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Mortgage Insights

What is a Credit Score?

February 16, 2020 | Posted by: Haystax Mortgage

 

According to Investopedia a credit score is a statistical number that evaluates a consumer's creditworthiness. Lenders use credit scores to evaluate the probability that an individual will repay their debts.

In Canada a person's credit score ranges from 300 to 900, and the higher the score, the more financially trustworthy a person is considered to be. Lenders will use your credit score to determine if you are a good risk, how much you qualify for, and even use it to determine the interest rate that you pay on your debts.

The general rule is that the lower your score the higher the risk. If your score is too low, you will be considered far too high risk to lend too.

For mortgage lending in Canada to qualify for low rates and the largest suite of products, a minimum score of 680 is the widely accepted minimum. If you really want to have options, a score of over 700 opens the most doors. Seeing a 900 score is incredible rare and is often considered the “Unicorn” of credit bureaus.

Your credit score is determined by a wide range of factors such as re-payment, amount of credit owing, amount available, types of credit, how long you have had credit, as well as the amount of times you apply for credit. In addition, public records like collections, judgements (debt you owe through the courts because of a lawsuit) can impact your credit score.


Why is a credit score so important today?

This is a common question that more and more people are asking because of the ever-growing impact credit has on our lives. If you are a renter, your landlord will likely want to see your credit report to determine if you will pay your rent on time. You need a credit card to book travel, stay in a hotel, rent a vehicle and any number of daily activities. Without a good credit score you are confined much more than you would be with a good one.

If you are working towards the goal of buying a home, having good credit can not only mean you actually qualify for a mortgage, but with higher scores comes lower rates, and that means saving tens of thousands in interest costs. A big part of being Mortgage Ready is having a solid credit score and a plan in place to improve it if needed.

Predictive Scoring

A new trend around the world is for credit reporting agencies like Trans Union and Equifax is to create a credit score that tries to predict your future credit rating. This could be good if you are focused on increasing your credit score and are focused on better managing your credit and spending. However, it could be bad if you are suddenly faced with an unexpected loss of income, illness, or something else beyond your control.

While the use of this type of score is not widespread, and likely will not be in the near future, the implications for the average Canadian could be very significant.

As we continue to evolve as a society and cash becomes less and less of a daily spending tool credit will play a bigger role in more aspects of our lives. Understanding what a credit report is and how to build a budget are important first steps in being better positioned for when you will need to rely on credit as a solution.

One of the most important things to remember is do not be afraid to ask questions and engage with a professional if you need help. Credit is complicated because of all the different products, lenders, and even credit reporting agencies out there. It is hard to really understand it all when you don’t do it for a living like a Haystax Mortgage Advisor does, so let the professionals do their jobs and help – that way you get to rest a little easier.

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