Credit Score

One of the things lenders consider when deciding whether or not you are a good candidate for a mortgage loan is your credit score. Your credit score is a measure of your financial health, and shows lenders their level of risk if they lend you money.

What is a credit score?

Your credit score is a number between 300 and 900. A credit score above 700 proves you manage your credit well, meaning a lender should feel comfortable letting you borrow money. A lower credit score shows that you have mismanaged your credit, making you more of a risk to the lender, which means you may be required to pay a higher mortgage rate.

Who assigns my credit score?

Your credit score is built and tracked based on information sent to credit-reporting agencies – more commonly known as credit bureaus – by companies that lend you money or issue you credit cards, such as banks, retailers, credit unions and other financial institutions. This information is used to generate a credit report, which details your activities over the last six years: The types of credit you have, what your limits are, how much you owe on each account and whether you make payments on time. All of this data is translated into your credit score.

There are two credit-reporting agencies in Canada: Equifax Canada and TransUnion. Upon request, both agencies will send you one free copy of your credit report each year, as well as allow you to look up your credit score at any time for a small fee. It’s a good idea to check your credit report annually, to make sure there are no mistakes on it. 

What is a good credit score?

Every lender has its own criteria for what constitutes a good score, so what range you fall under is more important than the exact point value. Here’s a general guide:

• 760+: Excellent—Congratulations, you’re considered the cream of the crop and will be offered the lowest interest rates and best terms on mortgages, loans and lines of credit. You have a long history of using credit responsibly, have a mix of different types of credit, consistently repay your debts on time and keep your account balances low.
  
• 725 to 759: Good—This score signifies to lenders that you generally make most of your payments on time, and your credit balances are relatively low compared to their limits. You’ll still qualify for good rates almost anywhere. The only thing holding you back may be that your balance-to-limit ratio is slightly too high.
  
• 660 to 724: Fair—You represent a default risk because you’ve hit a few financial speed bumps: late payments, too much debt or an account in collections. Creditors may give you a loan, but will charge you higher interest rates and may require a deposit or collateral. You’ll need to do some work to improve your score.
  
• 560 to 659: Poor—A score in this range flags you as high risk, so you’ll experience great difficulty obtaining new credit. If you’re approved for a loan, you’ll have to pay exorbitant rates. Your score may be damaged by late payments to more than one lender, loan defaults or bankruptcy. If you fall into this category, consider talking to a credit counsellor.
  
• 300 to 559: Very poor—Scores in this range are rarely approved for anything. If your credit is this poor, you shouldn’t be applying anyway. Employers who check credit likely won’t hire you, and landlords will probably reject your application for rental housing. To repair your credit, you should focus on reducing your debts, paying off any accounts in collection, making payments on time and switching to a secured credit card to rebuild your credit profile. You should definitely seek the professional help of a credit counsellor.

It’s possible to have a credit score of zero if you’ve never opened any kind of credit account, or if all your accounts are closed or inactive and have fallen off your report after several years. If you have little or no credit history, getting approved can be difficult because lenders have no way to measure your level of credit risk.

How is a credit score calculated?

Credit bureaus keep their exact proprietary scoring models secret, but they generally follow this breakdown:

• Payment history (35%): This is the most important component of your credit score because it shows how you manage your finances and whether you pay your bills on time and in full. It includes any bankruptcies, foreclosures, wage garnishments, liens and delinquencies. The amount of time information stays on your file differs based on which province or territory you live in, but negative information generally remains on your file for seven years.
  
• Amount owed (30%): How much money you owe on your credit accounts and the number of accounts you have that carry balances. Carrying large balances, especially if those balances are close to your limit, can signal to creditors that you aren’t in control of your debt.
  
• Length of credit history (15%): This isn’t simply the number of years since you started using credit, but how long each of your credit accounts have been established, the ages of your oldest and newest accounts, the average age of all accounts and how recently each one was used.
  
• Types of credit (10%): It’s considered healthy to have a mix of three types of credit: revolving (accounts with a different payment each month depending on how much credit is utilized but doesn’t need to be paid in full, such as credit cards), instalment (accounts with fixed payments for a fixed period of time, such as mortgages and student loans) and open (a hybrid—the payment is not the same each month but does need to be paid in full, such as utility accounts)
  
• New credit (10%): The number of recent requests for new credit or newly opened accounts in proportion to older ones. When you apply for most types of credit, a “hard inquiry” (or “hard pull”) will appear on your credit report due to lenders requesting a copy. If you don’t have a long credit history, or apply for lot of credit in a short amount of time, it can negatively affect your score. Requesting your own credit report counts as a “soft inquiry” and will not affect your score.

It’s important to note that one person has more than one credit score—a subscriber may report information to one agency but not the other, or may update one agency with your current information less frequently than the other. The agencies themselves also use different methodologies and software to calculate their scores. Because of this, you should check your score with both bureaus. Your respective scores, however, should fall within the same range—a significant discrepancy can indicate an error. 

How do I find out my credit score?

As noted above, it’s recommended that you check your credit report and score at least once a year. Both Equifax and TransUnion will mail you a free copy of your credit report when you order it via telephone or mail/fax in a request form with photocopies of two pieces of identification. However, the free report will not include your credit score. To find out your score, and to instantly access your credit report online, you’ll have to pay a fee. Equifax and TransUnion offer one-off access to your report and score and subscription services to monitor your credit.

Think of credit as a circle, not a line—it requires constant diligence. If you’ve established good credit, you need to be vigilant to keep it stable. If your score is dismal, you should be working methodically to rehabilitate it.

How to improve your credit score

Why do you need a good credit score?

When the credit score was first introduced, it was meant to help financial institutions make, “complex, high-volume decisions about creditworthiness”. Under that reason, it’s always been a piece of the puzzle in determining what interest rate borrowers can get, when applying for mortgages or other loans.

Today, however, it can be used in what seems like a dozen other circumstances, including when you’re applying for an apartment rental, an insurance policy and even a new cell phone contract. Some people even have to sign off on future employers running a credit check on them, before they can be hired.

Overall, credit scores are meant to prove one thing: how good or “trustworthy” you are with your finances. For this reason, you’ll want to build up and maintain a good credit score for as long as you’ll need access to credit, as the vast majority of people do.

How your credit score impacts your mortgage

Your credit score is important, because it affects which lender you can get your mortgage from and what your interest rate on that mortgage will be. Prime lenders, such as major banks, will definitely give you a mortgage if your credit score is above 700, and they will consider applications with credit scores between 600 and 700.

If your score is between 600 and 700, the rest of your application will need to be strong in order to get approved. The lower your score, the greater risk you pose to the lender. To compensate for that risk, some lenders, such as trust companies and private lenders, will charge you a higher interest rate. Some lenders won’t lend you money at all if your credit score is too low.

Here is a table showing which lenders you can get a mortgage from in different credit score range scenarios.

References and notes

1. Two clients with the same credit score may not qualify with the same lenders. In addition to credit score, lenders will look at income, debt obligations and equity in property, as well as the property itself.
2. Mortgage rates listed are examples of 5-year fixed rates and may change at any time.