Do you know what your credit score is?
Do you know how it changes and what you have control over to ensure it helps you, not hurt you?
Having poor credit isnt the end of the world, but it can hurt your financial position, especially when wanting to buy or invest in real estate. Poor credit isnt impossible to recover from. You always have options to improve your credit and get fit. With some time, discipline, and direction, you can certainly improve your position.
In the mortgage space, there are two nationwide reporting agencies that calculate, monitor, and report on your credit situation and provide an associated score – Equifax and TransUnion. To get a free trial and see where you are at, visit Equifax’s site here.
What is a Credit Score?
A 3-digit number, typically between 300 and 900, which represents your risk to lenders about your likelihood to pay your bills on time.
According to Equifax, “a credit score is intended to help financial risk managers and others make fair decisions on whether or not to “take a risk” on someone. The risk might involve giving that person a loan (will they repay it?), offering a credit card (will they make the payments?) or approving their apartment rental application (will they pay their rent?). Credit scores are designed to predict the likelihood that individuals will pay their bills as agreed.” While your score is important, it is not the only piece of information needed to assess your risk profile.
For someone seeking a mortgage, it is one of the first pieces of information brokers and lenders will want to know. Your credit score helps determine what type of lender you can access. For example, if you have a credit score above 650, you have access to most of the banks and monoline lenders, where rates, fees, and terms are the most favourable. Below that score you will have to seek alternatives to the bank, like alternative lenders, MICs, or even private lenders where rates, fees, and terms are less favourable.
The Main Factors in Calculating Your Credit Score:
Your payment history
Your used credit vs. your available credit
Public records
Number of inquiries into your credit file
Note: If you look at your credit score based on data from both national credit reporting agencies – Equifax and TransUnion – you may see different scores. This is completely normal. Each credit bureau has multiple scoring algorithms and lenders typically request only one of them when making decisions. When getting a mortgage, we pull your data and it is our number that will be used, not yours. Credit Karma or any other similar provider isnt used, but a potentially good reference for you.
Different Models and Ways to Calculate Your Score (according to Equifax):
Payment History: ~35%
Your credit history includes information about how you have repaid the credit you have already been extended on credit accounts such as credit cards, lines of credit, retail department store accounts, installment loans, auto loans, student loans, finance company accounts, home equity loans and mortgage loans for primary, secondary, vacation and investment properties.
In addition to reporting the number and type of credit accounts that you’ve paid on time, this category also includes details on late or missed payments, public record items and collection information. Credit scoring models look at how late your payments were, how much was owed, and how recently and how often you missed a payment. Your credit history will also detail how many of your credit accounts are delinquent in relation to all of your accounts on file. For example, if you have 10 credit accounts (known as “tradelines” in the credit industry), and you’ve had a late payment in 5 of those accounts, that ratio may impact your credit score.
Used Credit vs. Available credit: ~30%
A key part of your credit score analyzes how much of the total available credit is being used on your credit cards, as well as any other revolving lines of credit. A revolving line of credit is a type of loan that allows you to borrow, repay, and then reuse the credit line up to its available limit.
Also included in this factor is the total line of credit or credit limit. This is the maximum amount you could charge against a particular credit account, say $2,500 on a credit card.
Credit History: ~15%
This section of your credit file details how long your credit accounts have been in existence. The credit score calculation typically includes both how long your oldest and most recent accounts have been open. In general, creditors like to see that you’ve been able to properly handle credit accounts over a period of time.
Public Records: ~10%
Those who have a prior history of bankruptcy, or have had collection issues or other derogatory public records may be considered risky. The presence of these events may have a significant negative impact on a credit score.
Inquiries: ~10%
Anytime an individual’s credit file is accessed for any reason, the request for information is logged on the file as an inquiry. Inquiries require the consent of the individual and some may affect the individual’s credit score calculation. The only inquiries which may impact a credit score are those related to active credit seeking (such as applying for a new loan or credit card). These inquiries are known in industry jargon as “hard pulls” or “hard hits” on your credit file. The hard inquiry may be the leading indicator, the first sign of financial distress that appears on the credit file. Of course not every inquiry is a sign of financial difficulty, and only a number of recent inquiries, in combination with other warning signals on the credit file should lead to a significant decline in a credit score.
