Responsible Credit Use: A Pillar of Your Financial Health
Responsible credit use goes beyond paying bills on time. It involves strategically managing all your credit products, which directly influences your credit score, mortgage borrowing capacity, and financing terms. In Canada, credit agencies Equifax and TransUnion use sophisticated algorithms that assign significant weight to how you manage available credit. AMF-certified mortgage brokers in Quebec must master these concepts to guide clients toward optimal mortgage qualification.
Credit Utilization Rate
The credit utilization rate represents the percentage of revolving credit used relative to the available limit. It is the second most important factor in your credit score, after payment history. The calculation is straightforward: if you have a $2,000 balance on a card with a $10,000 limit, your utilization rate is 20%. Key industry-recognized thresholds are as follows: below 10% is excellent, below 30% is good, between 30% and 50% is acceptable but may limit your score, between 50% and 75% becomes concerning, and above 75% represents a major risk signal for lenders.
Credit Rotation and Diversity
Credit rotation refers to the regular use of your credit accounts followed by repayment in a cyclical manner. This practice demonstrates to lenders that you can manage credit responsibly. Scoring algorithms also favour diversity in credit types: having a mix of revolving credit (credit cards, line of credit) and instalment credit (auto loan, personal loan) is viewed positively. However, do not open new accounts solely to diversify your file, as each new application generates a credit inquiry that can temporarily affect your score.
Impact on Mortgage Qualification
To obtain a mortgage in Canada, lenders and CMHC rigorously evaluate your credit profile. OSFI's B-20 guidelines impose maximum debt service ratios: the gross debt service ratio (GDS) must not exceed 39%, and the total debt service ratio (TDS) must not exceed 44%. The TDS ratio includes all credit obligations: mortgage payments, property taxes, heating, plus minimum payments on credit cards, loans, and lines of credit. A high utilization rate on your revolving products increases your minimum monthly payments, which raises your TDS ratio and can reduce the mortgage amount you qualify for.
- For a CMHC-insured mortgage: minimum of 2 active tradelines for at least 2 years, with impeccable payment history.
- Typical minimum credit score: 600 for A lenders (680+ for best rates), 500-600 for B lenders.
- Any revolving balance above 75% of the limit can trigger additional conditions or a decline.
- Delinquent accounts (R2 and above) generally must be brought current before approval.
Best Practices for Optimal Management
- Keep utilization under 30%: On each card and line of credit, keep your balance below 30% of the limit. If needed, request a limit increase (without a hard credit inquiry if possible) to improve your ratio.
- Automate minimum payments: Set up automatic payments for at least the minimum required on each account. A single payment more than 30 days late can reduce your score by 50 to 100 points.
- Use credit regularly: An account inactive for a long time does not help your file. Make small regular purchases on your cards and pay them in full to demonstrate responsible and active use.
- Review your file regularly: Check your credit file for free through Equifax and TransUnion at least once per year. Verify the accuracy of the information and dispute any errors immediately.
The AMF-certified mortgage broker in Quebec plays an essential educational role with clients. By helping them understand and optimize their credit usage well before the mortgage application, the broker significantly increases the chances of approval at the best terms. The LDPSF requires the broker to ensure their recommendations are suited to the client's actual financial situation, including a complete assessment of credit management.