Credit scores are created using very complex equations or algorithms to determine how “safe” it is for a lender to lend money to a borrower. It uses the borrower’s credit history to help determine their ability to pay back a loan. The two main credit bureau companies in Canada are Equifax and TransUnion. They express the score as a number, usually between 300 and 850 – the higher the number, the better the score. One should aim for a credit score of 700 or better. People with better credit scores, have better mortgage options at better rates.
Delinquent accounts and payment history are weighted heavily, but the length of credit history, types of accounts used, number of open accounts and credit inquiries also are involved in the equation.
How to Improve Your Credit Score
First, contact https://www.equifax.com/ or https://www.transunion.ca/ and obtain a copy of your credit history. Ensure there are no inaccuracies in the information that might impact your score. Perhaps there is a creditor listed that you do not recognize or a debt that has been paid off, that is not showing as paid. You can ask that these issues be rectified.
The next step is to gain control of your credit utilization. This means trying to pay down debt so that you are using, at most, 20-30% of your credit available. What does that mean? If you have a credit card with a limit of $1000, try to always pay it off each month, but if that is not possible, try to maintain a monthly balance of no more than 20-30% of the available credit, or in this case no more that $300.
Now it is time to tackle any delinquent accounts you may have and you can not pay off. Contact the creditor, and try to negotiate a smaller pay out amount. If this fails, set up a payment plan that you can afford and will allow you to remain current on your other debt.
Overall, remember that your credit score is quite fluid, going up and down fairly quickly depending on your current situation. If your score is low now, keep working on it and you will see an improvement fairly quickly, perhaps as soon as 6 months (although sometimes it can take a year or two). There is no time like the present to take ownership of your credit rating, and make any improvements that you can to get the best possible mortgage rates.