Buying a Home in Canada? Here’s Why Credit Matters
The credit game is a tricky one, no matter where you live. If you have zero credit, which tends to happen to immigrants or young adults fresh out of school, you are entering the credit market with zero marks against you, but also zero for you. This means that while you don’t have bad credit, you also don’t have proof of good credit, which makes it very hard to get approved for loans.
The best way to get past this is to apply for a secured credit card or loan, which you can pay off, on time, over time in order to establish credit. From there, getting good credit is simply a matter of paying bills on time and managing your credit well.
If you have had credit problems in the past, whether through late bill payments, lawsuits, or repossession, then it’s likely your credit score will be low. Low credit scores with a history of bad credit decisions will make it very hard for you to get a mortgage, especially without a significant amount of money down.
The worst part about having no credit and/or bad credit is that when you do get a loan or line of credit, you will pay a much higher interest rate. Banks do this to accommodate the risk involved in funding you. This is why getting a home loan with a low credit score is a bad idea. Just a percentage, over the course of 30 years, can mean tens of thousands of dollars in additional costs.
The best way to get a low interest rate is to have a good credit score, and the best way to do that is to guard your credit fiercely. In Canada, there are two bureaus that use credit score: Equifax and Transunion. They are tracked using your social insurance number (SIN) and therefore will follow you everywhere you go.
Make sure that you pay all bills on time, and keep a low debt to income ratio. For example, if you have a few credit cards, it’s OK to carry a balance, but if they are all maxed out, it’s likely your credit will be negatively effected. Fortunately, it’s easy to fix this by paying the debt down and carrying no more than a 10%-25% balance. When doing that, you’ll build credit much quicker because you will have proven that you can manage credit.
To learn more about how your credit might affect your chances of getting approved for a home loan, visit our free mortgage calculator & mortgage quotes tool. You’ll get five free quotes from qualified local lenders to help you analyze your credit score and see what you can do in order to improve your situation. You’ll also get a chance to use the mortgage calculator to test interest rates and see how just a single percentage point can make a huge difference in regards to your monthly payment. It’s free, and there’s absolutely no obligation!