Why Is My Credit Score So Low?
How to Manage Your Credit Score?
Your credit score is one of the first things a creditor will consider when determining whether or not you’re a good candidate for a mortgage. It shows creditors their level of risk if they lend you capital, and is a gauge of your financial condition.
It’s important to note that not only prospective lenders use credit scores. Insurance companies are increasingly using credit scores as a predictor of receiving their premiums on time, and also to gauge your financial behaviour, which could be a good predictor of your overall risk. Prospective employers are also known to check credit scores in order to screen out undesirable applicants.
Credit scores reveal payment patterns over time, with more weight given to recent information. Your credit score is a number between 300 and 600. A creditor should feel relaxed allowing you to borrow money if your score is over 700 since this shows that you manage your credit well. You’re more of a risk to the creditor if you have a lower score, which can show that you’ve mishandled your credit. If your score is lower you may be required to pay a higher mortgage rate.
Large stores, banks, credit unions and other financial institutions, and other businesses that issue credit cards and lend you money send your information to credit-reporting agencies – popularly known as credit bureaus – and these bureaus use this info to build and track your score.
TransUnion and Equifax Canada are the two credit-reporting agencies in Canada. Both agencies will send you one free copy of your credit report every year (upon request), in addition to allowing you to look up your credit score at any time for a small charge. Checking your own credit does not impact your score. In order to ensure that there are no errors on your credit report, it’s a good idea to take advantage of the free annual copy offered by the agencies.
Issues that can Impact Your Credit Score
Each credit-reporting agency uses its own exclusive method to determine credit scores. Certain factors are more important than others. Your score is estimated based on the following:
- Credit Utilisation – The ratio of your current debt to the amount of credit you have available will impact your credit score. You should always try to keep your current debt below 35 percent of your available credit.
- Payment History – Past due accounts, late or missed payments, any written off debts, and past insolvencies will lower your credit score
- Requests for New Credit Lines – How often you apply for new credit and the recency of your last request.
- Credit History – How long you’ve maintained accounts for – the longer, the better.
- Types of Credit – It’s best to have a mix, for example, a car loan, a few credit cards, and a line of credit.
The Impact of a Mortgage on Your Credit Score
The interest rate you will get on your mortgage, and which lenders you can approach, are all impacted by your credit score. Major banks and other prime lenders will certainly give you a mortgage if your score is above 700, and they will consider requests from people falling within the range of 600 to 700. If you fall within the latter category, the rest of your application will need to be strong in order for your mortgage to be approved.
The lower your score the greater the risk you pose to the lender. Some lenders, for example, trust companies and private lenders, will charge you a higher interest rate in order to offset that risk. If your credit score is too low, some lenders won’t lend you money at all.
Improving Your Credit Score
Keep in mind that your score is a record of past behaviour, so your current actions won’t magically make past mistakes disappear. If you implement the suggestions in this article, however, you should start to see some improvements over the next year, and your new credit score is likely to be higher.
Obviously, it’s best to avoid those things that can have a harmful effect on your credit rating in the first place.
If you’ve newly relocated to Canada and would like to establish a score, or if you have damaged (or ruined) your credit, here’s what you can do:
- Always make at least the minimum payment on your accounts, on or before the agreed date. You should immediately let your lender know if you can’t make the minimum payment, as they may be able to accommodate you by extending your due date. Collections and delinquent payments can have a hugely adverse effect on your credit score.
- Use at least two credit facilities at all times. Use each one at least once a month, and pay off the balance.
- Establish a lengthy credit history. Even if you seldom use your oldest credit card, try not to cancel it. Your credit rating improves when you have a long history. And good debt that you’ve paid as agreed and handled well is good for your credit. So don’t get on the phone with your credit agencies to have the old debt removed from your record – leave it as long as possible.
- Don’t use more than 35 percent of your available credit. For instance, if you have a line of credit with a limit of $8,000, and your credit card maximum is $2,000; try not to use more than $3,500 on the two facilities at any given time. High outstanding debt can negatively affect your credit score.
- Don’t apply for credit too often. Lenders frown upon this. Also, pay off debt instead of moving it around.
- Check for errors on your credit report. In this age of identity theft, people can fraudulently apply for credit in your name without your knowledge, so if you see anything in your credit report that doesn’t apply to you, contact your credit bureau immediately to have it removed.
Remember, nothing will change if you continue with your old behaviours. So get in action, order a copy of your credit report, and save this article so you can improve your credit and your standard of living.
Factors to keep in mind:
Some people may find that their credit rating needs improvement if they are going to lock in a loan at an affordable interest rate. In this instance, you can help improve your credit score by:
- Correcting any errors or misinformation that is showing up on your credit report.
- Paying all your bills on time.
- Cutting up or putting away your credit cards so you can focus on repaying debt rather than incurring it.
- Consolidating your loans and credit card debt into one larger loan.
- Avoiding going over the limit on your credit card. A high balance will have a greater impact on your credit score.
- Restricting the number of applications for credit that you make. Too many inquiries into your credit in a short time may have a negative impact on your credit score.
- Contacting your lenders and make inquiring about alternate repayment solutions if you need to do so.
- Developing a plan to reduce your debt that includes evaluating your lifestyle and the money you are spending and puts any “found” money toward debt reduction.
- Consulting a credit counsellor. Canada has many not-for-profit agencies that can help you assess your options.
Even if your credit rating is not stellar, it doesn’t mean you cannot qualify for a mortgage loan. There are many institutions out there that will be willing to finance your loan, just be warned that this can come at a high cost since their interest rates are sure to be higher. A good mortgage broker can help you find an institution with the best interest available to you. This will let you assess whether homeownership needs to be postponed for a complete of years, or whether you can take the loan now and adjust the mortgage at renewal or after a couple of years clean payment history.