Find out how to improve your credit score and boost your chances of securing a new property
If you’re planning on buying or investing in real estate, you’re probably already saving for your down payment. But have you thought about taking measures to ensure that your credit score is in good standing? If you don’t have a glowing credit score and you’re looking to buy a property in the near future, you’ll need to boost your rating as soon as possible. A high credit score will help you to secure lower rates and approvals for a mortgage.
your score isn’t as high as you’d like, don’t worry. Storey Collective has all the tips you need to improve your credit score so that you can secure that down payment for your new property.
What Is a Credit Score and How Do You Get One?
A credit score is a number between 300 and 900 that indicates your credit risk. Creditors use your credit score to predict whether you’ll be able to pay back the loan or credit that you’ve requested. You can obtain a credit score through Equifax or TransUnion. Alternatively, most major Canadian banks will calculate your credit score, though these might not match up to Equifax or Transunion results. More on these differences in the next section.
If you’ve ever taken out a cell phone plan, credit card, or personal loan, then you’ll have a credit score that reflects how timely your repayments are. Usually, a credit score between 800 and 900 is considered excellent, while a credit score between 300 and 599 is considered poor.
Why Do Different Firms Calculate Different Credit Scores?
Many credit bureaus (credit reporting agencies), lenders, and credit scoring firms develop independent algorithms to calculate your credit score. This means that you’re likely to receive different credit scores from different companies—and each of these scores might mean something entirely different.
Plus, you can’t compare credit scores from different industries. Credit bureaus use different algorithms depending on whether they’re calculating an insurance score, mortgage loan score, or other type of credit score.
Your individual situation can also make a difference to your credit score. Your income, credit report, and various other factors can influence your credit score.
Different creditors have different opinions on what marks a ‘good’ credit score, and they offer different cutoffs for approvals and interest rates. As a result, it’s a good idea to look at the credit score that you need to purchase the particular property that you’re interested in. If a score of 800 will help you to get the loan that you need, 800 is the score that you need to aim for.
What Is a Credit Report and How Do You Get One?
Contrary to the common assumption, your credit report doesn’t include your credit score. Instead, a credit report solely details your credit history. You can ask credit bureaus such as Equifax or TransUnion for a credit report once a year.
Lenders calculate your credit score based on information in your credit report, which includes:
- Your personal identification.
- Records of organizations that have requested your credit report.
- Payment history for accounts reported to the credit bureau.
- Collections, judgments, and bankruptcies on the Public Record.
- Any types of credit that you have.
Your credit report lists each of your accounts with a rating that denotes the account’s credit type and payment status. A letter indicates the credit type, and a number between 0 and 9 indicates the payment status (e.g. R5). Credit bureaus calculate your credit score by converting the information in your credit report into the FICO formula. They consider the following information.
- Payment history: how timely your payments are (35% of your credit score).
- Credit utilization: how much of your available credit you are using (30% of your credit score).
- Credit history: how long you have been using credit (15% of your credit score).
- Diversity of credit: how many types of credit you are using (10% of your credit score).
- Credit inquiries: how often you have attempted to secure new credit (10% of your credit score).
What Are The Types of Credit Listed In Your Report?
There are four main types of credit that you may use.
- R: Revolving or recurring credit, usually in the form of a credit card.
- O: Open accounts, usually in the form of lines of credit.
- I: Installment loans, usually in the form of auto loans or student loans.
- M: Mortgage loans.
While these letters identify the credit type, the numbers attributed to your credit accounts refer to the following payment statuses.
- R0: approved but not yet used, too new to rate.
- R1: pays within 30 days of billing, as agreed.
- R2: payment late by 31–59 days.
- R3: payment late by 60–89 days.
- R4: payment late by 90–119 days.
- R5: payment late by over 120 days but not yet rated a 9.
- R6: the rating doesn’t yet exist.
- R7: making regular payments through special arrangements to settle a debt, such as an orderly payment of debts, debt management program, consolidation order, or consumer proposal.
- R8: repossession (voluntary/involuntary return of merchandise).
- R9: claimed bankruptcy, debt in collections, bad debt, or moved without giving a new address.
How Can You Improve Your Credit Report?
Before you can improve your credit score, you need to improve your credit report. The first thing you should do is make payments on accounts that haven’t gone into collections. This will prevent your accounts from being sent to collections, where they would remain on your credit report for six years—even if you repaid them later.
Once you have made these payments, it’s a good idea to contact accounts in collections to find out how to pay back any further debts. Make sure you notify the creditor and get proof of payment. At this point, it’s essential that you know your rights. Some collectors might demand a full repayment upfront or threaten legal action when they don’t necessarily have the right to do so.
Another option is to apply for a secured credit card, which you can load with your own money. Secured credit cards also help to improve your credit report.
How Can You Improve Your Credit Score?
Once you’ve followed the steps to improve your credit report, there are a few extra measures you can take to boost your credit score. These tips can take time, so start early to make the biggest impact.
- Review your credit report at least annually, and report any incorrect information to Equifax or TransUnion. Don’t assume that all the information in your credit report is correct. The Federal Trade Commission concludes that around 1 in 5 consumers have errors in their credit reports that have a negative impact on their credit scores.
- Ensure that you pay your bills on time. Many creditors allow you to set email reminders so that you don’t forget. Alternatively, you can create reminders in your phone, calendar, or diary.
- Don’t apply for lots of credit in a short timeframe—you don’t want to appear as though you’re relying on credit to pay your bills.
- Don’t issue cheques if you have insufficient funds.
- Draw up a savings plan to budget effectively—saving 10–15% of your net income is usually attainable. If you’re unemployed, aim for 2–3%.
- Track your expenses to monitor your incoming and outgoing funds and identify where you can cut back to save costs.
- Use a variety of credit accounts to show that you can manage different credit facilities, such as credit cards, lines of credit, and installment loans.
Improve Your Credit Score With Storey Collective
Don’t let the myths and misunderstandings associated with credit scores catch you out. Book a free consultation with Storey Collective to find out how you can improve your credit score and improve your chances when it comes to securing your desired property.
Also, remember that saving up for a down payment and improving your credit score aren’t the only steps you can follow when in the market for a new property. Take a look at Storey Collective’s Home Buying 101 guide to find out about all the measures you can take to make property shopping as easy and practical as possible.