Credit Status: Why It Matters
Whether or not a lender will approve you for a mortgage depends significantly on your past and present dealings with debt. The more financially responsible you appear to a lender, the better a lending risk you appear as well.
Before any lender makes the decision whether or not to approve a mortgage applicant they will require a credit bureau check. The credit bureau is a compilation of all credit activity associated with the borrower. Based on the information in the report, a 3-digit score is assigned to the borrower which indicates the level of risk associated with them. The higher the score, the lower the risk, and the better the chance for an approval.
The higher your credit score, the more power you will have in terms of negotiating competitive rates, lower fees, etc. Collectively, more competitive rates and lower fees mean greater savings throughout your mortgage career.
The credit score is derived from three main areas:
1) Payment Behaviour – have you consistently made your payments on time and for the appropriate amounts?
2) Debt Levels – How much debt do you have outstanding compared to the amount of credit you have available to you? If you are using up all of the credit available to you, this is a negative.
3) Credit History – Are there items in your past that indicate repeat patterns of irresponsible financial behaviour such as a propensity towards slow repayment habits, credit overutilization, or unwillingness to fulfill financial obligations? Your credit report also lists any bad debts, bankruptcies, collections, etc. Any records in this section label you as a poor credit risk, and therefore hinders your chance for an approval.
The best strategy for optimizing your credit worthiness is to never miss payments, apply for credit in moderation and only when necessary, and stay within about 50%-60% utilization of your available credit limit.