Like many Canadians, Rubina Ahmed-Haq graduated from university with student debt. But in her case, she paid it off responsibly. And so she was surprised that there were questions about her credit-worthiness when purchasing her first home.
"Despite having paid off that debt within two years of graduating, I wasn't aware that my credit score didn't reflect that fact, and so I had a problem when I went to buy a house," Ms. Ahmed-Haq says. "I was considered a bad credit risk even though the error wasn't mine."
A resident of Toronto, Ms. Ahmed-Haq flagged the discrepancy and had the credit agency correct her score. "But the lesson here," she says, "is I should have looked into it ahead of time."
Today, Ms. Ahmed-Haq is not only a home owner but a personal finance expert and family finance adviser for President's Choice Financial, helping others through the sometimes complicated process of securing a first mortgage.
"A bad credit score might seem like a huge obstacle," Ms. Ahmed-Haq offers, "but it's not the end of the world. You can take steps to turn it around, but the first step is ensuring you're educated on your own credit history and what contributes to your score."
Bad credit has many causes, from missing a minimum monthly credit card payment to an unpaid traffic violation. Even a minor financial indiscretion can add up to trouble when trying to buy a home.
A survey released this year by New York-based Bankrate.com reports that 29 per cent of people who don't own a house said they couldn't afford a down payment, while another 16 per cent said their credit score wasn't good enough to qualify for a mortgage.
"I always say the credit bureau is your adult report card and your credit score is your grade," says Chantel Chapman, the financial fitness coach for Vancouver-based Mogo Finance Technology Inc.
"The credit score is based on your financial history and the way you handle borrowing money. It overall shows a person's financial responsibility and money management skills."
So credit scores are a fact of life, yet few Canadians take the trouble to find out about them until faced with a big asset purchase like a home.
"What's really interesting is that 52 per cent of Canadians don't know about their credit score and don't even think to care to know until they need to borrow funds," Ms. Chapman observes.
It's not something that comes up much, even when seeking other forms of borrowing.
"Getting a mortgage is not the same as applying for a credit card," she says. "With a mortgage, a broker will look at your personal application, assessing your individual risk, so it's a much more involved process and something that shouldn't be done last-minute, especially not in a hot real-estate market where not being prepared might cost you the house you really want."
Louis-François Ethier, product manager with National Bank of Canada, says financial institutions look at everything from credit history to income stability when assessing individual risk.
"A good repayment history is important to obtain financing from a financial institution. A credit verification is done every time a new financing is requested," Mr. Ethier says.
People with seasonal jobs can also be deemed a credit risk because their incomes cannot be tracked long term.
"Financial institutions are looking for permanent employment or job stability of three to six months," Mr. Ethier says. "When the income is less stable – like business for self or seasonal employment – it may be requested to confirm the income over a period of two years."
But there's good news. Credit scores fluctuate, and often. Every 30 to 60 days a score will update, allowing those with bad credit to take steps to improve their standing in the eyes of a potential lender.
It requires a bit of planning, Ms. Chapman says. Inquiring early into your credit score – at least six months in advance of a potential home purchase – is an obvious first step "because then you can take steps to get back on track."
Some of those steps involve paying attention to utilization rates, also known as debt-to-limit ratio. They can significantly affect credit scores, so a sure way of improving them is to keep credit card balances 70 per cent below the defined limit – 35 per cent if a debt balance is carried month-to-month, according to Ms. Chapman.
She also says to pay all bills on time and in full, an obvious point that still needs repeating as many people fail to heed it.
"Never miss a minimum payment," Ms. Chapman cautions. "Even if it's $4 and not $400, it is important to pay your debts on time."
Also make sure to take care of any unpaid parking tickets. Ms. Ahmed-Haq would second that.
"Canadians should be aware that it's also the little things they need to stay on top of. Something as small as a traffic ticket can negatively impact your score." She speaks from experience.
"When younger, I paid a parking ticket late, one parking ticket that I had forgotten about, and it lowered my credit score," Ms. Ahmed-Haq says.
"I guess you could say I learned the hard way always to pay your bills on time."