Improving your credit score

Your credit score and history reflect your strength as a borrower, and as such, have an enormous impact on your ability to get a mortgage – especially one with a competitive interest rate and good terms. If you don’t know whether or not you have good credit, don’t wait until you’re filling out a mortgage application to find out.

What is credit?

Before you can improve your credit score, you need to know the five factors that go into determining it. These things impact whether or not a lender sees you as a non-risky borrower.
  • Credit – Your credit history is your track record when it comes to managing and making payments on previous loans. It’s measured by your credit score, which is a number on a scale from 300 to 900. The higher your score, the lower the risk you present as a borrower.
  • Capacity – Your capacity is a look at your ability to repay loans based on your current cash flow. If your debts account for 70 per cent of your income, for example, you’re not an attractive candidate for someone to lend you money.
  • Capital – Show lenders the money; they want to see that you have some skin in the game as well by providing something upfront, i.e., your down payment.
  • Character -- Even if your credit history isn’t so great or you have a spotty past, you may still may be able to get a mortgage based on whether or not your lender thinks that you will repay the loan. They may look at your length of employment as a measure of your overall stability, for example.
  • Collateral – Yes, the property that you want to buy will be collateral, but proof of collateral can also be in the form of other people’s property, as indicated by a guarantor or co-buyer.

Life is full of the unexpected, and sometimes those unanticipated twists and turns can leave you in dire straits financially. If you’ve gone through a tough time and damaged your credit in order to dig your way out, or if you developed some bad credit habits when you didn’t know how credit worked and have since educated yourself on the subject, know that you don’t have to live with bad credit history forever.

You may think that your credit history works like an elephant’s memory: It never forgets, and your chances of getting a “good” mortgage with bad credit is near impossible. The good news is, you’re wrong! According to the Financial Consumer Agency of Canada, “By law, negative information can only be kept on your credit report for a certain length of time. For most information, the maximum is six or seven years. The exact amount of time varies by category and by province or territory. Positive information, such as accounts that you paid on time, may be kept longer.”

You also may get lucky in that lenders have the ability to be understanding and generous when it comes to past credit blunders, such as a period of unemployment or divorce or other hardship. But it’s far from the norm.

“You’ve got to be in control of your own credit file, because the bank doesn’t really care. They’ll say, ‘Oh, that’s too bad, I’m sorry to hear that,’ and you’re declined,” says James Robinson, mortgage agent and owner of Dominion Lending Centres Mortgage Watch. “I’ve certainly seen situations where they have said, ‘Okay, we understand that this was three years ago, you went through this six month separation where everyone was fighting with each other and your credit went down for six months but then you figured it out, and for the last two and a half years you’ve been perfect,’ and they will say that’s okay. But more often than not, your credit remains bad.”

How to fix it

It’s never too late to fix bad credit. So whether you’re going through a rough patch and find it hard to keep up or have given up hope that you can do anything about your credit, keep in mind that credit isn’t just something that happened in your past. Instead, it’s a rolling track record. Everything is recorded, and it’s in your best interest to do the best you can now, lest a poor history affect your future borrowing capacity.

First, continue to pay your bills by their due date. This may seem like a no-brainer, but people think that letting bills slip “just once” and catching up with them on the next cycle is the way to go. Once you’re late, though, even if it’s just one cycle, you can be penalized. Even if you don’t have the money to pay off your balance each billing cycle, even just making the minimum payment – although bad for you in terms of interest on your debt – is better for your credit score than waiting to pay more the next time.

You should also review your credit reports each year and know what’s on them. You can request a free copy of your report directly from each of the two credit reporting agencies, TransUnion Canada and Equifax Canada. These reports can reveal anything from innocent data entry mistakes to serious instances of fraud, so it’s important to keep on top of it. If there is an error on the report, contacting the credit reporting agency and the creditor to get it corrected and/or removed can boost your credit score very quickly. You can also pay to get your exact credit score from each of the agencies, but that’s actually not as useful because the number will vary slightly depending on who’s requesting the information and it won’t have any details as to why your number is what it is. So save your cash and get the more detailed, free report.

Try to refrain from closing old credit card accounts, even if your balance is at zero. Lenders like to see that you have credit available to you but that you’re responsible and flush enough to not actually need to use it. If you have a difficult time with overspending and managing your credit line, keep the accounts but cut up the cards so that you can’t use them. Remember, your credit history goes back years, so if an account that’s in good standing is closed, it goes against you rather than working in your favour.

In that same vein, opening a line of credit can be a good thing. This is especially true if you have limited credit history or don’t have very many accounts. An example of good credit isn’t just about how much debt you have relative to how much money you have, although that’s part of it. Good credit also has to do with how you manage that debt, and if you have accounts in good standing with many creditors/lenders, then that reflects well on you and your ability to manage debt in a responsible fashion.

Be careful, though, that you’re not getting too many loans at one time. If you apply to borrow a lot of money within a short period of time, lenders will assume that you either don’t have enough money to support yourself, or that you don’t know how to manage the money that you do have, both of which would indicate that you would be less likely to be able to repay any money that they borrowed from you. 

Lastly, most people are under the impression that living without debt is a good thing, and that’s true when it comes to living within your means. But having no debt doesn’t mean having no credit. If you don’t have credit available to you, or if you have never really used credit, that will negatively affect your credit history because there isn’t a paper record of you managing your money. Be smart about your credit and you will have options for years to come.

More Mortgage Guide