Your credit score plays a crucial role in securing the lowest mortgage rates in Canada, making your monthly mortgage payments more affordable. The first step in the mortgage process, once you have completed the application, is pulling and reviewing your credit report. A higher beacon score puts you in a better position to secure a lower interest rate. Understanding and maintaining a good credit score is essential for securing the best mortgage rates available.
Here is a breakdown of the factors that determine your overall credit score:
- 30% Amount Owed
- 35% Payment History
- 10% Type of Credit
- 10% New Credit
- 15% Length of Credit History
Credit scores in Canada range from 300 to 900, with the average being 750 to 799. Only 27% of the population falls within this range, a percentage that is declining due to economic hardships.
Having too many credit cards can negatively affect your credit score. If you have a credit card that you have paid off and no longer use, it is best to close the account. You only need two major credit cards. When closing credit accounts, it is best to close those with the least history. Active accounts still impact your credit score, even if they are not in use.
Credit-reporting agencies rate each item on your credit history on a scale of 1 to 9. A rating of “1” means you pay your bills within 30 days of the due date, while a rating of “9” indicates that you never pay your bills or have made a consumer debt repayment proposal to the lender. A letter will appear in front of the number, indicating the type of credit you are using:
- “I” for installment credit (e.g., car loans)
- “O” for open credit (e.g., lines of credit)
- “R” for revolving credit (e.g., credit cards)
The most common ratings are “R” ratings, known as North American Standard Account Ratings. If you always pay on time, your rating will be coded as R1. If an amount was written off because you never paid it back, it is coded R9.
Here are Canada’s major credit-reporting agencies:
R0: Too new to rate; approved but not used
R1: Pays (or paid) within 30 days of payment due date or not over one payment past due
R2: Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due
R3: Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due
R4: Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due
R5: Account is at least 120 days overdue, but is not yet rated “9”
R6: This rating does not exist
R7: Making regular payments through a special arrangement to settle your debts
R8: Repossession (voluntary or involuntary return of merchandise)
R9: Bad debt; placed for collection; moved without giving a new address or bankruptcy
Another factor affecting your credit score is the number of times your credit is pulled. Multiple checks in a short period can lower your score. However, you are allowed a certain number of checks within a timeframe without affecting your score. When shopping for a car or house, lenders understand multiple checks and will overlook them if you explain that your current credit score reflects shopping around.
Understanding your credit score can be confusing, but it is crucial to check it at least every six months. This ensures there are no errors or fraudulent activities affecting your score. Keeping your credit report accurate is vital when seeking mortgage pre-approval and the best mortgage broker to help you navigate mortgage rates in Canada.
Two major companies track your credit report in Canada: Equifax and TransUnion. Some lenders may pull reports from both agencies, as they can sometimes have different information.
You can contact Equifax and TransUnion to get a copy of your credit report:
- Equifax : Call 1-800-465-7166 between 8:00 AM and 5:00 PM ET
- TransUnion : Call 1-800-888-4213
Staying informed about your credit score and report is essential for obtaining the best Canadian mortgage rates. Utilize tools like a mortgage calculator Canada and seek advice from the best mortgage brokers to guide you through the process of mortgage pre-approval and securing favorable mortgage rates in Canada.