If you’re here, you already know what a credit score is and why it matters. So, you won’t be surprised to hear that your credit score is critical to buying any real estate, whether its a house, condo or a plot of land.

In this article, we’ll explain how your credit score impacts buying property and then how you can improve it to maximize your buying power.

The Impact

Lenders, such as banks, will use your score to determine whether they should lend you money, how much they should lend you and the interest rate that you’ll pay.

The lower your score, the higher the risk that you won’t repay the lender. To compensate for that higher risk, lenders can

• Seek a higher interest rate from you. This means you’ll be paying more for your property due to a higher mortgage rate.

• You may be required you to put down a higher down payment

• You may have to get co-signer on the mortgage.

• If your score is poor, the lender may not even approve your mortgage

The Dollar Impact

Are you wondering what a lower credit score could cost you in terms of interest payments? We’ll explain using our friend Denise’s situation.

• Let’s assume Denise’s down payment and amortization period (we’ll use 25 years) are constant and she’ll be getting a 5-year fixed term mortgage.
• A poor credit score versus a very good one could cost you half a percent (0.5%) on your interest rate.
• If we use a 5% vs a 5.5% rate for Denise, she would save $142 per month. Enough to add to a vacation fund!
• And over 5 years, Denise would save almost $12,000. And over 25 years, that adds up to almost $43,000.
• You can do your own calculations for your own situation as well.

Its always important to have a good credit score but if you’re thinking about buying a place, you need to find out where you stand.

But let’s say you weren’t the best at paying your bills on time when you were in school. Or let’s say you had some unexpected costs, put them on credit and had to miss a few payments. Or you got your first credit card pretty late compared to your friends and you’ve barely used any other credit since. You request your credit score and find out that its below the Canadian average of 650. So, what can you do to improve it?

Improving Your Credit Score

• Pay your bills on time, every time. At the very least, ensure you make the minimum payment. We recommend automatic payments if you tend to forget (at least for the minimum payment)!

• Don’t skip any payments, even if you’re disputing the bill

• Keep your overall debt below the maximum limits. This means you’ll be using up less credit.

• Generally, you should keep your total debt / total credit limits, known as the credit utilization ratio, below 35% (below 50% for credit cards). You can achieve this by either paying down debt or asking for a credit limit increase (responsibly!). Don’t apply for multiple credit card accounts or loans in too short a time period. However, if you’re shopping for a specific type of loan, like a mortgage, multiple inquiries within a two-week period (while you shop around) will generally count as one inquiry.

• Keep older credit accounts open and use them occasionally to keep them active. This will positively impact the length of your credit history.

• Have a good credit mix: Too many of one type, like only credit cards, or not having a mix at all, can negatively affect your credit score. Different types include credit cards, car loans, retail accounts, mortgages, etc. This shows that you can handle multiple types of loans, assuming you did so responsibly.

• Keep an eye on your credit reports so that you can correct course if necessary! If you see any inaccuracies, you can dispute them.

Now that you know how your credit score impacts buying property, request your score and get started! You can even start to see an improvement in a month.