As a mortgage broker dealing regularly with clients having ‘Bruised’ or ‘Challenged’ credit (or any of the other euphemisms used to describe it!), I often notice a lack of awareness in terms of the importance of acquiring and maintaining, a good credit score.
The realization of the importance of good credit history particularly hits home with clients wanting to make a house purchase, or obtain business financing
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 or FICO Score. This is a number produced by credit reporting agencies such as Equifax, and 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 a credit profile are important in determining one’s personal Credit 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 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.
Lenders rely on your credit score and the details of your credit performance when reviewing your mortgage or business loan 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:
- Outright refusal by lenders or
- Usurious interest rates (in some cases, one year interest only at 10%-14%)
What gives you a good credit score?
A good business credit score is not obtained immediately. Over time, the credit bureaus consider the following factors when determining your credit score:
- Data gathered from vendors about your payment history, including cash flow, returned cheques, working capital, net worth and financial resources.
- Your company’s business reports and corporate filings.
- Any third-party collection claims, legal suits and judgments.
- Data gathered from your business through interviews and investigations.
When should you check your credit score?
There is no one-size-fits-all answer. You need to pick a frequency that suits your business. If you have never looked over your score, we recommend immediately adding this task to your priorities list. After you check it once, perhaps you will review your credit score twice a year, once a year or every quarter.
How can you improve your company’s credit score?
- If your credit score is not great, start today to improve your credit report. Here are a few ideas to enhance your company’s credit report:
- Pay your bills on time. When possible, pay vendors in advance of their deadlines.
- Report and fix errors on your credit report. Where a dispute exists such as with a merchant service’s provider, make the details known.
What if there are errors on your report?
- Credit Bureaus are not necessarily always accurate; If you spot an error, contact the credit bureau right away to report and correct it as this could negatively affect your loan application.
- By building your credit rating and regularly monitoring your credit score, you will ensure your business is financially stable and credit worthy.
- If your credit score is low, but financing is needed, let me help – call Terry Lynch – (416) 315-1787.
Terry Lynch is a licenced mortgage agent with TMG, The Mortgage Group. In addition to Reverse Mortgages, Terry also specializes in: conventional mortgage funding, lines of credit, commercial and construction loans, Challenged Credit. He also secures funding for a variety of businesses such as retail, restaurants, franchises etc.