How credit works: What is a credit score?

Your credit score, or ‘Beacon score’, is a number determined by Equifax (or Transunion) credit agency that reflects your overall likelihood to handle debt responsibly, at a given point in time. The score ranges from 400 on the low end to 850 at the highest. Typically lenders will require a minimum score of 630 – 650 to get into a low rate mortgage and over 680 to attain a lowest rate mortgage.

It is important to note that credit scores change over time, and that anyone can potentially increase their score. In order for a credit score to accepted by a mortgage lender, there must be at least 2 years of credit (such as a loan or credit card) on file. If your score is less than 2 years old, we can still take your application however and work towards a purchase.

Any financial institution that lends money to you must report your credit information and payment activity to the credit agencies.

1. Ensure minimum monthly payments are made. Also make sure that you continue to use your credit card or line of credit – even if this means simply paying for your gas or one bill per month on a given lien. Some credit fluctuation is ok, as long as you make the minimum payments and repay some of the balance. Missing monthly payments will lower your credit score substantially depending on the length of the missed payment, and how many payments were missed.

2. Any line of credit or credit card that carries a balance that is over 40% of the total credit limit will begin to eat away at your score. A credit card that is at or very close to its limit can easily take 30-40 points off of your score.

3. Make sure that your highest credit limit is $2000 or higher. This will prove that you can be responsible with higher credit amounts – such as those seen in a mortgage.

4. The longer your credit has been on file, and the more history of timely payments, the higher your score.

5. Keeping credit checks/ searches to a reasonable minimum will help add some points to your score.

If your credit has been impaired – that is if you have just emerged from collections or bankruptcy, the following steps will help get you back on your feet as quickly as possible. If all goes well, the lowest scores can be brought back to life in as little as 1 to 2 years.

  1. Make sure that you have a credit card with a balance of at least $2000. Credit cards of $500 will not grow your credit. You may require a pre paid credit card until a regular card is granted. Ensure that the card activity will be reflected on your credit history.
  2. Use this card – if only to buy gas or pay one bill per month. But NEVER spend more than 50% of the limit. For example, if your credit card has a limit of $2000, never carry more than $1000 of balance on it at any time. If you have had past credit issues, the credit reporting agencies will be quite sensitive for signs of future credit weakness. In turn, they can be quite harsh to lower your score further.
  3. Do not miss any payment. Mark on your calendar to make payments one week in advance if necessary. One missed payment could set you back months.
  4. About 6 months into having good credit history with a card over $2000, attempt to secure a loan from a bank. Apply for an RRSP loan. Make sure the value of the loan is at least $2500. Try repaying the loan over 2 years to keep the payments manageable. There are several benefits to having an RRSP loan including: a nice tax refund that corresponds with size of your RRSP investment purchase, possible guaranteed interest that can help offset the interest paid on the RRSP loan, and your credit score will continue to increase at an even faster pace!

These are some best practices available to help jump-start your credit score if it has been impaired. If you and a spouse plan on purchasing a home together, make sure that you are BOTH benefiting from the credit repair strategies. Ensure both names are on the credit cards and loans that are reporting to the credit agency.

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