You’ve saved up enough for a down payment and now you’re ready to buy your next home. But, if you’re planning on financing your purchase with a mortgage, you might want to check and improve your credit score.
Your credit score is an important measure of your financial health and is the first thing banks and mortgage lenders will look at to assess whether you can be trusted to consistently make your mortgage payments on time. A low score can reduce your chances of the best mortgage rate or prevent you from being approved at all.
Here are the five biggest reasons your credit score may be lower than expected and how you can fix them:
Not paying your bills on time
The most important factor affecting your credit score is your payment history. Missing even just one credit card bill for example can cause your score to drop – not to mention you’ll accrue interest for carrying a balance. Always pay your credit bill on time, but if you can’t, make sure you’re paying at least the minimum. A simple way to avoid paying late is scheduling automatic payments for all your bills from your bank account.
Your credit utilization ratio is too high
After payment history, the next biggest influence on your score is your credit utilization ratio – that’s the amount of available credit you use each month. For example, if you have a credit card balance of $5,000 and a credit limit of $10,000, your utilization ratio is 50%. Lenders generally prefer to see a credit utilization ratio of no more than 30% of your card’s credit limit. Anything higher can decrease your score and make lenders think you will have trouble paying off your debt.
Not enough information in your credit history
While a low credit ratio is generally recommended, not using the card at all won’t help. Banks and lenders want to see that you have a long-established history of managing debt responsibly. Using a credit card and paying it off on time every month can quickly boost your score.
Closing your oldest accounts
Your credit score also takes into account the length of your credit history. The longer your history, the better, which is why experts recommend you keeping credit card accounts open, even if you don’t use them anymore. Closing old credit cards, especially your oldest card, makes your credit history seem shorter than it actually is and can cost you valuable points. The good news is the first card you were approved for is likely a no fee credit card, which means it won’t cost you anything to keep it.
Applying for too many cards at once
Some credit card or loan offers might seem too good to pass up. But every time you apply for new credit you trigger an inquiry on your credit score. One hard inquiry won’t have much impact, but several inquiries in a short period of time can raise red flags and lower your overall score. Keep your inquiries to a minimum and only apply for credit as needed. This is true for anyone that checks your credit – insurance, utilities, or even your landlord.
Good credit goes a long way
A low credit score isn’t the end of the world. With a little work and patience, you can get your finances back in good shape. One way you can start is by getting a secured credit card. These credit cards are for people with bad credit and virtually anyone who applies for one is guaranteed to be approved under the condition they provide a security deposit.
If your credit is in good standing, and you’re able to pay your bills every month, you should look to double up your earning potential with one of the best travel credit cards in Canada. These cards offer points for every dollar you spend that let you save on travel-related expenses like flights. If you’re not into travel, check out the best cash back credit cards which give a percentage of all your card spending back to you.
By using a credit card responsibly and paying your balance off on time and in full every month, you can boost your credit score – and, in turn, your chances of being approved for a mortgage.