Understanding Canadian Credit Scores and Mortgages | Michael Friedman

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Credit Scores and Credit Checks.

A credit score is a numerical rating that reflects an individual’s creditworthiness and is a crucial factor for mortgage lenders in Canada. A high credit score can increase the chances of qualifying for a lower interest rate, while a low score can hinder the process. Lenders use the score to assess the risk of lending money, with a higher score indicating lower risk. The credit score in Canada ranges from 300 to 900, and a score of 650 or higher is suitable, whereas below 600 is considered poor. To maintain a good credit score, pay bills on time, keep credit card balances low, and avoid applying for too many credit products simultaneously.

When applying for a mortgage, the lender conducts a credit check by pulling the credit report from a major credit reporting agency. Credit inquiries are of two types: hard inquiries and soft inquiries. A soft inquiry, which does not impact credit scores, happens when the individual checks their credit report or a lender conducts a pre-approval or promotional offer check. According to FICO, a hard inquiry occurs when applying for credit, such as a mortgage, credit card, or personal loan, and may cause a temporary drop of 5-10 points in the credit score.

In my years of practice, I have only noticed a slight drop in credit scores when pulling a hard inquiry, usually below 5 points. If your credit score is in good standing, above 700, this will not affect you in any manner. However, if you are suspicious that you have a questionable credit score, discuss this with your mortgage broker before a credit check is done. There are ways to work around this issue.

In conclusion, having a credit check for a mortgage may temporarily impact credit scores due to hard inquiries. However, the impact is usually small and should not hinder the mortgage approval process. To maintain a good credit score, minimizing hard inquiries and being mindful of credit usage can protect the credit score while securing the necessary mortgage.