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Everything you need to know about your Credit Score

Everything you need to know about your Credit Score

As a mortgage broker, one of the biggest problems we see is that people often begin applying for a mortgage without first understanding what their credit score is. Your credit score is a crucial determining factor in whether or not a bank will extend you a loan. If your credit score is too low, no matter how many banks or credit unions you apply to, you will always end up with a denial notice. Conversely, if your credit score is high, you’ll likely be able to put in your application anywhere and wind up with the best rate.

Since obtaining a mortgage is a time-consuming process that will involve at least one hard pull on your credit report, you will want to know your credit score before applying. If your score is too low to obtain a mortgage, you will want to make changes now to improve it.

How Is My Credit Score Used and What Number Is Too Low?

Would-be home buyers should think of their credit score as the first step to qualifying for a loan. It is the “gatekeeper.” Your score tries to predict how much of a risk it will be for the bank to lend you money. Too low of a credit score, and you will receive an instant denial. If you have a perfect credit score, most financial institutions would be happy to have you as a client. Few people have the worst credit score possible and equally as few have the best. Most of us fall somewhere in the middle.

Other factors, such as your TDS and GDS ratios, also come into play before a bank will underwrite the mortgage. However, even with TDS and GDS numbers under the maximums, if you don’t have a decent credit score, unfortunately, you won’t get a loan. 

There is no law stating the minimum credit score for a lender. Usually, it’s up to the particular financial institution to set the credit score with which they are comfortable. When looking for a home, you should have at least 700 and preferably 720. If you have under 700, some lenders may be able to accept as low as 650, but that is not common. A score of 620 or below is a “hard stop” [1]. 

If you have a score at or below 650, you should improve it before contacting your bank. You’ll save quite a bit of frustration by doing so. You can still talk with a mortgage broker to see if they might have a solution for you, but, in general, finding a mortgage will be an uphill battle.

What Can I Do To Boost My Score?

There are numerous ways to boost your credit score. For most people, the easiest way to give their number a substantial boost is by paying off debt. The amount of unsecured debt you have in proportion to the maximum limit is the single most impactful metric. By paying that down, you will almost invariably boost your score.

It is worth noting that it is the ratio that matters. If you have $10,000 in debt on your credit cards and their combined limit is $20,000, you will have a usage percentage of 50%. If their combined limit is $40,000, then the usage amount is 25%. Credit bureaus view the latter scenario as being significantly more preferable. A usage of 35% or less is what you need. If you use more than 35%, you will find your credit score quickly sinking [2]. 

Given the fact that your ratio matters most, an alternative way to boost your score is to increase your overall limit. There is a downside, however. Requesting a credit limit increase will invariably result in a hard pull of your credit. A hard pull of your credit report stays on your file for two years and will decrease your score very slightly. However, if you have $10,000 used on a $20,000 credit card, bumping that up to even $25,000 or $30,000 in limit could boost your score significantly. If you have reasonably high confidence that your limit increase will be approved, it is something to try.

Another way that you can boost your credit score is by restructuring your debt. Having a wider variety of debts, such as car loans, personal loans, and credit cards, looks better than using only one type. Lenders like to see that you are responsible for multiple credit types. After all, a credit card is much different than a car loan. A car loan requires you to have the money available at the time the payment is due. Credit cards are a lot more flexible. You could even, in theory, withdraw from the cash balance to pay the minimum amount due.

One last way to improve your score is to pull it and check for errors. It is not uncommon to find mistakes within your credit report. Sometimes errors are glaring – like a negative mark for a missed payment when you never had one. Other times, however, these mistakes are subtle. An incorrectly recorded limit on a personal loan could have a dramatic effect on your score. For example, if your report said you had used $20,000 of your $4,000 limit (instead of the correct $40,000), you would have a credit usage ratio of 500%. In this particular case, one small error could tank your overall score.

Bottom Line: Know Your Score

Your credit score will have a significant impact on your mortgage. A low score can result in a lousy interest rate or, worse, a straight denial. While it is not the only factor lenders will consider, it is arguably the most significant. A bad credit score is challenging to overcome.

No matter what your credit score is, talk with a mortgage broker to see what your options are. At Citadel, we work to get all people approved. If your score is low, we may give you some pointers on how to improve it or work with a lender that could still give you a mortgage. Of course, if your score is stellar, we can help you find the best possible interest rate. Speak with us today and let us find the perfect mortgage for you!

[1] https://www.theglobeandmail.com/investing/personal-finance/article-low-credit-score-how-to-appease-picky-mortgage-lenders/

[2] https://www.canada.ca/en/financial-consumer-agency/services/credit-reports-score/improve-credit-score.html

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