Credit: Knowing Your Score And How It Works
Mortgage rates and products are constantly changing, and the Canadian market is more competitive than ever before. By working with a Mortgage Professional (Broker), you can access all your mortgage options with just one phone call, one application. A mortgage professional works for you, on your behalf, to find the right mortgage for your situation with whatever lender is the best fit for you, whether it’s a major bank or private lender.
Being able to borrow money from lenders for major purchases like a home or car and how much it will cost you to do so is determined by a number of factors and largely affected by your credit score. Lenders use more than just your credit score to evaluate your credit worthiness and determine whether they will extend credit to you however it does form a major component in the lending process.
In this economic time when lenders are a lot tighter with their money and much more selective on whom they lend it to it is increasingly more important to maintain a good credit score and know how to improve a less than perfect one.
A credit score is a statistical analysis of a person’s credit files which generate a 3 digit number between 300-900 and is used to estimate a person’s credit worthiness (willingness to repair their debts). The higher the score, the higher the persons credit worthiness. Lenders can use this number with some accuracy to predict how likely a borrower can and will repay a loan and make payments on time.
There are 2 credit reporting agencies in Canada; Equifax and Transunion. Consumers can request a copy of their report including their score online (in the links above) for a fee or in writing for free but must be delivered by mail. When consumers inquire into their own credit report it has no impact on their score.
What does the score mean?
700+: Excellent Credit and will have access to the best terms, options and interest rates.
680-699: Very good credit and that you are in good shape to obtain credit with very good terms and best rates.
660-679: OK credit and will still have access to many financing options however perhaps not be eligible for any lender exceptions to any of their guidelines.
640-659: Borderline and other parts of the application must be strong.
620-639: Very weak but possible with higher down payments, much higher interest rates and fees, and less flexible terms would be offered.
600-619: Difficult but again under special programs or private financing is possible.
Below 600: Very difficult. In some cases large equity positions in a home will offset the risk with higher rates and fees. It would be advisable to fix your credit first.
What affects the score?
There are 5 factors which make up how the credit score is determined and each factor is weighted based on how it helps predict a person’s ability to take on additional credit.
Payment History: 35% – paying debts on time positively impacts your credit. Late payments, collections, judgements, bankruptcies and writeoffs have a negative impact.
Amount of credit owning: 30% – this is the amount owed on accounts in proportion to the total credit limits in available credit. Keeping balances at their maximum even if being paid on time can have a negative effect on your score.
Length of your credit history:15% – this is the time that your credit facilities have operated for. The longer the time frame opened with a good payment history the better the impact has.
Types of Credit used: 10% – a mix of types of credit facilities between installment loans, revolving credit and lines of credit cards is better than only 1 type of facility.
New credit or inquiries: 10% – Evaluates the number and types of newly opened credit in comparison to total number of accounts and facilities. Also evaluates recent inquiries.
How to Improve your Credit Score
If you find yourself in a position with a weak credit score and would like to know how to improve your credit score quickly in order to qualify for better terms and interest rates, here are a few tips. Note: Keep in mind it will take time to have your efforts reflect onto the credit bureau so plan at least 3-6 months or longer, depending on how much improvement is needed.
First off, make payments on time and higher than the minimum payment required. Even just $10 more than the minimum payment will have a positive effect. Also, get the balances UNDER 80% of the limits and don’t allow it to go above. (*Example: If you have a credit card with a $0balance and another is at it’s upper limit, transfer some of the balance to the $0 balance card and make payments higher than the minimum on both). Do not close credit facilities that have $0 balance. This will positively impact your length of credit history of your credit bureau and the balance-to-limit ratio. **Caution: Don’t open new credit thinking this will do the same.
Ensure that collections and judgements are paid in full and more importantly, be diligent about getting your credit bureau updates to reflect PAID. Having paperwork to prove it is not the same as having a credit score to show for it. It is Crucial you make sure your credit bureau is accurate.
If you have had credit problems in the past, lenders will want to see that you have a minimum 24 months current period operating a minimum of 2 credit facilities in good standing and as agreed. Any slip ups, even 1 day late payments, will be seen as a pattern of poor credit usage you will not be offered credit or will have to accept much higher interest rates.
Have any questions?