While your credit score is not the be-all and end-all when applying for a mortgage, it is one of the more important factors a lender considers when they receive a mortgage application. Because your credit is central to qualifying for any type of loan - whether it be a mortgage, credit card, auto loan or line of credit - there is a lot of information (and misinformation) out there about staying on top of your score.
Myth: All Credit Reports are the Same
Canada has two national credit bureaus - TransUnion and Equifax - and both bureaus have unique algorithms that they use in calculating your score. Although your score will likely be similar between the two, it may not be the same across the board.
Further, each bureau has multiple types of scores depending on the inquiring party because different types of lenders are focused on different aspects of your credit history. This means that the score you see versus the score a mortgage lender sees might be different even if both reports are coming from the same credit bureau.
Myth: Closing a Credit Card will Improve your Score
If your credit card has a negative payment history (late payments, going over the limit, etc.), it can be tempting to just close off the card immediately upon paying the full balance. However, this is likely to do more harm than good. Negative credit card information stays on your report for 6 years, regardless of whether the card is currently open or closed. It can also impact your score in two different ways:
- Affecting Credit History Length - having a longer credit history is attractive to lenders, and closing the card may limit the length of your credit history. Consider keeping older accounts active (if you can avoid paying fees) and be sure to use the card periodically.
- Decreasing your Available Credit - When evaluating your financial situation, lenders will look at the total amount of credit you have available to you. Closing off a credit card will decrease this amount - so it is generally better to pay the account off and leave it open if you can.
Keep in mind that transferring an existing balance to a new card would be considered new credit, even if the amount owing is from an old card. Many credit card companies offer low rates and promotions for balance transfers, so be sure to weigh the pros and cons before deciding whether or not to make the transfer.
Myth: Making your Minimum Payments will Improve your Score
You should never use your available credit unless you are sure you can make the minimum payment.
However, accessing a large amount of debt and only making the minimum payment each month is not likely to move your credit score in a positive direction. This is because most minimum payments are calculated to cover all of your interest and only a small percentage of your principal balance. This means your total balance owing will only slightly decrease if you make the minimum payment alone, and how much credit you are utilizing will remain high against what you have available. Since credit utilization is one of the most important factors lenders consider, you should always aim to pay more than what is required if you can.
If you have questions about your credit, we can help!