Are you a young professional dreaming of owning your own home? Have you been diligently saving for a down payment and browsing through real estate listings in your free time? If so, understanding your credit score is a crucial step in the home buying journey.  Exercising discipline and makinng wise choices to improve your credit score can impact the interest rate you receive on a mortgage, the amount you can borrow, and even whether you are approved for a loan. Let’s delve into the world of credit scores and uncover the key factors that can make or break your financial goals.

One of the important factors in home ownership is understanding things like your credit score.  Some people don’t pay much attention to this metric until they begin the mortgage discussion! However, you will find that your credit score is one of the most important factors when it comes to qualifying for a mortgage at the best rate – and with the most purchasing power.   Whether you qualify for a mortgage through a bank, credit union or other financial institution, you should be aiming for a credit score of 680 for at least one borrower (or guarantor), especially if you have a downpayment of less than 20% of the purchase price.  If you are able to make a larger down payment of 20% or more, then a score of 680 is not required.

If you are not sure what your current credit score is, you can find out through Canada’s two credit-reporting agencies: Equifax Canada and TransUnion Canada. Once you have your credit score, always double check that there are no mistakes and ensure you dispute any problems if applicable.

How Can You Improve Your Credit Score

1. **Timely Payments**: Your payment history is one of the most significant factors affecting your credit score. Make on-time payments for your credit cards, loans, and other bills demonstrates your reliability as a borrower.  Make every payment on time.  This is the most helpful way to improve your credit score.
2.  **Low Credit Account Balances**: Credit utilization refers to the amount of credit you’re using compared to the total amount available to you. Keep your credit card balances low relative to your credit limits.  This can have a positive impact on your score.  We recommend keeping your balances below 35% of your credit limit on each account.
3. **Diverse Credit Mix**: Lenders like to see a mix of credit types, such as credit cards, student loans, and car loans, on your credit report. Manage different types of credit responsibly.  This can really boost your credit score.  We recommend having two or more bank credit accounts with a credit limit over $2,000 each with credit card balances balance being kept under 35% of the credit limit or paid off each month.
4. **Long Credit History**: The length of your credit history matters. Generally, the longer you’ve had credit accounts in good standing, the better it is for your score.
5. **Limited New Credit Inquiries**: When you apply for new credit, it triggers a hard inquiry on your credit report. Multiple inquiries within a short period can signal to lenders that you’re in financial distress. Try to limit new credit applications to avoid this.

My father-in-law once told me that seen people who, with a few bad choices, have destroyed a reputation that has taken a lifetime to build.   This might seem a bit drastic when it comes to credit, but a few bad choices can quickly erode what might otherwise have been a great credit report.  Here are some practices and activities that can lower your credit score and result in a less than favourable credit report.

What Can Harm Your Credit Report?

1. **Late Payments**: Pay attention to your bills each month and make payments on time.  Missing payments or paying bills past their due dates can significantly damage your credit score.
2. **High Credit Card Balances**: Do not allow your credit card balances to exceed 35% of the credit limit.  Carrying high balances on your credit cards relative to your credit limits can indicate financial strain and lower your credit score.  This is a leading contributor to downward pressure on your credit score.
3. **Closing Old Accounts**: Do not close out old credit accounts.  Closing our accounts can shorten your credit history and reduce the overall amount of credit available to you, potentially lowering your score.
4. **Defaulting on Loans**: Do not allow accounts to go into default or collections.  Defaulting on loans, such as student loans or car loans, can have a severe negative impact on your credit score.  The same can be said of a file being sent to collections.  Lender underwriters want an explanation for accounts being in default or collections.
5. **Frequent Credit Inquiries**: Be careful about applying for new credit.  Applying for multiple new credit accounts within a short timeframe can signal to lenders that you’re a higher risk borrower, leading to a decrease in your credit report.
6. **Consumer Report or Bankruptcy**: The most serious harm to your credit history can be attributed to filing a Consumer Proposal or Bankruptcy.  While this might be unavoidable in some cases, while your file is in a Proposal or Bankruptcy, you will not be granted a mortgage loan.  Once a release has been granted, it will take two or more years to rebuild credit.  Great care must be taken to not miss a single payment during this time

While this might sound like gloom and doom, it is important to realize that credit can always be rebuilt.  It just takes time, discipline and diligence.  A mortgage professional has the training and experience to journey with you to help you strengthen or rebuild your credit., and the best time to get started is NOW!