Personal
Benefit from improving your credit score when buying a home
Understanding what goes into calculating your credit score can help you when you're ready to buy a home.
Amy Folmer Rieke
3-minute read
We’ve all heard the advice that having a good credit score is important for our financial life. It’s true — whether you’re applying for a credit card, a mortgage, a car loan or just about any other financing, your credit score is a key factor in the approval process.
When it comes to buying a home, your credit score can influence the size of the mortgage you’re offered and the rate you have to pay. Understanding what goes into calculating your credit score can help you ensure that the financial decisions you make today build a stronger credit score when you’re ready to buy a home.
Your credit payment history is one of the most important factors when determining your credit score. It’s based on whether you make payments towards your credit on time. When you pay your bills on time, you’ll see an improvement in your credit score. In fact, it can help improve your credit score within one to two months.
Debt-to-credit utilization
Debt-to-credit utilization divides the balance of your credit accounts by your credit limit on the accounts. This comparison shows how much of your expenses are going toward paying down existing debt.
Paying down your debt is the fastest way to improve your credit score. By using less than 30% of your available credit, you could see improvement in as little as one month.
How long you’ve held a credit account also affects your score. In theory, the longer you’ve had an account the more experience you’ve had using credit, making you more credible to lenders. Generally speaking, it takes at least 6 months of credit history to affect your score. So, while this can help improve your score, it may take longer to see the results.
The types of credit accounts you have also plays a part in determining your score. While opening new accounts can increase your debt-to-credit utilization, they also decrease the average length of your credit history. Avoid opening a new account just for the sake of improving your credit mix. Instead, look at the credit accounts you already have and make sure you’re making timely payments.
Errors on your credit report can occur, so make sure to review your credit report before applying for a mortgage. If you do find a mistake, you can contact the credit bureau to have it fixed. If it’s an error on your credit card account, you’ll need to contact your credit card company as well as the credit bureaus. Correcting errors can take several months, so it’s important to review your report far enough in advance of applying for a mortgage to allow time for adjustments to appear.
Even if buying a home isn’t in your future, your credit score can impact your ability to rent an apartment, sign up for a phone plan, buy a car and much more. With these insights, you can take steps to improve or maintain your credit score.
If you’re ready to buy a home, discover how CIBC can guide you through the mortgage process by visiting our Mortgage page.
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