A credit score is a numerical representation of your creditworthiness, based on your credit history and current financial behaviour. It helps lenders determine how risky it is to lend you money. In Canada, there are two credit reporting companies, Equifax and Transunion.  Lenders could use either or both when reviewing a borrower applicant’s credit. Credit scores range from 300 to 900.

 

Credit Score Ranges for mortgage financing:

Below 600: Considered Poor credit. A lenders do not consider credit applications below 600.  Alternative B Lender will review and underwrite each application on case by case on it’s own merit.

600 – 679: Fair credit but below average. You may have access to loans or credit but with some A lenders however many will only consider above 640. Current government lending rules require that the maximum GDS/TDS debt service ratio for credit score below 680 is 35/42% used for approval calculations.   

680 – 724: Average credit. You qualify for the lowest rates. Current government lending rules require that the maximum GDS/TDS debt service ratio for credit score 680 and above is 39/44% used for approval calculations. This will allow you to qualify for the maximum loan amount.

725 – 759: Very good credit. Lenders view you as a low-risk borrower. The rest is the same as 680 and above for mortgage financing. 

760 – 900: Excellent credit. The rest is the same as 680 and above for mortgage financing. 

 

Factors That Affect Your Credit Score in Canada

  1. Payment History (35%): On-time payments contribute positively to your score. Late payments, missed payments, or defaults will harm it.
    • Tip: Always pay bills and loans on time, even if it’s just the minimum payment.
  1. Credit Utilization (30%): The ratio of your current credit card balances to your available credit limit. High utilization (e.g., using more than 30% of your available credit) negatively impacts your score.
    • Tip: Aim to keep your credit utilization below 30% and pay off balances in full each month.
  1. Length of Credit History (15%): A longer credit history shows lenders that you have experience managing credit. However, it’s not about how many accounts you have but how long your accounts have been open.
    • Tip: Keep old accounts open, even if you’re not using them, to increase your credit history length.
  1. Types of Credit (10%): A diverse mix of credit types (e.g., credit cards, loans, mortgages) can positively affect your score.
    • Tip: Don’t open multiple new credit accounts in a short time period as it can lower your score.
  1. Recent Credit Inquiries (10%): Every time a lender checks your credit, it’s considered a hard inquiry. Too many inquiries within a short period can hurt your score.
    • Tip: Only apply for credit when necessary, and try to limit hard inquiries.

 

Mortgage Financing Lender Credit Requirements and Important Tips

Lenders want to see that each borrower has at least 2 revolving credit account (Credit Card/s and/s or Unsecured Lines of Credit), with at least two years of perfect repayment history for each account, and with minimum limits of $3,000 on each account. Always keep this as a minimum for yourself if you want to be sure you will qualify for the lowest rates with a strong credit score.

 

How to Check Your Credit Score in Canada

  1. Equifax Canada and TransUnion Canada are the two major credit bureaus in Canada. Both offer the ability to check your credit score online.
  2. Free Credit Reports: By law, you’re entitled to a free credit report from both bureaus once a year. You can request this report by mail or online to review your credit history.
  3. Paid Services: You can also subscribe to services from Equifax, TransUnion, or third-party services like Borrowell and Credit Karma, which provide free credit scores and updates.

 

Why is Your Credit Score Important?

  • Loan Approval: Lenders use your score to decide whether to approve loans (like mortgages, car loans, or personal loans) and what interest rate to offer.
  • Credit Cards: A higher credit score increases your chances of being approved for a credit card, and it helps you qualify for higher limits and lower interest rates.
  • Renting: Landlords may check your credit score before renting out property to assess your reliability in making payments.
  • Employment: Some employers check credit reports as part of the hiring process, particularly in financial or security-sensitive roles.

 

How to Improve Your Credit Score

  1. Make Payments on Time: Ensure you never miss a payment. Set up automatic payments or reminders if necessary.
  2. Pay Down Debt: Reduce balances, especially on high-interest credit cards. Try to keep credit utilization low.
  3. Avoid Unnecessary Credit Applications: Each hard inquiry can slightly lower your score. Apply for new credit only when needed.
  4. Diversify Your Credit: Having a mix of credit types (credit cards, personal loans, etc.) can positively impact your score. However, have at least 2 revolving credit accounts (Credit Card/s and/s or Unsecured Lines of Credit).
  5. Monitor Your Credit Report: Regularly check for any errors or signs of identity theft, such as accounts or inquiries you didn’t authorize.

 

How Long It Takes to Improve Your Credit Score

  • Improving your credit score can take several months to a few years, depending on your situation.
  • Negative marks (such as missed payments or defaults) can stay on your report for up to 6 years.
  • Positive actions, such as paying down debt and keeping accounts in good standing, will gradually boost your score.

 

Common Myths About Credit Scores in Canada

  1. Checking Your Own Credit Score Lowers It: This is not true. Checking your own score is considered a “soft inquiry” and has no impact.
  2. Closing Old Accounts Improves Your Score: Closing old accounts can hurt your score by shortening your credit history and increasing your credit utilization ratio.  If you are unsure, consult with your mortgage professional.
  3. Credit Scores Are the Same Across All Bureaus: Your score may vary slightly between Equifax and TransUnion due to differences in how each bureau gathers and reports data.

Your credit score is a key factor in your financial health, affecting everything from a mortgage loan approvals, other lending options and credit instruments, and the interest rates you pay. Maintaining a good credit score requires managing your debt responsibly, paying bills on time, and regularly monitoring your credit report for accuracy. Understanding and managing your credit score can help you achieve your financial goals and secure better lending terms.

 

Important Note Regarding Your Credit

When we meet with our clients during a mortgage consultation, we also complete a full review and analysis of your credit as part of your pre-qualification, without pulling a credit report file.  Only when you are ready to proceed with a full underwritten pre-approval and provide authorization and instruction will we pull your credit report.  

One of the additional benefits of working with a mortgage broker, instead of shopping around yourself from bank/lender to bank and each institution pulling your credit report – we use the same single credit report to shop your mortgage to all the lenders, and the report is good to be used for all lenders we submit to for a full 30 days.

Contact us now for free advice and counsel.