How Long Does It Take To Increase Your Credit Score In Canada?
Your credit score is a three-digit number between 300 and 900 that lenders use to determine your creditworthiness for a mortgage loan. A good credit score will open doors to low mortgage rates and stress-free mortgage loan approvals for you.
A Good Credit Score for Mortgage
A good credit score for a mortgage loan will be those in the 620 to 900 credit score range. A score in this range will get you qualified for better rates and low-down-payment mortgage loans.
Credit scores below 620 can still get you qualified for a mortgage loan but require you to have a high down payment amount. Mortgage loans for lower credit scores are called bad credit mortgages. To be eligible for a bad credit mortgage, you must put down a minimum of 20% of the property value in cash.
With the skyrocketing real estate prices and flattened income growth, it is becoming harder for most Canadians to save the required 20% down payment of a bad credit score mortgage. The best option is to improve your credit score first and then second for a mortgage loan.
A suitable credit mortgage will save you thousands of dollars in interest expenses, closing costs, and fees.
Factors Affecting Your Credit Score
Your payment history has the highest impact on your credit score. Payment history is how you have paid your debts in the past.
Have you made your payments on time, and did you pay the total required amount when you made the payment? 35% of your credit score is based on payment history. You can increase your credit score drastically by simply making your required debts paid in full and on time.
Credit Utilization Rate:
Your credit utilization ratio is your outstanding debt balance to the credit limit. For example, if you have a credit card of $4000 value, and you have used $1500, your credit utilization rate will be
[1,500/$4,000.00] * 100% = 37.5%
The higher your credit utilization rate, the lower your credit score, and vice versa. It is advisable to keep this utilization below 30%. This factor also has a considerable effect on your credit score. 30% of your credit score depends on how you have consumed your credit products to the credit limits.
Length of Your Credit History:
This is simply the average age of credit products. You will often hear that closing your oldest credit cards is a bad idea. The impact it has on your credit score is the measure of this factor – the length of your credit history. This factor impacts your final credit score by 15%.
Your Credit Mix:
This is simply a measure of the different loan products in your credit report – student loans, mortgages, car loans, lines of credit, credit cards, and more. However, it is risky to open several new credit card accounts than you can manage in a bid to increase your credit mix.
New Credit Accounts:
When you apply for new credit accounts, the average age of your account may drop. As a result, your credit score reduces. Also, your credit score may suffer when a lender inquires about your credit report in response to your application for new credit. This type of inquiry is called a hard inquiry. According to Equifax, it is responsible for about 10% of the credit score.
How Long Does It Take To Increase Your Credit Score?
CNBC and FICO studied the average recovery time after the 2008 financial crisis. The below table is a summary of this study.
|Event||Average Recovery Time|
|Application for new credit card||Three months|
|Maxed credit card account||Three months|
|Closing credit card account||Three months|
|Late mortgage payment 30-90 days||Nine months|
|Missed payment||18 months|
|Home foreclosure||Three years|
|Bankruptcy||Six years or more|
How to Improve Your Credit Score
Unfortunately, you cannot improve your credit score overnight. How long it takes to increase your credit score depends on your past and current credit situation. Nevertheless, there are actions you can take to speed up the process.
Get a Copy of Your Credit Report
To improve your credit score, you need to take an inventory of what has or is impacting your credit score negatively or why your credit score is low—the first place to start a detailed review of your credit report. You can get a free copy of your credit report from Borrowell, Credit Karma, or most Online Banking accounts.
Learn More: How To Check Your Credit Score For Free In Canda
Correct Errors in Your Credit Report
Watch out for the following errors in your credit report and take action to correct them:
- Errors in your personal information; wrong date of birth, name, employer details or current address
- Signs of identity theft such as accounts in your report that you did not open
- Payments you made on time appear as late.
- Collections, Judgement, Bankruptcy, or Consumer Proposal that you have paid in full but are reporting on your credit report as open
- Any debts that you have paid in full and close but are still reporting on your debt as open
- Any debt reported as written off: Written-Off does not necessarily mean you will not be the debt. You still owe the debt. The lender removed it from its books and probably sold it to a collection agency. Written-Off trades on your credit report still affect your credit score negatively.
You can dispute these inaccuracies by filling out the necessary forms with Equifax or TransUnion. They will have to investigate your claims first. Be that as it may, it is not advisable to skip a payment simply because a bill is in dispute.
Pay Outstanding Debts
Make your required payments in full and on time. The more you are behind in settling your debts, the lower your credit score. Your score will improve when your account status is updated to indicate full pay. To achieve this, you may need to reduce your credit card spending by paying more or curbing your spending.
Pay Your Bills Promptly
Your credit score suffers when you make late payments on your credit card. It is advisable to call your lender if you cannot make the full payment to avoid it being reported to the credit reporting agencies as a late payment.
Hold Off Applications for New Credit Cards
While trying to repair your credit score, avoid applying for new credit cards. When you apply for a new card, the issuer will make a hard inquiry (i.e. a review of your credit account).
This inquiry shows in your credit report and may cause your credit score to drop. When you open many credit accounts over a short period, you appear to be in a financial crisis or living above your means.
Opening new accounts reflects a high level of risk as a borrower. In contrast, opening little or no new accounts suggests that you are financially stable and creditworthy. You must find the balance taking into consideration your financial means.
Leave Your Old Accounts Open
Although it might be tempting to close credit card accounts that are past due, doing so will bring your credit score lower. The credit score will reduce because the outstanding balance will remain in your credit report until you complete the payment. Given this, leaving the account open is favourable and gradually paying it down monthly.
If you close the account, a credit card with zero balance may still harm your credit score. Both old and new accounts factor in the length of credit history. The longer you keep tabs open, the longer your credit history and your credit score are better.
Contact Your Lender
Inform your lender on time if you think you will not be able to pay a bill. Your credit card issuer might be able to help you out of a difficult financial situation.
Suppose you let them know of the probability of you missing an upcoming payment. In that case, your issuer may help you with an arrangement that reduces your monthly payments until you recover.
Such an arrangement might help you pay outstanding balances and increase your credit score progressively.
So, how long does it take to increase your credit score? Correct errors in your credit report, pay off outstanding debts, pay your bills on time, reduce applications for new credit, and keep down your credit usage. If you do these in no time, your credit score will improve.