Credit Scores – Part i

Today’s consumer is more aware of the importance of credit scores to secure a mortgage.  Many clients are relying on their mortgage professional to explain the basics of credit scores.  Part i of “Credit Scores” will go over a few basic questions clients usually ask their mortgage professional in regards to credit scores.

How are credit scores assembled?

By selecting a large sample of customers and using the good, the bad and ugly in their credit reports to determine which factors relate to credit worthiness.  Those factors are then assigned a degree of importance to determine the likelihood of the credit being repaid on time.  There are two major firms who hold a persons credit bureau they are Equifax and TransUnion. The scoring models used in the industry are referred to as “bureau scores”, most commonly “Beacon Scores”, which is the model used by Equifax.  TransUnion’s scoring model, Empirica, is substantially the same as the “Beacon Score”.  Although they are two different firms and call their credit scores differently, essentially the score values are the same, somewhere between 300-900.  There are thousands of different credit scoring formulas being used today but each system is accurate and correct for its own application.

Who Reports?

All major lenders, banks, financial institutions and retail outlets granting credit.  What do not report on credit bureaus are utilities i.e. your cell phone, cable, overdue parking tickets and fines.

What Factors Most Effect Credit Scores?

1. Payment History is worth 35% of your total score. Be sure to make payments on time, the longer past due, the lower the score. Frequency is also a factor, the number of times you are late. This also applies to bankruptcies, liens and judgments.
2. Amounts Owed is worth 30% of your score. Are you maxed out on all your credit cards? If you don’t want to have this affecting you then be sure to use only 75% of your credit limit. If your limit is $5000 don’t use more than $3750 or it will affect your score.
3. Length of Credit History is worth 15% of your score. How long have you had your loan/credit card for? Have you been using your credit cards recently?
4. New Credit is worth 10% of your score. Make sure you do not apply for credit too often. Newly activated accounts may lower your score. Also, make sure you do NOT have your credit checked too many times. This will lower your score. They want to make sure you are not living beyond your means.
5. Types of Credit you use are worth 10% of your score. Watch out if you have several credit cards with high limits. This could mean that at anytime you can max these out and have financial hardship, because unlike installment loans, you do not need re-approval to reach the maximum limit. NOTE: If you are the person who likes paying with cash, make sure you use your credit card at least once a month to boost your credit score.

When applying for larger purchases that involve credit checks i.e. mortgages or automobiles some company’s take these lumped inquiries and will not lower your score because of this.  However, clients should not apply for credit cards 6 months prior to taking a mortgage application as this will be a sign that you are shopping for money.

What’s Considered a “Good Score”

The average Canadian has a credit score of 720 but a high score will not guarantee a mortgage any more than a low score as there are more than just one factor in determining a clients approval.  To qualify for the best rates in town and to qualify for the “zero down” mortgage or any other fancy mortgage product out there that CMHC or Genworth will allow, the minimum beacon they look at for these privileges are a score of 680.   So again, industry wide the minimum beacon score for best rates and products is 680!  However, if you have a great mortgage professional, they should be able to help you with these products even with a 600 beacon score.  So don’t be worried if your beacon score is lower than 680, there are options specifically for you!

Credit scores are a part of the criteria used by lenders to determine risk which evaluates their credit worthiness.  A credit score is a moment in time, it’s fluid nature means that it will go up and down depending on the clients activity over time.  As credit scores are not written in stone it gives you time to build and repair your rating over time.

Some people in the business consider scores above 680 to be prime(“A” business), between 640-680 as near prime(“A-” business) and anything below 640 is sub-prime(B-C business).

To apply for a no-charge consultation and to find out your credit score contact me directly!