If you’re planning on buying a home soon, you’re likely going to be applying for a mortgage.

But before a lender finances your real estate dreams, they’re going to want to make sure you’re suitable for it. They will need a quick and easy way to see if you’ve previously been good at paying back your outstanding debts. This is where your credit score comes in.

Your credit score is not the only factor lenders consider on a mortgage application, but maintaining a good score is critical if you’re hoping to get the mortgage you want, with favorable terms. It can even make or break your application altogether, in ways you may not expect.

In this blog, we’ll discuss what a credit score is, how it can be damaged, and various ways to improve it before you apply for a mortgage or mortgage pre-approval.

Your Payment History

Lenders prefer a steady payment history. Your payment history has a great impact on your credit score.

Remember that time you forgot to pay an outstanding bill on time? It probably didn’t help to build your credit score. Late or partial payments on any credit cards, loans, or other accounts will always count against you. If any of your debts were written off or sent to collections, or if you ever had to file for bankruptcy, your credit score will be severely hit.

The Length of Your Credit History

Lenders even want to prefer that you have a long track record of using your credit responsibly. People who’ve had credit cards and other credit accounts open for around ten years have proven as a borrower better than someone who applied for a credit card recently. As for how long you’ve had credit accounts open matter, and canceling credit cards will lower your score.

Your Current Available Credit

Your available credit matter a great deal after your credit history. Your current available credit is how much money you can borrow at a given point in time.

Your available credit is determined by taking your credit limit and subtracting any balances you’re currently carrying. 

If you use less than 35% of your available credit, it suggests to lenders and credit bureaus that you’re a responsible borrower. For this reason, lowering your credit limits may lower your score, even though it may seem like a responsible thing to do.

The Number of Credit Inquiries

The third factor influencing your score is the number of times you’ve initiated credit inquiries, which are requests to obtain your credit information.

There are usually two types of credit inquiries: soft hits and hard hits. Soft hits don’t count against your credit score. The most common example can be requesting a copy of your credit report.

Hard inquiries will impact your credit score. A typical example is applying for credit, such as a mortgage, and making too many hard inquiries within a short time, making lenders nervous and lowering your credit score.

What do you need to have to get a credit score?

A credit score is considered personal information, so the credit bureaus, Equifax and TransUnion, won’t give it away to just anyone.

You will be required to verify your identity by confirming personal data such as your SIN, address, and full name.

When you go through this process, you may discover that you have known as “thin credit.” This means your credit history isn’t long or in-depth enough to establish a credit score. In this case, you can start building up credit by, for example, applying for a credit card.

Equifax vs. TransUnion: What’s the real difference?

As mentioned, Canada has two major credit bureaus: Equifax and TransUnion. Although they use the same scoring scale, 300 to 900, they calculate credit scores in slightly different ways, so your score is likely to be a little different at each. For example, one credit card where you’re carrying a balance could appear on your Equifax credit report. In contrast, it doesn’t appear on your Transunion report, lowering your credit score with Equifax.

The idea that all lenders report to both Equifax and Transunion is a common misconception. Although many do, lenders can request credit reports with either credit bureau, and some lenders report only to one because of the cost of putting in requests.

What this means is that your credit score could be different from one lender to the next. It’s best to clarify with your lender or broker which agency is being used.