A credit score, also known as a FICO score, is a digital representation that measures your creditworthiness. It reflects your past repayment history and credit behavior. Lenders use this score to assess your ability and willingness to repay a loan. A high credit score indicates that you are a reliable borrower who is able to make repayments on time, while a low credit score may indicate that you have a history of late payments or other credit problems.

1. Credit score range

Credit scores usually range from 300 to 850, with 850 being the perfect score. Lenders may have different definitions of “good” or “excellent” scores, but the usual breakdown is:

Excellent: 750-850

Good: 700-749

Fair: 650-699

Poor: below 650

For people looking to get a traditional mortgage, having a good (700+) or excellent credit score usually means a smoother loan application.

2. What about low credit scores?

With a low credit score, while it doesn't mean you can't get a mortgage, you may face higher interest rates or be required to purchase private mortgage insurance. A low credit score reflects the fact that the borrower may have had a history of late payments, and the lender may therefore consider you to be at a higher risk of defaulting on the loan.

However, it is still possible to get a loan through some specialized lending products (e.g., subprime), it just may cost more.

3. How is credit score calculated?

Credit scores are mainly determined by the following factors:

Repayment history (35%): It is vital that you make your payments on time. Even an occasional delay of 30 days or more can result in a significant drop in score.

Debt to Credit Utilization Ratio (30%): refers to the ratio of debt you owe to your credit limit. Ideally, debt to credit limit should be less than 30%.

Length of credit history (15%): a long history of good credit improves the score.

Credit portfolio (10%): Having multiple types of credit accounts (e.g., credit cards, auto loans, etc.) is conducive to a better score.

New Credit Accounts (10%): Opening multiple new credit accounts can affect your score, especially before purchasing a home.

4. How can I improve my credit score?

Make payments on time: Make sure you're not late on any payments, especially on credit cards and loans.

Reduce debt: Keep your credit utilization ratio below 30% to avoid accumulating too much debt.

Avoid opening new accounts too often: Don't apply for multiple credit cards or loans in a short period of time to avoid lowering the average length of your credit history.

When purchasing a home, a good credit score is key to getting a low interest rate mortgage. Making sure you make your payments on time, keeping your debt low and using your credit cards wisely can help you improve your credit score, which can lead to easier loan approvals.