How to Keep Your Cost of Borrowing Low

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In our previous article, we described situations where a bank turns down your mortgage application, and we discussed alternative or private financing as an option. For some clients, this is a perfectly reasonable, and often the only available, short-term solution when buying or refinancing a property. Sometimes, though, a client has solid, verifiable income and would seem to qualify for the best possible interest rate, but a less-than-perfect credit history stands in the way, since A-category banks tend to have fairly strict minimum credit score requirements.

Today we want to share some straightforward tips on how to keep your credit history in top shape and qualify for mortgages and other credit products at the best possible rate.

It's no secret that consumer debt in Canada is at a record high. We know this from recent data released by Equifax and TransUnion, which warns that credit card debt has reached its highest level since 2019.

With interest rates and the cost of borrowing at record highs, it's more important than ever to make sure your credit profile is in good shape, so you can keep your cost of borrowing as low as possible.

Tip 1: Credit Cards Have the Biggest Impact on Your Credit Score

Your credit score is a three-digit number that carries enormous weight when it comes to the interest rate banks can offer you when you apply for a mortgage or other type of financing.

There are currently five types of accounts reported to Equifax and TransUnion: credit cards, lines of credit, loans, mortgages, and cell phone accounts. While each of these affects your score, credit cards carry the most weight. Your balance-to-limit ratio, also known as your utilization rate, matters just as much as your payment history. Making the minimum payment is mandatory, and paying off your balance in full every month will save you from paying double-digit interest - but that alone isn't enough to achieve a high credit score.

Credit bureaus don't have continuous access to your balances. Instead, each bank or lender is responsible for submitting summary data about your account to Equifax and TransUnion every 30 to 90 days. You'll be assessed based on whatever data was current at the time it was submitted.

If your balance at that particular moment is more than 50% of your limit, it can pull your score down quite significantly. If you notice your score drop by a double- or even triple-digit number in the span of just a month, it's most likely because your credit cards were maxed out, or your balance ran well above half your limit, right at the time your bank reported to the bureaus. The lower your balance sits on an ongoing basis, the better. That means you can improve your score by making several payments a month, or by relying more often on debit or cash instead of credit.

Tip 2: Review Your Entire Credit Report, Not Just the Score

Given the rising number of scams out there, we wish we could tell you that making a few monthly payments, buying insurance, or some other simple trick could keep you safe from becoming a victim of financial fraud. The reality is that the one thing that genuinely helps cut down your risk is systematically reviewing your entire credit report, not just your score.

According to police data, in 2022 the average loss from fraud came to $530, up 40% from the year before. Fraud remains the fastest-growing category of crime in Canada.

Most Canadians are so focused on their credit score alone that they often overlook the rest of the information in their file - things like inquiries or account details. One way to protect yourself is to regularly check that your personal information with Equifax and TransUnion is accurate. Pay particular attention to your current address and phone number.

When fraudsters try to steal and impersonate your identity, they typically start with your contact information, specifically so that it takes you longer to notice the problem and resolve it.

You should know who's pulling your file. If you see an inquiry into your credit history that you didn't initiate, call the number listed in the report next to the name of the bank or other lender that made the request, and flag it right away. The sooner you get in touch with the financial institution involved, the less damage can be done to your score.

Most online versions of your credit report don't show all the relevant information on the main screen. You need to click the expand arrow or the "View more details" button to see everything you need to check. The more often you check, the faster you'll catch an unexpected debt or a fraudulent change to your account.

Tip 3: Check Your File at Both Equifax and TransUnion

If you're having trouble keeping up with debt payments, don't avoid contact with your creditors or the government. We know that can feel intimidating, but reaching out to them early on will help you avoid much more serious consequences down the road.

Working out a payment plan can help you avoid serious damage to your credit score in the form of a registered collection or a court judgment. If a collection agency has already contacted you, chances are they've already registered a collection against your accounts with Equifax and/or TransUnion.

The good news is that if a collection or judgment has already made it onto your file, you don't necessarily have to pay the full amount all at once. Aside from government debt, it's often possible to negotiate a partial payment. Just be sure to get written confirmation once the matter with the account has been resolved. It's always much easier to dispute errors or leftover balances if you have that confirmation in writing.

The best advice for protecting your credit score is to check your file at both Equifax and TransUnion before you apply for any new financing. Some lenders report only to Equifax, others only to TransUnion, and some report to both. Quite often, a collection agency, a government agency, or a court judgment may show up in only one file and not the other. It only takes one negative account with an outstanding balance, or one missed payment, to seriously delay - or completely derail - your application for a mortgage at the best possible rate.

It becomes even more important to review both reports carefully if you've previously gone through a consumer proposal or bankruptcy. A bankruptcy stays on your TransUnion report longer if you filed in Ontario, Quebec, New Brunswick, Nova Scotia, or one of the territories. If an insolvency is listed as unresolved, it can remain on your TransUnion file indefinitely, until it's formally disputed.

Once a debt-restructuring program has been completed, errors in the file are fairly common - and they can prevent your credit score from recovering enough to qualify for a mortgage at the best possible rate. Any account that was included in a bankruptcy or consumer proposal shouldn't show an outstanding balance, late payments, or incorrect information. These kinds of errors can, and should, be corrected.

Since the pandemic, both credit bureaus have allowed consumers to check their credit reports and scores online for free (Equifax across all of Canada, while TransUnion only offers a free report in Quebec). Which means there's really no excuse left not to follow these tips to protect your credit file and improve your score.