The Importance of Credit Rating
If you plan to buy your dream house through mortgage finance, your credit rating (score) will play a critical role in determining how much you can borrow. A credit score is a three-digit number which allows lenders to assess the risk of lending to you. The higher your credit score is, the better your mortgage prospects will be. On the other hand, the lower your score is, the higher your interest rates will be, and the slimmer are your chances of obtaining a mortgage.
To access your credit information, there are four main credit information collecting agencies in Canada, which lenders can consult. Out of these, Equifax is primarily used by most lenders. These agencies collect personal credit-related details from their members in the lending community.
They have information on loans, leases, lines of credit, as well as credit cards used by different borrowers. They keep track of your credit limit and your credit balances, the frequency of your late payments, and other credit-related details. They generally emphasize on how often your credit is used and how your balance to limit ratio is maintained. These details are then put through a unique algorithm to identify your credit rating.
How are credit ratings used?
Lenders use credit ratings to price mortgage or loan interest rates. An outstanding credit rating will get you the best possible interest rate. In case you have poor credit ratings, you will be charged higher rates. In some cases, lenders may even decline your credit application.
Credit scores are used in a lot of credit situations. The newest is car and house insurance. You may need to pay a higher insurance premium if your credit score is inadequate. That’s because insurance companies feel that there are higher chances of your house catching fire or your car being stolen when you have credit issues.
How to improve your credit rating?
If your credit rating is good or excellent, congrats, you have some great options lined up for you! If your credit is poor, do not give up hope as there are several ways in which you can improve your credit score. You can begin by talking with a professional (like a mortgage broker) who understands what is needed to improve your credit score. However, please keep in mind that improving your credit does not happen overnight. It may take months for it to get better. The algorithm used to determine credit scores requires a history of a few months to show how your credit has improved.
Tips to improve your credit rating:
#1: Start paying your bills on time and don’t miss any occasional payments.
#2: Keep your credit balances to the prescribed limit, which is under 70%. If your credit limit is low, try to have your lender increase it. If there is a $1000 limit and you owe $1050. This is not good. If you can have a $2000 limit, you will now have a 50% balance to the limit. This will help increase your credit score. The other option is to pay down your credit card to under $500.
#3: Talk with your insurance company or lender to see why you are paying a higher premium. If your credit score is the issue, you need to find out why you have a low rating, so you can effectively work on a solution to improve it.
Besides your credit score, your income also plays a vital role in determining your prospects of obtaining a mortgage. To know where you stand as a borrower, reach out to Canadian National Mortgage Corporation, O/A The Mortgage Centre. We offer mortgage solutions in Mississauga, Ontario.
Our founder, David, is licensed in the province of Ontario as a mortgage broker with over thirty years of experience. Given his experience, he understands how to help people improve their financial standing to obtain a mortgage successfully. Moreover, he listens to your needs first, then tailors solutions that meet your unique requirements.
To learn more about what we do at Canadian National Mortgage Corporation, O/A The Mortgage Centre, please click here. To get in touch with us, please click here.