Your credit report is a vital part of your financial profile. Not only is it used to determine if you qualify for the best mortgage rates, it’s also used by landlords and new employers to evaluate your character before meeting you in person. There are two basic components of a great looking credit report, your credit score and credit history. This week is all about your score; how high or low can it go and what factors on your credit report affect your score positively or negatively. Keep reading to find out what you need to know.
What does the number really mean?
In Canada, your credit score can range from 300-900, although the highest I’ve seen is 850 and anything below 400 seems to default to a ‘reject’ credit score instead of a number. Beware of a false credit score which is not a true representation of your repayment history and therefore cannot be depended on as a determining factor. An accurate credit score must be accompanied by at least 2 active debts reporting to the credit bureau showing at least 2 years of repayment history. If we’re just looking at a credit score, which is only a portion of the picture, here is a quick cheat sheet to see where you stand in terms of credit score and mortgage options for a home purchase or refinance;
750 plus: You have an excellent credit score and a bevy of financing options for you to choose from, you should be receiving prime interest rates and terms too.
650 – 749: You have a good credit score, and as long as your history looks healthy too, your score qualifies you for multiple choices. This is the most common beacon score range that we see.
550 – 649: It could be better, so history of repayment will be important. Approval might not be automatic, but there are still many financing opportunities available to you though a higher downpayment may be required at slightly higher rates.
499 or less: Your credit score needs some work. You still have mortgage options, but the interest rate will be much higher and downpayment requirement is larger along with extra fees charged. Don’t take the first answer you get at face value, be persistent if financing is your goal as there is most likely an option for everyone but it will cost more.
What’s in a score?
I briefly mentioned the 2 and 2 rule above, where I indicated a true credit score is based on at least 2 debts reporting to the credit bureau for at least 2 years. This is our rule of thumb when we’re determining if a credit score can be relied upon when a lender is assessing an application for mortgage approval. The credit score itself is derived from 5 basic factors relating to your debts and the repayment of those debts. These are good to know so you can keep your credit score in tip top shape at all times.
- Payment History
How debts are repaid is important. The credit report shows when a minimum payment is 30, 60 and 90 days late, and how many times it has been so. Recent late payments affect a credit negatively. Consistent and timely payments keep your credit score high.
- Debt balance to limit ratio
Another factor considered in a credit score is how much of the debt is being used up. This can also be called 'availability'. A credit report with more availability has a better score than a report where all the debts are maxed out. Having 3 credit cards with 50% of their limit owing looks better than 1 credit card with 100% of the limit owing is an example of differences in availability.
- Length and variety of debts
The longer you have debts reporting on your credit report, the better. An accurate credit score includes at least 24 months of history, any less and there could be a request for alternate credit confirmation such as a cell phone or car insurance. In addition to length of reporting, a healthy credit report has found a balance between different types of credit. This includes credit cards, car loans, lines of credit; a variety of installment and revolving debts. Instalment loans having a fixed repayment schedule and term like a car loan while revolving credit represents debts that can be paid off and advanced again such as credit cards.
- Recent inquiries
Credit seeking is the act of constantly looking for new credit sources which can negatively affect the credit score. It’s hard to put a number as to how many inquiries it takes to be considered 'credit seeking'. I can say that a borrower who has had their credit report pulled at a few places within a reasonable timeframe with the same types of institutions should not be penalized for some sensible shopping to get a competitive rate.
Collections, judgments, consumer proposal, and bankruptcies are considered delinquencies. These are the types of bad credit that stay on the report for years and keep affecting the score negatively each month they’re on there. The best way to mitigate past delinquencies on a credit report is to have new positive credit repayment habits to balance it out. Hopefully your score will be somewhere right in the middle.
Your credit report contains valuable information that allows potential lenders, landlords and employers to make a decision whether to approve or decline your application. It is important to ensure the information is accurate and correct any mistakes as soon as possible by contacting the credit-reporting agency directly with documents to support your claim. Credit scores are not an exact science though the best way to maintain a high credit score is to stay on top of it by viewing it regularly to ensure it is accurate.