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5 Tips to Improve Your Credit Score Before Applying for a Mortgage
September 6, 2023 | Posted by: Matt Broom-Hall
Owning a home is a dream for many Canadians. However, taking the first step towards that dream often involves applying for a mortgage—a process that can be daunting for some, especially if you're not certain about your credit score. A higher credit score can provide you with more mortgage options and lower interest rates, making it easier to own your dream home.
Here are five tips to help you improve your credit score before you apply for a mortgage in Canada
1. Obtain and Review Your Credit Report
Why It's Important:
Before you can improve your credit score, you need to know where you stand. Both Equifax and TransUnion provide credit reports and scores in Canada. By law, you're entitled to one free copy of your credit report from each bureau every 12 months.
How to Do It:
• Order your credit report online or by mail.
• Review it carefully for any errors or discrepancies.
• If you find any inaccuracies, contact the credit bureau to correct them.
2. Pay Off High-Interest Debts
Why It's Important:
Your credit utilization ratio—the percentage of your available credit that you're using—affects your credit score. Lenders prefer this number to be below 30%.
How to Do It:
• Identify high-interest debts such as credit card balances.
• Prioritize paying these off.
• If you can't pay them off immediately, consider a balance transfer or a consolidation loan.
3. Keep Your Credit Accounts Open
Why It's Important:
The length of your credit history accounts for a significant portion of your credit score. Closing old or unused accounts can negatively impact this factor.
How to Do It:
• Keep your oldest accounts open to show a longer history of credit.
• Avoid opening new accounts too frequently, as each credit inquiry can temporarily lower your score.!
4. Set Up Automatic Payments
Why It's Important:
Payment history is the most significant factor affecting your credit score. One late payment can drastically reduce it.
How to Do It:
• Use your bank’s online services to set up automatic payments for all your bills.
• Ensure that you have sufficient funds in your account to avoid overdraft fees.
5. Diversify Your Credit Mix
Why It's Important:
Lenders like to see that you can manage different types of credit—credit cards, car loans, student loans, etc.
Minimum Requirements from Lenders:
Most lenders in Canada require you to have at least two different types of credit products (like a credit card and a car loan) reporting on your credit history for a minimum of two years.
How to Do It:
• If you only have one type of credit, consider diversifying by taking out a small installment loan or line of credit.
• Always remember to manage this new credit responsibly.
Conclusion
Improving your credit score doesn't happen overnight. But with careful planning and responsible financial habits, you'll be better positioned to secure a mortgage for your dream home in Canada. Make sure you begin this process well before you plan to apply for a mortgage, as credit improvements can take several months to reflect on your credit report.
Remember, a higher credit score can save you thousands of dollars over the life of your mortgage by qualifying you for lower interest rates. So start now, and take that first step towards your dream home today!