend to spend $2000, your utilization ratio is 40 per cent. Lenders generally prefer to see ratios below the 40 per cent mark, because it indicates responsible spending and an ability to take on more debt. To keep your utilization in this range, be mindful of how much you are spending each month. If you consistently go over that 40 per cent mark, there are a couple of options. You can try to spend less, or you can apply for a credit limit increase. However, we only recommend the second option if you are confident in your ability to repay your debt and not increase your spending!
Always pay your bills on time!
Your payment history has the biggest impact on your credit. To build your credit score, it’s essential to make your payments on time, and always pay at least the minimum amount. A history of consistency goes a long way towards increasing your score. Use calendar reminders or autodeposit to ensure you never miss a payment. If you are unable to pay the full balance, be sure to make the minimum payment to avoid penalties. Demonstrating reliability with your payments is key to building your score and securing future loans.
It takes time to build your credit score, but it’s an important task that will have long-lasting financial benefits. Whether you are hoping to purchase a home, secure a loan, or improve your overall financial health, following these basic tips will help you along the way. You should also reach out to your mortgage broker if homeownership is on the horizon! We can work together to ensure your credit is where it needs to be in order to present a strong application and secure the product you deserve.
If you have any questions about your mortgage,get in touch with me!