As a mortgage broker dealing regularly with clients having ‘Bruised’ or ‘Challenged’ credit (or any of the other euphemisms used to describe it!), I am constantly amazed at the lack of knowledge of some generations about this important financial measure. There is a generation of young adults with no idea whatever about the importance of acquiring, and maintaining, a good credit score.
This particularly hits home when trying to make the first house purchase, and usually the first inkling of just how they have neglected this important component of their lives: credit history.
Credit History is one of the 5 Vital Signs in mortgage underwriting. The first indicator of credit performance that a lender uses is a Beacon Score. This is a number produced by credit reporting agencies such as Equifax, TransUnion and is a measure of the credit history and credit worthiness of mortgage applicants.
CREDIT HISTORY IS VITAL TO BORROWING
These mysterious “scores” come from a statistical model that processes all of the transactions in one’s credit life. Someone starting out brand new in the credit world starts with a score of 600. At the top of the positive end of the scale the score can reach well into the 800’s. At the low end the score can be in the 300’s.
Four aspects of your credit profile are important in determining your personal Beacon Score.
- Loan payments on time and credit card payments within the 0 to 30 day window have a positive impact on your score.
- Late loan payments and credit card payments over 30, 60, 90 and 120 days have negative impact on your score; with longer overdue payments having greater negative impact.
- Collections and judgments have a negative impact on your score.
- Running your credit cards consistently at over 75% of their credit limit has a negative impact on your score.
Applying for credit at many stores or with many credit card companies in a short period of time will also have a negative impact on your score. The theory in the model is that if you apply for credit it is granted; if it is granted it is used; and if you take on a lot of new credit in a short period of time then you are not AS LIKELY, statistically, to be able to make the payments on time. Hence the negative impact.
Note: multiple inquiries for automobile financing and mortgage financing in a short period of time do not have the same impact as multiple inquiries for retail credit.
MANAGING A GOOD CREDIT SCORE:
- Make payments on time.
- Keep credit card balances at or below 70% of the authorized limit.
- Apply for new credit over a measured period of time.
Mortgage lenders rely on your credit score and the details of your credit performance when reviewing your mortgage application. However, other than on mortgages which operate as Lines of Credit, mortgage lenders do not report mortgage payment performance to Equifax or TransUnion, the dominant Canadian credit bureaus.
The results of applicants trying to obtain credit with a low score are either: 1). Outright refusal by lenders or 2). Usurious interest rates (in some cases, one year interest only at 10%-14%)
This is information that should be shared with high school, college and university aged children. Let’s not forget: the credit card companies are lined up outside the door at the graduation ceremonies! Schools today are not addressing the importance of future credit scores and this will impact their financial futures in very serious ways, e.g. getting car loan, a credit card or a mortgage.
