Your credit score is one of the most important numbers lenders consider when you apply for a mortgage. It provides a snapshot of how you manage borrowed money and helps lenders assess the level of risk involved in lending to you. Understanding how your credit score is calculated can help you make small adjustments that may improve your financial profile and potentially lead to better mortgage options.
Your credit score will typically range between 300 and 900. The higher the number, the stronger your credit profile appears to lenders. Credit scores are typically categorized as follows:
· 300-559: Poor
· 560-659: Fair
· 660-724: Good
· 725-759: Very Good
· 760-900: Excellent
While many people focus only on the number itself, the score is actually compiled using several different factors that reflect your overall credit behaviour.
Payment History – 35%
Your payment history is the single biggest factor affecting your credit score. Lenders want to see that you consistently make payments on time. Late or missed payments on credit cards, credit lines, loans or other credit accounts can lower your score and remain on your credit report for years.
Credit Utilization – 30%
Credit utilization refers to how much of your available credit you’re actually using. For example, if your credit card has a $10,000 limit and you carry a $5,000 balance, your utilization rate is 50%. Generally, keeping your balances below about 30% of your credit limit can help support a stronger score.
Credit Age – 15%
This factor looks at how long your credit accounts have been active. A longer credit history provides lenders with more data about how you manage credit over time. Closing old accounts can sometimes shorten your average credit age, which may impact your score.
Credit Mix – 10%
Lenders like to see a variety of credit types, such as credit cards, credit lines and installment loans. A healthy mix can demonstrate that you can responsibly manage different forms of borrowing.
New Credit – 10%
Each time you apply for new credit, a hard inquiry may appear on your credit report. Multiple applications within a short period can signal financial stress to lenders and may temporarily lower your score.
The good news is that improving your credit score often comes down to consistent financial habits. Paying bills on time, keeping balances low and avoiding unnecessary credit applications can gradually strengthen your score.
Canada’s two credit reporting agencies are Equifax Canada and TransUnion Canada. Both agencies have a credit history file on anyone who has ever borrowed money. Every time you borrow money or make a payment on a loan or credit card, the lender then reports information about the transaction to these two agencies.
It’s a good idea to request a copy of your credit report from both agencies at least once a year, since these two reports can vary widely. You can make these requests online. Not only will this check help verify that your personal information is up to date, but it will also ensure that you haven’t been the victim of identity fraud. If there are errors, it’s important to dispute them right away.
When it comes time to apply for a mortgage, a stronger credit score can help you qualify for better rates and more flexible lending options. If you’re unsure where your credit stands or want guidance on improving it before buying or refinancing a home, having that conversation with your mortgage agent early can make a meaningful difference in your mortgage strategy.
Wondering how to maximize your creditworthiness? Answers to all your questions are a call or email away!