Mortgage Credit Scores
Your Canadian Credit Score, also known as your “FICO score”, is calculated based on the information contained in your Equifax credit history. While knowing your actual score is a good start, understanding the key factors affecting your FICO score is much more important.
What is a Credit Score and how does it affect my chance of getting a mortgage?
What is a credit score? Your credit score and rating are produced by Equifax. Your credit score is also referred to as a FICO Score as the mathematical formulas behind your score were created by Fair Isaac & Company (FICO). This Credit Score is used by most lenders to help them decide whether or not you’re a good credit risk. Equifax crunches the numbers from your credit report, and spits out a score somewhere between 300 and 850. A low score says you’re a bad credit risk, a score of 750 or higher puts you in the driver’s seat.
Here are some factors considered when calculating your credit score and an estimate of how heavily each factor might be weighted:
Past payment history (35%): bankruptcies, late payments, past due accounts and wage attachments
Amount of credit owing (30%): amount owed on accounts, proportion of balances to total credit limits
Length of time credit established (15%): time since accounts opened, time since account activity
Search for and acquisition of new credit (10%): number of recent credit inquiries, number of recently opened accounts
Types of credit established (10%): number of various types of accounts (credit cards, retail accounts, mortgage)
A summary of factors that affect your credit score
The length of time your revolving or non-revolving accounts have been established is too short:
This reason is based on the age of the revolving or non-revolving charge accounts on your credit bureau report. A revolving account such as Visa, MasterCard, or retail store card allows consumers to make a minimum monthly payment and roll or “revolve” the remainder of their balance to the next month. Non-revolving accounts such as American Express and Diners Club must be paid off in full each month.
Research shows that consumers with longer credit histories have better repayment risk than those with shorter credit histories. Also, consumers who frequently open new accounts have greater repayment risk than those who do not.
It is a good idea to only apply for credit when you really need it. Meanwhile, maintain low-to-moderate balances and be sure to make your payments on time. Your score should improve as your revolving credit history ages.
The amount owed on your accounts is too high:
The score measures how much you owe on the accounts (revolving, non-revolving, and installment) that are listed on your credit bureau report. Research reveals that consumers owing larger amounts on their credit accounts have greater future repayment risk than those who owe less. (For credit cards, the total outstanding balance on your last statement is generally the amount that will show in your credit bureau report. Note that even if you pay off your credit cards in full each and every month, your credit bureau report may show the last billing statement balance on those accounts.)
Paying off your debts and maintaining low balances will help to improve your credit score. Consolidating or moving your debt around from one account to another will usually not, however, raise your score, since the same amount is still owed
Proportion of loan balances to original loan amounts is too high:
Simply having installment loans and owing money on them does not mean you are a high-risk borrower. To the contrary, paying down installment loans is a good sign that you are able and willing to manage and repay debt, and evidence of successful repayment weighs favourably on your credit rating. The FICO score examines many aspects of your current installment loan and revolving balances. One measurement is to compare outstanding installment balances against the original loan amounts. Generally, the closer the loans are to being fully paid off, the better the score. Compared to other measurements of indebtedness, however, this has limited influence on the FICO score.
Paying down installment loans on a timely basis generally reflects well on your credit score. But if you want to improve your score, one way to do it is to try to pay the loans, down as quickly as you can.
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This offers an outline of the steps involved when buying a home and qualifying for a mortgage. But it has probably left you with a few questions. We would love to hear from you – please take the time to Contact Us if you have questions.