Dear David,
We have a good income and are ready to buy our first home. We spoke to a mortgage advisor about pre-approval, but our credit score was low (it turns out my spouse has a delinquent $125 cell bill from university). How do we improve our credit score? – FRUSTRATED
DEAR FRUSTRATED: Credit scores are critical, as lenders use them to help gauge the creditworthiness of mortgage applicants. A high score can put an applicant on track for approval, while a low score can get them flagged as risky.
The definition of a “good” score can be a bit of a moving target. This past June, Canada Mortgage and Housing Corporation (CMHC) raised the credit score minimum for insured mortgages, so that at least one applicant now requires a minimum score of 680 (up from the low 600’s previously). This makes it more important than ever for buyers to maintain good credit and improve where they can.
The path to an improved credit score starts with finding out where you stand. I suggest pulling full credit reports from both TransUnion and Equifax, Canada’s two reporting agencies. Single reports are available online for about $25 to $30 each, and contrary to what you may have heard, requesting them will not affect your credit score. It’s important to order both reports, since lenders may not be submitting data to both agencies. Sign up only for what you need, be it a one-time report or a subscription you can monitor monthly to see if you are making progress.
Check your reports for errors, incomplete entries and delinquent balances. As you have discovered, past issues can come back to haunt you, and even keep you out of the housing market. That outstanding $125 cell bill on your spouse’s record needs to be paid off immediately, along with any other missed payments, no matter how minor. Paying these debts won’t erase them from your record, but it may improve your image with creditors.
Moving forward, pay your bills on time, or a few days in advance to allow for banking lag. If you can’t pay the balances in full, make the minimum payments at the very least.
Watch your credit card balances. Avoid using too much of the credit you have at your disposal, and make sure that your payments are clearing. Resist the temptation to apply for new credit cards at the checkout, as these can have a negative impact on your credit report and may make you seem irresponsible to lenders, we always recommend to only have one online credit card.
Finally, stay on top of things by checking your accounts online, rather than waiting for bills to arrive in the mail.
As a potential homebuyer, your credit doesn’t need to be perfect, but a stronger score may improve your access to better rates and terms when you are in a position to be approved for a mortgage.
PRO TIP: Your imperfect credit history is not set in stone. Paying bills ahead of time and not charging cards to the limit can boost your score almost immediately. Keep in mind that a bit of credit score fluctuation will be inevitable as payments are made, limits are adjusted and your debt-to-credit ratio changes. #AskDavid #Advice
