Credit 101

Why a good credit score and credit report matters when buying GTA real estateMortgages and Credit

If you are starting to research mortgage financing, chances are you’ve come across the term “credit”. As well, you’ve likely seen the terms “good credit” and “bad credit”.  So what’s the connection between mortgages and credit?  To understand that, we need to look at credit in more detail.

What is credit and what makes it “good” or “bad”?

When people talk about “credit”, what they really mean is “credit history”. If you have ever gotten a car loan, used any kind of credit card, or signed up for a “buy now, pay later” offer, you will have a credit history.

Your credit history is based on information from the companies who have given you these loans, credit cards, or deferred payment plans. They report information about your payment track record to the two credit reporting agencies in Canada, Equifax and TransUnion.  As well, Equifax and TransUnion receive and track information about debts you didn’t pay, collections, bankruptcy, and inquiries by potential creditors.

Two aspects of your credit history: your credit score and credit report

The credit score is based on a complicated math formula which takes into account a number of different factors. These include how long you have had credit, whether you have missed payments (and, if applicable, how frequently and how late your payments were), how large a balance you owe compared to your limits, how many recent credit inquiries there have been, the kind of credit you have (i.e. credit cards versus car loans), whether any of your debts have been sent to a collection agency due to non-payment, and whether you have previously declared bankruptcy. The resulting score is on a scale of 300 to 900. The higher your score, the more reliable you are in the eyes of a potential lender.

The credit report includes details about your address, current and previous employers, and an itemization of your financial track record. This itemization explains, in detail, the factors that were used to calculate your credit score.  It shows, in detail, how many months your credit has been reviewed for, how many times you were late in paying, how late you were in paying (by months), how high a balance you’re carrying compared to your limit on credit cards, whether a debt had to be written off or sent to a collection agency, and whether you declared bankruptcy.

Why do mortgage lenders care about your credit?

What a mortgage lender is looking for is a comfort level.  They want to know whether you can be expected to pay back the hundreds of thousands of dollars you want them to lend to you.  A big piece of this is your credit.  Ultimately, each lender has a different set of criteria that are used to determine whether they will lend to you. What you can do is to make sure you are doing everything you can to create and maintain the best possible credit.

To learn more, check out my articles about “establishing credit“, “repairing bad credit“, or what you need to do to fix your credit immediately following a bankruptcy discharge or a consumer proposal payout.

If you’re really keen, you can also get really in-depth on this topic by checking out the terrific information on the Financial Consumer Agency of Canada website which talks about your credit report and credit score in more detail.  Just click here.

And please feel free to get in touch with me to discuss any questions you might have about your own situation.  I’d be happy to help.