The importance of a good credit score
When buying a home, you really want to put all the odds in your favour. In today’s market you’ll have to deal with a lot of different factors such as bidding wars, short decision delays, financing changes, removal of conditions… Having a good credit score will make your life much easier before you start shopping for a home.
So, we all know what a credit score is, and how it works… But why is it important to financial institutions when applying for a mortgage, and how much difference does it really make?
No one is perfect – Credit scores typically go from 300-900, the bank is not expecting all of its applicants to walk in with an 890 credit score (thankfully ) usually they are looking for a minimum credit score of 600. They use the score to determine if you are a good candidate for a loan, and that you will be able to pay back the debt/borrowed money. They also use our credit score to determine which rate they will be able to offer us.
Example: Jack has a 620 credit score and wants to buy his first condo valued at $320,000, The rate for Jack will be 2.94%. Jill however has a credit score of 795 and wants to buy a $400,000 condo, the rate fore Jill will be 2.89%
Now that we know what they’re looking for and how it will affect us, we should know exactly WHAT affects our credit scores and what we should be focusing on if we want to make it better.
Which factors affect my credit, and how much do they affect it?
- Payment history (35%)
- Amounts owed against your credit limit (30%)
- Length of credit history (15%)
- New credit applications (10%)
- Number of creditors (10%)
How can you improve your credit score?
- Make a budget and stick to it
- Pay your credit cards in full
- Pay bills, credit cards and line of credit on time
- Keep an eye on your authorised limit. Do not use all your available credit.
- Keep your old accounts open to maintain a credit history
- Check your credit report and make sure it is free of errors
- Have only one credit card
- Take out different types of loans
- Avoid applying for too many loans
- Demonstrate your financial stability
This list is long and probably what you were expecting to read, but it is important to always think of your credit score and make decisions that will affect you in a positive nature, especially if you are looking to buy your first home, or your next one! Remember that making changes that will have a positive effect on your credit score takes time. With a bit of perseverance, and the building of some good habits, you should be able to get there quick enough!