Credit Hygiene Explained: How to Keep Your Credit Score as High as Possible
A good credit score is a must if you are hoping to secure a mortgage to help you buy a Waterloo Region home. However, your credit score does more than qualify you for a mortgage, it also helps to determine just how much interest you will pay on any mortgage loan you are granted.
As mortgage interest rates are rising in general right now, and may do so again as the government makes moves to lower inflation, keeping your credit score as high as possible in the run-up to the mortgage underwriting process is more important than ever. But what are the best ways to do that? This is what we are going to take a closer look at here.
How To Keep a Constant Eye on Your Credit Score
Via a paid subscription to Equifax Canada or Trans Union Canada, or through free offerings from your bank, or other organizations such as Borrowell, Credit Karma, Mopolo or Mogo, it’s pretty easy to track your credit score these days.
But among these varied sources, there is no continuity. There can be drastic variations, in fact. Therefore, instead of any single individual score, you should concentrate more on your overall “credit hygiene.” Meaning, at all times, focus on best practices that will help raise or maintain a ‘good’ credit score in general.
CBC News ran a great investigative piece entitled “Why 4 websites give you 4 different credit scores and none is the number most lenders actually see.” One Canadian encountered a 200-point difference between his highest and lowest scores from several score providers!
How Useful Are Free Credit Scores When Applying for a Mortgage?
To bring the conversation around to mortgage borrowing, the only credit score that matters is the one your lender sees when your application is submitted. And it’s almost certainly NOT a score you have seen for yourself from all the score providers out there.
These days, prospective mortgage clients are often excited to tell their Realtor and their mortgage broker what their credit score is. And we sometimes have to bite our tongues, and praise them for caring and for monitoring their credit, while explaining that, no, a screenshot of their Borrowell credit score is not sufficient for mortgage lenders.
FICO Score 8 is the Gold Standard
For the most part, mortgage brokers submit their mortgage applications with an Equifax Canada credit report attached. This report will display a few different measures to the lenders, but the one paid the most attention to is called FICO Score 8. It’s the number cited when a lender wants to know mortgage applicants’ credit scores.
FICO says 90% of Canadian lenders use it, including major banks. But Canadian consumers cannot access their FICO score on their own.
Why You Should Worry About Your Credit Hygiene, Not Your Credit Score
It’s great that Canadians are learning to care a lot more their credit history—it is so essential to many aspects of life, not just for major events like financing a home or an automobile. For example, some employers check candidates’ credit history, and so do most landlords when considering tenancies.
We are not here extolling the need for standardized credit score reporting. Because that is not going to happen anytime soon, as desirable as it may seem. Instead, we will talk about best practices of maintaining great credit hygiene to help you get the mortgage you want AND an interest rate that will not make that taking out that mortgage to buy a Waterloo Region home unnecessarily expensive.
What Is Credit Hygiene?
Dental hygiene is preventative maintenance to ensure your teeth and gums are the best they can be at all times. Having a similar routine for your personal credit history can be equally important to avoid problems when you least need them—like when buying or refinancing a home.
If you are always employing best practices, then you are optimizing your credit score and your overall credit profile, regardless of who is checking, when they are checking and what is being counted and reported. Here are some universal, useful for all tips to get you started.
Never Go Over Your Credit Limits – Leave Some Room
When you have a credit card or line of credit hovering around its limit, you are at risk of going over, which is not a good thing for your credit score. And it might happen innocently—you started out under the limit, but with interest charges and possible over-limit penalties, you are now in the Badlands.
Even when you use a balance transfer promotion or some form of interest-free period, you should leave room at the top. It’s like when ordering a coffee, you leave room at the top for the milk—even if you take it black, to avoid spillages.
Accept All Offers of Increased Limits
You should usually welcome credit limit increases. Your credit will healthier and stronger to because your limits have some heft to them. You will also instantly reduce your percentage utilization of credit with an increased limit.
This often results in a higher credit score. Equifax Canada says credit limit percentage utilization has a 30% weighting on your personal credit score. And that’s a lot.
Spread Around Your Balances
When trying to maximize your personal credit score, you should look at your utilization of available credit for each individual credit line. If your goal is to maximize your score at all times, but you do carry credit balances, try to spread it around, rather than cluster it all on one card. One way this can arise is when you use balance transfer promotions to reduce interest expenses. You’ll have to evaluate the trade-offs before you do.
Use All Your Cards and Lines of Credit
We all tend to favour one particular credit card (maybe we like their rewards program) and we might neglect our other cards. If you are trying to maximize your credit score, it is a better idea to use all your available credit lines fairly regularly, even if it’s just for a few dollars and you pay it right off (which is a good idea anyway)
Why? This demonstrates that you are good at managing your debt, which is exactly what mortgage lenders want to see.
Use It or Lose It
If you never borrow money, or you have a solitary credit card somewhere in your wallet and you never actually use it, eventually you will have nothing generating a credit score for you. And you may end up with no score at all. And that can really cramp your style when you need a mortgage. Make use of your available credit, but carefully.
One good way to do this often without going into big debt you don't need, and keeping your credit utilization under that 25-30% sweet spot is to use a credit card to pay for something you were going to pay cash for - like your weekly trip to the grocery store - and then hold onto that cash and use it to pay the balance off your credit card at the end of the month.