Ever wondered how a mysterious code called a credit score could impact your dream of having a home? Let’s take a simple trip through the world of credit scores and mortgages. This guide will reveal the secrets behind those three special numbers and help prepare you for home ownership in Canada.
Ready to get started? Let’s dive in!
How the Canadian Credit Score Works
In Canada, two big credit companies, Equifax and TransUnion, use your credit history to generate your score. While they keep the exact details of how this score is determined a secret, a few important things play a role:
- Payment History (35%):
This is the biggest factor. Your score goes up if you’ve been paying your bills on time. But if you’re late with payments, your score goes down. - Credit Utilization (30%):
This is about how much of your available credit you’re using. Keep it below 30% to show you’re managing your credit well. Maxing out your credit cards is a no-no. - Credit Mix (10%):
It’s advisable to have different types of credit, like a mortgage and a credit card. If you only have credit cards and no mortgage, your score might raise an eyebrow. - Inquiries (10%):
Every time you apply for credit, it appears on your report. Mortgage checks are a type of inquiry, but don’t worry – they fade away after a year.
Understanding the Dip: The Temporary Effect of a Mortgage Check
So, you’ve taken the leap, applied for that mortgage, and whoa! Your credit score drops a bit. It’s like that feeling on a rollercoaster – exciting, but maybe a bit nerve-wracking. This dip is because of the “hard inquiry,” a mark on your credit report from the mortgage check. Think of it as a small mark on your path to homeownership.
The good news is that this dip doesn’t last long!
Your score will bounce back within a few months, especially if you stay on top of your on-time mortgage payments. It’s usually just a small, single-digit decrease – not a big deal compared to the long-term benefits of building credit with your mortgage.
If you’d like to know how to manage your mortgage’s effect on your credit score, talk to a financial advisor before getting a mortgage. They can help you plan your repayments, manage any existing debts, and make sure you’re on solid financial ground before becoming a homeowner.
How to Build A Strong Credit Score with Mortgage
The truth is, every time you make an on-time mortgage payment, you add a strong brick to build your credit score castle. Each month, as you meet your responsibilities, your credit report gets another approval of “responsible borrower.”
Like we saw before, payment history is the big determinant of your credit score, holding a whopping 35% of the power. So consistent on-time payments is your financial superpower to send your score higher.
But the magic doesn’t stop there.
Owning a home means you get a regular stream of positive credit reports. Unlike other credit products that report occasionally, your mortgage updates the credit bureaus every month, year after year.
It’s like having a personal financial cheerleader singing your praises to the credit score gods!
And there’s more good news!
Being responsible with credit doesn’t have to stop at your mortgage. Adding other credit products like a credit card or personal loan and managing them well can help improve your score.
Imagine it as expanding your credit castle kingdom, with each smart financial move adding another gleaming tower!
So, future homeowner, your mortgage isn’t just a key to your dream home; it’s a magic tool for building a credit score.
Click to Understand the Canadian Real Estate as a First Time Home Buyer
FAQ – Understanding Mortgages and Credit Scores
Q: What is a credit score, and why is it important when applying for a mortgage?
A: A credit score is a three-digit number that reflects your creditworthiness. Lenders, including those offering mortgages, use it to assess your ability to repay a loan. A higher credit score increases your chances of getting approved for a mortgage with favorable terms.
Q: How do late payments affect my credit score, and what can I do to maintain a good score?
A: Late payments can negatively impact your credit score. To maintain a good score, prioritize making on-time payments for all your bills, including credit cards and loans. Consistency in timely payments is key to boosting and preserving your creditworthiness.
Q: What role does a mortgage check play in my credit score, and is the impact permanent?
A: Mortgage checks, known as “hard inquiries,” may cause a temporary dip in your credit score. However, this effect is short-lived, and your score typically rebounds within a few months. Keeping up with on-time mortgage payments helps mitigate any negative impact.
Q: How can owning a home positively impact my credit score in the long run?
A: Making on-time mortgage payments significantly builds a positive credit history. Additionally, owning a home provides consistent positive credit reporting, enhancing your creditworthiness over time.
Q: Are there other ways to boost my credit score while navigating the mortgage process?
A: Yes, diversifying your credit portfolio by responsibly managing other credit products, such as credit cards or personal loans, can further improve your credit score. Smart financial decisions, in addition to regular mortgage payments, contribute to a robust credit profile.
Final Take Away
We hope this guide has enlightened you on how your credit scores in Canada affect your mortgage. As a thank you for reading this article, grab our Free download of the ‘Calgary Home Buying Glossary’, for better understanding of realty and home buying terms- it’s been said to be a real help in understanding the real estate jargon by home buyers like you. Grab it here!
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If you’re ready to take the first step towards homeownership, see our current new homes and contact us for any inquiries at (403)-454-2218 today 🙂
