When applying for a loan, your credit risk is assessed by lenders based on a number of factors. The overall information on your credit report, along with your credit score, are important factors in determining what rate you will pay and the financing you’ll be able to get. Those whose credit report reflect that they are a responsible borrower, are more likely to get approved for a loan with a low-interest rate. Such borrowers are ones who pay their debts on time and have low risk of defaulting.

Credit Report vs. Credit Score

To start with, it’s important to understand that your credit report and your credit score are two separate things.

Credit Report

Credit Report – Your credit report contains detailed information about your credit history. Sources include lenders, utility companies and landlords. This information is put together by one of two major credit-reporting agencies. (Equifax and TransUnion) that try to create an accurate picture of your financial history. Credit files include information such as:

  • Name, address and social insurance number
  • Types of credit you use
  • When you have taken out a loan or line of credit
  • The balances and available credit on your credit cards and other lines of credit
  • Information about whether you pay your bills on time
  • Information about any accounts passed to a collection’s agency
  • How much new credit you’ve opened recently
  • Any records that are related to bankruptcy, court judgement, or tax liens

Any errors on your credit report can be significantly damaging and reduce your score artificially. Surveys show that 1 in 4 people have damaging errors in their credit reports. Therefore, it’s important to stay up-to-date on your credit report history. If there is an error, you should dispute it and get it removed as soon as possible. Last year, 4 out of 5 consumers who filed a dispute got their credit report modified, according to a U.S. study by the Federal Trade Commission.

Credit Score – Your credit score is the actual numeric value extrapolated from the information in your credit report. A credit-reporting bureau uses the credit information on your file to calculate a score with the use of complex algorithms.

Beacon is the most common credit scoring formula in Canada and is used by many creditors. An individual’s FICO score can fall anywhere between 300 to 850, where having a score of 400 is considered low and 700+ would be considered within a healthy range. Your credit score allows potential lenders to know how much of a financial risk you may be. A higher credit score communicates to lenders that you are less likely to default and are more likely to make payments on time. Overall, having a higher credit score makes it more likely for you to be approved for financing.

Three factors predominately affect your score: (1) payment history (35% of your score), (2) your debt  (30%), (3) and how long you’ve had credit for (15%).

What Are They Used For?

Lenders look at your credit score to determine what your credit risk is like. These lenders typically have pre-set metrics, where if your credit score lies within a certain range, you will be given a certain rate. If you don’t lie within a desired range where credit risk is low, you may be denied. Most financial institutions will approve a loan only if the client’s credit score is at least 640. Having a higher score than that results in a better change of getting approved with lenders at reasonable rates.

As for the interests rates, there are several factors that banks take into consideration to set them. Much of the factors involve maximizing the profits for themselves and their shareholders. Meanwhile, clients and businesses are seeking the lowest rate. The most reasonable way to achieve a lower mortgage rate is by having a credit score in the healthy range.

It is important to keep in mind that when applying for a loan, the lender is very likely to pull your credit score to determine your credit risk, which is commonly referred to as a “hard inquiry.” This process has a slightly lowers your credit score. Therefore, to increase the chance of getting approved and, know your credit score ahead of time and fix any errors prior to applying for a loan.

Using a mortgage broker will only get your credit pulled once; as when they send your mortgage application to a lender, the lender will use their credit report. If the lender decides to do another pull they will do what is called a “soft pull” and that will not affect your credit score.

Things You Can Do to Improve Your Credit Score

  1. Ensure your credit report is error free – Agencies work hard to keep your credit reports error free, however, sometimes they make mistakes. It is important to at least check your credit score once every year. In fact, consumers are entitled to one free credit check every year to ensure that their credit report does not have errors, so why not use it to your advantage. Each credit bureau report differently, so there may be some variations, and as a result, some reports may have errors while others are error free. Additionally, your credit score very minutely fluctuates each day as credit providers update reports.
  2. Set reminders to make payments – payments made on time is a crucial factor in determining your credit score. Some even find it more helpful to set automatic payments through their credit cards or lenders to make sure that their payments are made on time.
  3. Reduce the amount of debt you owe – Stop using your credit cards. Use your credit report to make a list of all your accounts and check recent statements to determine how much you owe on each account and what interest rate they’re charging you. Then create a payment plan to lower or eliminate the debt you still owe.

How can Sunlite Mortgage Help you?

Many businesses need financing to start or expand. Although your credit score is only one component of your lender’s decision, it’s an important one. If you have a low credit score and are unable to secure financing through a traditional bank; Sunlite Mortgage will be able to get you approved with our team of lenders. When the bank says no, our team will still say yes with flexible terms and interest rates.

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