What makes a good credit score?

One of the crucial things borrowers need to achieve before being able to proceed with their home-purchase journey is a good credit score.

In applying for a home loan, credit scores dictate not just the borrowers’ eligibility but the interest rates and terms lenders will offer, said Clover Mortgage president Steven Tulman in a think piece in B2C.

"If your credit score is low, then you will likely find it more difficult to qualify for credit products, and if you are able to qualify you will likely be forced to pay higher interest rates and costly fees," he said.

In Canada, credit scores usually range from 300 to 900. Most Canadian lenders consider scores below 600 as risky. A borrower with a credit score of 599, for instance, will have lower chances of getting approved for a home loan.

However, a bad credit score does not always mean an instant no from lenders. Some mortgage providers still consider low credit scores — the catch is, the available options will be limited.

"Even with bad credit, you might still be able to qualify for prepaid credit cards, or a mortgage loan through an alternative lending institution such as a trust company. If your credit is really bad, then you can qualify for things like a mortgage or home refinance loan through a private mortgage lender," Tulman said.

Credit scores are computed using five factors, but the two biggest things borrowers should be aware of are their repayment histories and utilization ratios.

"The habits you display through your payment history is one of the most influential factors that affect your credit score. About 35% of your credit score is based on your payment history and habits," Tulman said.

In terms of utilization ratio, lenders consider the current debts borrowers owe and their overall credit limits.

Other factors that make up credit scores are the types of credit, new credit histories, and the length of time.

As a rule of thumb, borrowers need to achieve a score considered "good", which is around 650 to 719. Achieving a "good" score will enable borrowers to unlock better deals.

"With a good, very good, or excellent credit score, you will be able to qualify for better credit and loan products at great low rates," Tulman said.

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