With the recent and continuing interest rate hikes, potential homebuyers who were already on the fringe of housing affordability were effectively priced out of the market. A potential solution to this situation is to reduce the mortgage interest rate you are eligible to receive.
With a good or excellent credit score, you will likely be offered lower interest rates on the money you borrow which also means that you pay less overall for credit purchases.
When you are ready to buy a home, shop around for mortgages and research the lenders before accepting a mortgage. With a purchase of this magnitude, having the right team of professionals is crucial for a seamless, hassle-free transaction.
If you’re buying a home in Mississauga, for example, using local real estate professionals like a Mississauga real estate lawyer or real estate agent gives you access to insights a real estate agent from outside the city might not have.
Taking advantage of those insights can save you thousands of dollars over time. The same is true for even the smallest reduction in a mortgage rate. This is why optimizing your credit score can be the difference that enables you to afford home ownership.
What is a Credit Score?
A credit score is a three-digit number between 300 and 900 that credit reporting bureaus like Equifax and Transunion use to score potential borrowers based on their ability to pay back money loaned to them.
Your score is based on the information in your credit report as it contains a history of your credit accounts, payment history, and other information discussed in the next section.
The higher your credit score, the more likely you are to be offered credit products, get approved on your credit applications and have access to higher loan amounts – and the more likely you will be offered lower interest rates.
How is My Score Calculated?
These are the factors that affect a credit score and the percentage of a score that factor is used to calculate:
- Payment History – 35%. Every payment you make, and miss, on a credit account, is recorded.
- Credit Utilization – 30% This is the percentage of the credit available to you that you use.
- Credit History – 15% Your credit history is the length of time a credit account has been active.
- Credit Mix – 10% Credit mix shows the percentage of your total credit that is allocated to each type of credit account, i.e., how much of the money you’ve borrowed is from credit card accounts vs how much you have out in loans, etc.
- Credit Inquiries – 10% A credit inquiry takes place when you apply for a credit account, not when you ask for a copy of your credit report and score.
When the credit bureaus analyze these factors, they come up with a credit score that lenders use as part of their decision on your application for credit. These are the credit score ranges and how they are defined:
|300 – 574||Poor|
|575 – 659||Below Average|
|660 – 712||Fair|
|713 – 740||Good|
|741 – 900||Excellent|
How Can I Improve My Credit Score?
As you can see from the percentages above, improving in the categories with the most influence on a credit score can have the greatest impact on your credit score.
Having a have a long history of making your payments on time carries the most weight for creditors who want to know that an applicant has proven that they are financially responsible and are at low risk of defaulting on the account.
To avoid missing bill payments, set up as many of them as you can for auto-withdrawals, and don’t let that account dip below a specific amount to give yourself a cushion for emergencies.
Creditors also want to know that you can live within your means and aren’t relying on credit to get by. If your credit card or line of credit is maxed out, consider consolidating your accounts and reducing the percentage of available credit you use. 30% utilization is the optimal rate.
The longer a well-managed account is open, the better you will do in this category. This means keeping older credit accounts active and not closing them or paying them off.
Creditors prefer that you have different types of credit accounts and not one or multiple accounts of the same type. Diversifying your credit accounts can improve your standing in this category.
Applying for multiple credit accounts in a short amount of time causes creditors to think that you are in financial trouble. Space out your credit applications to avoid this.