Your credit score does not take into account requests a creditor has made for your credit file or credit score in order to make a pre-approved credit offer, or to review your account with them, nor does it take into account your own request for a copy of your credit history. These are some examples of "soft inquiries" or "soft pulls" of your credit.
Impact to Your Credit Score Being Pulled
Some people are reluctant to check their credit score because doing so may hurt their credit score. This isnt fully true. A “soft” pull doesn’t affect it, but a “hard” pull, like applying for a credit card or mortgage loan, would. These pulls can remain on your file’s timeline for 2-3 years, but typically only affect your score for 1 year.
When shopping for a mortgage, you may have multiple pulls by multiple lenders. Using a broker is an advantage here as they pull it once and can shop it for you without multiple hard pulls further degrading your credit score. If you do go at it alone, typically there is a 14–45-day window where multiple pulls will only have a single impact on your score as though your only did a single pull.
Ultimately, lenders are looking for things in your credit score beyond just the score itself:
No credit history
Minimum of 1-2 tradelines, like a phone bill or car payment
Bankruptcies (if you have filed for bankruptcy, most A-lenders need proof of discharge for a minimum of 2 years before lending to you)
Consumer proposals, Unpaid collections, judgements
History of late payments
Foreclosures or repossessions
Bad Credit Costs You More Money
As mentioned prior, having a better Credit Score gives you access to better rates through lenders who offer them only to people with better scores. At time of writing, for a convention mortgage, A-lenders are around 1.55% variable rate and 3.04% fixed rate on a 5-year term. By contrast, B-lenders start around 3.29% for a 1-year term, plus a 1% fee. Additional options and lenders, including private lenders exist and rates and fees go up from there. So, having a worse score pushes you into the B-lender space or worse, requiring you to pay more – more down payment required, higher rates, and fees, that don’t exist with an A-lender.
How to Improve Your Credit Score
Your credit can be repaired, sometimes in as little as 6 months. Here are some tips to help you get financially fit. The faster you can do the following, the quicker this can happen:
If you have high interest debt and are a homeowner already, consolidate that debt into one easy payment and at a lower rate than your debt costs today.
Make payments on time.
If you cannot afford to repay the balance, ensure you pay back the minimum required on time.
Stop applying for credit cards you don’t really need.
Get collections removed from your credit report. (pay them off and report back to Equifax/TransUnion)
Pay down cards you have that are over utilized or near being maxed out to be below 40-50% of that card’s credit limit.
Don’t close cards that you have that are in good standing just to minimize the number of cards you have. That good standing shows positively on you. Cancelling them removes that positivity.
When you obtain your credit report from Equifax or TransUnion, check for inaccuracies and errors. You think it should be accurate and up to date, but often not. It requires the merchants to accurately update the agency and that to be posted. To get these fixed you need to deal directly with the merchant and agency of the associated issue. This process can take months. I’ve seen it all. Look for:
Accounts that don’t belong to you
Bankruptcy or other legal actions that don’t belong to you
Misspellings
Incorrect dates
Debts that can’t be validated or verified
Debts that should have aged off your report (7 years max)
Don’t go over your credit limits
It is very important to note that bad credit happens over time and for your unique reasons. Just fixing the above doesn’t keep you in good standing. You may consider looking at yourself to ensure you stay financially fit and with a good credit score:
Step 1: Where does your money go?
Do you have a credit problem or a spending problem? Credit is meant to be extended to help you pay over time, not to help you pay for things you really cannot afford. Assess your wants vs. needs and where your money goes.
Step 2: Create a Plan
From that, you need to create a plan…a strategy…a budget. If you don’t know how there are many online resources, including money coaches. With the money you don’t spend, the money you save, you can turn those high balances into nothing and start building savings that will help you move onto new opportunities, like investing your savings...making your money make more money. It’s a beautiful thing.
When you do this, you will be in a better position over time to catch up on those missed or late payments, and even manage any bankruptcy or consumer proposal. If you are questioning if filing for bankruptcy or debt repayment program may fix your issue, I urge you to speak to a non-profit credit counselling service to learn of your best options.
This may sound like a lot and there is more to it. Remember, you have options. I am always here to help you do better. Its what I specialize in.
Your situation is unique to you and so is your credit. I am here to ensure that we get you the best based on your current situation and simultaneously help you repair your credit, if needed, to ensure you can get access to those best rates and terms in the near future, helping you pay less and save more over time.
Reach out today to learn more about your options today.
