Credit score basics for first-time buyers
Understand how credit scores affect mortgage approval, what score you may need, what impacts your rating, and how to improve it before buying your first home.
Your credit score is one of the most important factors in getting approved for a mortgage and securing a competitive interest rate. Here's what you need to know before you apply.
What Is a Credit Score?
A credit score is a three-digit number between 300 and 900 that summarizes your credit history. It is calculated by credit bureaus, primarily Equifax and TransUnion in Canada, based on your borrowing and repayment behaviour. Lenders use it to assess how likely you are to repay a loan.
What Score Do You Need for a Mortgage?
Most lenders require a minimum credit score of around 600 to 680 for mortgage approval. A score above 720 generally gives you access to the best available rates. The higher your score, the lower the risk you represent to a lender, and the better the terms you're likely to be offered.
What Affects Your Credit Score
The main factors that influence your score are:
- Payment history: Whether you pay bills and debt obligations on time. This is the most significant factor.
- Credit utilization: How much of your available credit you're using. Keeping utilization below 30% is generally recommended.
- Length of credit history: How long your accounts have been open. Older accounts contribute positively.
- Credit mix: Having a variety of credit types (credit card, car loan, line of credit) can help.
- New credit inquiries: Applying for multiple new credit products in a short period can temporarily lower your score.
How to Improve Your Score Before Applying
- Pay every bill on time, every month
- Pay down credit card balances to reduce your utilization ratio
- Avoid applying for new credit products in the months before your mortgage application
- Check your credit report for errors and dispute any inaccuracies with Equifax or TransUnion
- Keep older accounts open even if you don't use them frequently, as they contribute to your credit history length
How to Check Your Score
You can request a free copy of your credit report from Equifax and TransUnion at any time. Many Canadian banks and financial apps also provide free credit score monitoring. Checking your own score does not affect it.