Credit Score Info – this is great data

Below is a good article on credit scores.

Mortgage applications are evaluated on 4 factors. You can think of them as “legs of a chair.” If 1 or 2 legs are shaky it could still stand if the other 2 are strong. Obviously, a 1, 2 or 3 leg chair does not work so well.

The 4 factors are:

  1. Credit report and score – this article is all about this point
  2. Down payment amount and source of funds
  3. Employment history
  4. and Property quality.

There is lots of good info below on #1 and here are the magic percentages that are hard to find:

  • 35% of your score is your debt -to-limit ratio of your existing credit. There are extra points for balances at less than 50% of the max and you slowly lose points as you get up to 75%. Even $1 over limit can cost you 50 points or more.
  • 30% of your score is your repayment history. Ensure you make ALL of your payments on time, even if it is only $10. These are tracked for 7 years so on time payments are super important. Remember to pre-pay if you are going to be away on holiday – this is where most people get caught.
  • Only 10% of your score is based on “credit inquiries.” There is more on that below.
  • The final 25% of your score is based on a few other “things” like:
  1. your credit mix (installment payments like car loans and RRSP loans, and revolving credit like credit cards)
  2. the length of time your that you have had credit – banks like to see 2 years for each to get a good idea of what your long-term behavior is like.
  3. and collections, judgments, other “things”

So … Why is it so important to have a good credit score? 

“When a client is applying for a mortgage, they need to bear in mind that lenders (and in most cases, the insurers as well) put considerable weight on the applicant’s credit score,” explains Leslie Penney, a mortgage professional in St. John’s.

“It’s basically a snapshot of a client’s credit situation at that moment in time, although it also reports on the client’s credit history.” 

Credit scores are determined by using a complex formula and rating scale, says Penney.  Credit rating agencies look at your income, your debt repayment history, your total approved credit limits, your credit usage levels and more and that information is crunched into a scoring system that assigns a number of between 300 and 900. This is known as your FICO score. The higher you are on the scale, the less risky you are to a lender.

For example, says Putnam, a number of 750 to 799 is shared by 27 per cent of the population. Statistics show that only two per cent of the borrowers in this category will default on a loan or go bankrupt in the next two years. So that means that anyone with this score is very likely to get that loan or mortgage they’ve applied for. These scores, which are called beacon scores, may also be used to determine the interest rate you will pay on the loan for which you’re applying.

Credit rating agencies like Equifax Canada and TransUnion Canada are typically used in Canada to determine scores. Remember that your credit report or rating is not the same as your credit score, though they’re closely linked. You can get your report or rating from Equifax or TransUnion for free by going to their websites. Equifax now offers a phone based service for free reports without score at 1-800-465-7166. Your credit score will cost you approximately $23 and it will include your credit rating or report. See the appropriate websites for more information. 

Mortgage and credit experts all recommend getting a sneak peek at your credit rating yearly or every two years. The main reasons for this are to ensure that the information the credit bureau has is accurate and to make sure you’re not the victim of fraud. “Because we love to borrow money, that means almost every adult Canadian has a credit file,” explains Putnam. “More than 21 million of us have credit reports. And most of us have no idea what’s in them. Are there mistakes? Have you been denied credit and don’t know why? Is someone trying to steal your identity? A simple check of your credit report will probably answer all those questions.” 

Factors affecting a credit score are paying your bills on time. This one weighs fairly heavily with some estimates as high as 35 per cent, says Tanner Coles, a mortgage expert at Dominion Lending Centres in Surrey, B.C.   “Most of the public is aware that by failing to make debt payments on time or not at all, that will damage their beacon score,” he says.  “I cannot stress enough how important it is to make your payments on time, even if it is just the monthly minimum.  The credit report will show when you have made late payments and how many times.  This is a large red flag for lenders.  They want to see that you are able to pay your debts.  The riskier it is for the lender, the harder it will be for you to obtain a mortgage.” 

Don’t be afraid to use your credit as lenders want to see a history of repayment, says David Larock, an independent mortgage agent in Toronto. But keep your credit card balance well below your account limit. “Most people don’t realize that spending up to their limit every month will hurt their score, even if they pay in full each month,” Larock says. “There are two ways to address this: spend less or get your limit raised. In fact, raising your limit, if you qualify, is one of the easiest ways to help your credit score.” 

Consumers also need to be wary of heavy-duty credit seeking, says Kristian Harris, a mortgage broker with Monstermortgage.ca in Toronto. Harris is adamant that consumers should not apply for every credit card that comes their way as this will bode poorly on your rating.  “Unless you absolutely need it, don’t do it,” he warns. “Typically, the ones that need credit are the ones who use it, and they’re the ones who get in trouble.” 

Most credit holders are unaware that your credit is negatively affected every time a company checks your credit, says Coles.  Your score may decrease by a couple points every time you authorize an inquiry.  “This is a major benefit of using a mortgage broker rather than shopping for a mortgage on your own,” he says. “A mortgage broker is able to pull a credit report once and use this report to find you the best product.  A consumer who approaches five different banks about a mortgage will have five different credit inquiries which will hurt their beacon score.  Sometimes this is difference between being able to get a great discounted rate or not.”

Larock thinks borrowers need to be wary of having too many credit lines. A series of small loans can hurt your score because it looks like your cobbling together any credit you can get your hands on and lenders will worry that you could end up in a position where you have borrowed more than you can pay back.

The best way to avoid this is to consolidate your debt into one large loan, he recommends. Negative credit issues can stay on your record for quite a while, depending on what province you live in and the type of issue reported. Three to six years is the average length of time that negative credit information must stay on your record in most provinces.

If you have poor credit, don’t despair, says Harris. Resolve to improve your rating by paying down balances and paying your bills on time. People with exceptionally poor credit need to re-establish their credit by getting a secured credit card. These cards are similar to gift cards as you pay the credit company upfront and then make purchases on it until the balance depletes.

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