When you’re on the hunt for a new home, it’s vital that your finances are in order. Obtaining a pre-approved mortgage is a huge advantage. Becoming pre-approved, however, depends largely on the state of your credit score.
If yours isn’t where you want it to be, don’t worry! Read on to discover our 5 top tips for improving your credit score and getting the loan you need to buy your dream home.
Understand Your Credit Score
First of all, it’s important that you understand your credit score. In Canada, the higher your rating, the better, within a range of 300 to 900. Typically, a score of 750 or higher is considered very good while anything below 580 is considered low and you may struggle to gain credit at all.
Your credit score reflects the past six years of credit history and once you get a bad mark on it, there’s no removing it – unless of course it was made in error. It’s believed that 80% of all credit reports contain errors, with one in 20 featuring mistakes that can seriously reduce your score. Most errors are simply a case of mistaken identity and are easily rectified by contacting the credit bureau.
Never Miss Payments
In order to keep your credit score high and healthy, always pay on time and in full, as agreed with the lender. Lenders report to the credit bureau on the statement date rather than the due date, so even if you pay in full and on time, your report may look as if you’ve extended into your available credit. For this reason, it’s worth paying off your debts before the statement date rather than the due date.
Payments that are reported as 30 days late can reduce your score but not by a devastating amount. On the other hand, any payments that are 90 days late are similar to filing for bankruptcy and can drastically lower your score, leaving a scar on your report for years to come.
Try to make the minimum payments each month and if there’s a chance of missing the deadline, speak to your lender and attempt to make a special arrangement in advance. Be sure to prioritize what you pay. Surprisingly, mortgage payments and utility bills rarely have an impact on your credit score, whereas delayed credit card payments, loans, and lease payments almost certainly do.
Maintain a Low Balance
The amount of credit being used at any time is referred to as the credit utilization ratio. To arrive at this figure, simply add up all of your outstanding balances. Then, add up all of the credit limits and loan amounts, which results in the maximum credit available to you. Divide the first figure by the second and you’ll see the percentage of credit you’re currently using.
In general, the best practice is to stay below 35% at all times, and even so, the lower the better. If you’re trying to rapidly improve your credit score, attempt to stay under 10% for several months. You can also try to increase your available credit limit by speaking to your lender,which will further reduce your credit utilization ratio as long as your spending habits remain the same.
Keep a Long Credit History
An established credit history is better than a newer, unknown one. Credit bureaus calculate the average age of your accounts, so the more new accounts you open, the more this average is reduced. Keep older accounts and cards open and use them for small, regular payments in order to keep them active.
If you need to open a new account, beware of making too many credit inquiries, as each time a lender checks your credit report, it has a negative impact. However, all inquiries carried out within a two-week window only count as one hit, so plan ahead!
Avoid Applying for Too Much Credit
Finally, avoid applying for too much credit within a short space of time, as this can indicate financial trouble. Every time you open a new account, your credit score takes a double hit, first for the credit inquiry and secondly by reducing the average age of your accounts. If you buy a new car, renovate your home and take out a personal loan all within the space of a month or two, your credit score will take a hammering.
In general, your score can be improved within a few months by avoiding late payments and by cultivating sensible spending habits. Avoid opening too many new accounts and never live beyond your means; your credit score will suffer if you do and it will be that much harder to bring it back up again.