WHAT’S REALLY BEHIND A CREDIT SCORE? Revealing the components of the calculations
Credit scores typically range between 300 and 850 points and provide an indication of a borrower’s capacity r to repay their loans. There are two main credit bureaus in Canada – Equifax and TransUnion – that collect, store, and share information about how you use credit.
5 main factors used to calculate credit scores:
The most important factor in a credit score is whether a borrower has a good track record of repaying the money loaned to them. Payment history comprises up to 35% of a credit score. Remind clients that multiple late or missed payments, overdue accounts, bankruptcies and any written off debts will all lower their credit score. Paying back debt quickly can help repair their credit.
Credit utilization ratio looks at the percentage of debt used out of all credit limits available to the borrower. If your client has multiple credit cards, revolving lines of credit or other accounts that are maxed out consistently, it can lower their credit score. Help clients examine the type of accounts they hold and stress the importance of managing each of them responsibly.
The longer someone has an account open, the better for their credit score. Credit history is a window into how much experience a borrower has managing debt and their ability to pay it off. Work with clients to review active and inactive accounts. Suggest leaving credit card accounts open, even if they don’t use them much, as the age of the account might help boost their score.
New credit is another key input to a person’s credit score. Check with clients to see how recently and how often they’ve applied for new credit, as well as how many new accounts have actually been opened. When you apply for new credit, borrowers are subject to a “hard inquiry” so that the lender can check their credit information. If there have been many of these hard credit checks in a short period of time, it could impact their credit score negatively.
Types of Credit
Having more than one type of credit account (while managing them responsibly) can improve your credit score, such as credit cards, an auto loan, mortgages, and lines of credit. This makes up a smaller portion of a borrower’s score, but balancing different types of credit can be a way to raise your client’s score.
Rates and Prices Trending Up Due to Inflation and War
Mid-March Commentary: Rates and Prices Trending Up Due to Inflation! and War!!
On March 2nd, 2022, the Bank of Canada made its most anticipated decision on interest rates since the pandemic began. After weeks of speculation and anticipation of an increase, central bankers finally pulled the trigger and moved their overnight rate higher.
For the 1st time since the pandemic began to hurt the economy in March 2020, the Bank raised its overnight benchmark rate by .25% and the knock-on effect is that borrowing costs for Canadians will rise modestly although by historical norms, remain low.
In its updated comments on the state of the economy, the Bank and singled out the unprovoked invasion of Ukraine by Russia as a “major new source of uncertainty” that will add to inflation “around the world,” and have negative impacts on confidence that could weigh on global growth.
Below are the other highlights…
Canadian economy and the housing market
- Economic growth in Canada was very strong in the fourth quarter of 2021 at 6.7%, which is stronger than the Bank’s previous projection and confirms its view that economic slack has been absorbed
- Both exports and imports have picked up, consistent with solid global demand
- In January 2022, the recovery in Canada’s labour market suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism, however, the rebound from Omicron now appears to be “well in train”
- Household spending is proving resilient and should strengthen further with the lifting of public health restrictions
- Housing market activity is “more elevated,” adding further pressure to house prices
- First-quarter 2022 growth is “now looking more solid” than previously projected
Canadian inflation and the impact of the invasion of Ukraine
- CPI inflation is currently at 5.1%, as the BoC expected in January, and remains well above the Bank’s target range
- Price increases have become “more pervasive,” and measures of core inflation have all risen
- Poor harvests and higher transportation costs have pushed up food prices
- The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities
- Inflation is now expected to be higher in the near term than projected in January
- Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards
- The Bank will use its monetary policy tools to return inflation to the 2% target and “keep inflation expectations well-anchored”
- Global economic data has come in broadly in line with projections in the Bank’s January Monetary Policy Report
- Economies are emerging from the impact of the Omicron variant of COVID-19 more quickly than expected, although the virus continues to circulate, and the possibility of new variants remains a concern
- Demand is robust, particularly in the United States
- Global supply bottlenecks remain challenging, “although there are indications that some constraints have eased”
As the economy continues to expand and inflation pressures remain elevated, the Bank made a clear point of telling Canadians “To expect interest rates to rise further.”
The resulting quantitative tightening (which central bankers framed as “QT” rather than the previous term “QE” for quantitative easing) would complement increases in the Bank’s policy-setting interest rate. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving a 2% inflation target.
BoC’s next scheduled policy announcement is April 13, 2022. We will update you following that announcement as always.
Rising rates: fixed or variable?
The Bank of Canada pulled the trigger on an interest rate increase, the first since October 2018 and the Bank has made it clear more increases are coming.
The upward move and the Bank’s messaging have rekindled the perennial mortgage debate: fixed or variable. The answer remains the perennial: it depends.
It depends on the borrower’s end goals, finances and their desire for stability. That last point, stability, is what leads most Canadian home buyers to opt for a 5-year, fixed-rate mortgage. But in purely financial terms – and saving money – variable-rate mortgages tend to be cheaper, and they do not have to be volatile.
In a rising rate environment, many borrowers worry about the cost of their debt going up. But right now, variable-rates are notably lower than fixed-rates and it will take several Bank of Canada increases to close the gap. In the meantime, that amounts to savings for the borrower.
Those savings – often hundreds of dollars a month – could be applied against principal. As rates rise the amount can be adjusted, thereby keeping total monthly payments the same and evening-out any volatility.
It should be remembered that fixed-rates are rising as well. They are tied to Government of Canada 5-year bond yields. Those yields have been increasing, and at least some of that is tied to increases in U.S. government bond yields. Canadian bonds tend to move in sync with American bonds, but those changes do not necessarily reflect the Canadian economy. In other words, the changes are not completely within our control.
A Few More Words on Russia Invading Ukraine
Markets were thrown into a tizzy. They plunged. But the frenzy was short lived. By the end of the day markets were back in the black.
Canada’s economic exposure to Russia and Ukraine is relatively small. Canada imported $1.2 billion from Russia in 2020; Russia imported roughly the same from Canada – less than a week’s worth of commercial traffic across the Ambassador Bridge.
The key factor in the conflict, for Canada, will likely be the price of oil, which has climbed past $100 a barrel. Rising oil prices and higher fuel costs have been a principal driver of inflation here, and inflation is the main concern of the Bank of Canada. It is currently running at 5.1%, a 30 year high, and the central bank is under growing pressure to bring it under control.
Oil is also an important part of Canada’s resource economy. Higher prices will likely lead to more production. Any embargo of Russian oil will create demand for Canadian product. That, in turn, would put more load onto Canada’s economic recovery, which is strong but hampered by pandemic labour shortages and supply-chain problems which, again, are adding to inflation pressures.
None the less, war creates uncertainty, and uncertainty triggers caution among central bankers. A recent Reuters poll of 25 economists suggests the Bank of Canada will go ahead with a quarter-point rate hike this week.