Credit Score and Report Overview

What is the main purpose of this section of your credit score?
What percentage of your credit score is made up of new credit inquiries?
What does the word " credit " mean?

Transcription

1 Credit Score and Report Overview Have you ever wondered how your credit score is calculated? Have you ever asked, but are always given vague answers? I will tell you exactly how credit scores are determined for Canadian credit users. Over the next 4 months I intend to inform, educate and coach you through on how to increase and maintain your credit score to at least a minimum of 680. The reason for choosing the benchmark of 680 is simply because the federal lending guidelines and policies provide more debt servicing leverage for borrowers with a score of 680 or more. I want you to have that option when it comes to purchasing or re-financing your property. It's just one less things to worry about when it comes to the intricate process of mortgage applications. Over the next 4 months we will cover topics such as: 1. What is a credit report. 2. What is a credit score and how is it calculated. 3. How to repair, increase and maintain your credit score: The Do's and Dont's. 4. Common myths about credit scores. Good credit score and overall report = Maximum Opportunities! Get better mortgage rates; access to more funds for a nicer home. Saves you thousands in interests. Allows for faster approvals. Makes it easier to attain credit. And can even be the difference in your career. Beacon Score Interest Rate Monthly Payment Total Interest Cost 5 Yr Term Mortgage Balance End 5 Yr Term 599 or < 5.50% $1, $77, $267, or > 2.89% $1, $40, $255, Difference 2.61% $ $37, $11, *Based on a $300,000 fixed rate 25 yr amortization mortgage with interest compounded semi-annually You see the difference your credit score can make. There is a significant amount of money you can save by having good credit. Interest rates is something you cannot control, but your credit score is. Why not opt to save thousands and provide yourself the best opportunities. What is a Credit Report

2 A credit report contains information about you; DOB, SIN, past/present addresses, employment, types of credit issues (credit cards, loans, LOCs etc) and total amount of inquiries you have made to obtain credit. A credit report also details balances along with repayment history. Basically a lender wants to know what is the probability that they will be repaid. Creditors and financial institutions report to the credit bureau every month. There are 2 agencies that receive and compile this data, Equifax and TransUnion. You're probably asking yourself now, who has access to this sensitive information. Credit grantors, employers landlords, insurance agents and utility companies all do but only when consent is granted by you. Here is an example of a real credit report. This part of the report details the score (not good) and address. I have omitted their birthdate and SIN.

3 This part of their credit report displays the creditors executing their credit checks along with his/her type of employment. This person seemed to be seeking alternative credit over the past 3 years. There were 4 collections listed. In this credit report snapshot it details the creditor, when you applied for the credit, limit, balance and minimum payment along status and the last time the trade or creditor reported it to Equifax. Along with making the necessary payments one if required to make them on time, this being once a month. The R2, R3 and R4 mean that it was 2 months late etc...

4 What is a Credit Score and How is it Calculated What is a Credit Score The credit score is used by lenders to predict the probability of you repaying your monthly expenses and mortgage; how credit worthy are 'you'? Credit scores range from 300 to 900, 70% of Canadians have a score between 700 and 850. There are 5 components that make up your score; Payment History, Amounts Owed, Length of credit history, New Credit and Types of Credit in Use. How Is Your Credit Score Calculated The exact breakdown of the calculation for how the Beacon or FICO score has never been released, but it is common knowledge that there are 5 categories, each weighed and allocated differently to come up with your score of creditworthiness;

5 1. Payment History 35% - Your payment history is the most important factor in your credit score. Creditors want to know if you are going to pay them back. So payment history will usually make up 35% of your credit score. Your credit bureau payment history takes into account all payments on all of your consumer debts: your credit cards, line of credit, car loan, etc. Your credit report payment history will look at how many accounts you have that are paid as agreed, how many past due payments you have, whether or not you have any adverse public records (bankruptcy, judgments, liens, etc.) or collection activities. It will also calculate the how recent any late payments or collection activities. 2. Balances or Amount Owed 30% - When you apply for credit, the amount of consumer debt you owe really matters to a lender. If you are close to maxing out all of your credit cards or your line of credit, this could be a sign that you are in financial distress, and it means that you are a higher risk to lenders statistically speaking. This is why the amounts that you owe on your debts make up 30% of your credit score. This part of your credit score will look at the amounts you owe on each credit card, line of credit and loan you have. It will look at the number of accounts you have with balances and what percent you are using of each of your credit limits. If you are using 75% or more of your credit limit on a credit card or line of credit, this is seen as a sign of trouble and your credit score will be negatively impacted. 3. Length of Credit History 15% - If you have had credit available to you for a long time, your credit report should provide an accurate picture of how you use it. For someone who has not had credit for very long, it is difficult to tell if they really know how to use credit responsibly. Time is needed to get a true picture of how responsible someone is with credit. This is why the length of your credit history is the third most important factor in your credit score calculation. It will usually make up 15% of your credit score. Your score will reflect how long it has been since you first obtained credit, how long each item on your credit report has been reporting and whether or not you have active credit right now. If you have recently obtained credit for the first time, your credit score will not be very strong. However, if you have been responsibly using credit for many years, this factor will really work for you. If you have been involved in a bankruptcy, consumer proposal or debt management program, your credit history will essentially restart whenever you complete your program (the record of your program also has to fall off your credit report for you to get a good credit score). Closed creditors will remain on your credit history for 6 years.

6 4. New Credit Inquiries 10% - If you are frequently applying for credit, your creditors want to know. This can mean that you re in a desperate financial situation, and this could mean that you are now a riskier customer to your creditors. This is one reason why new credit and credit inquiries compose around 10% of your credit score. This part of your credit score will take into account the number of credit accounts you have opened recently, the number of recent credit inquiries, the time since any new accounts were opened and the time since your most recent credit inquiries. This part of your credit score will also evaluate whether or not you are re-establishing good credit history follow past payment problems. 5. Types of Credit in Use 10% - Creditors are interested to see if you have experience handling different kinds of credit. Even though this part of your credit score makes up 10% of the total, it is the least significant unless you don t have much other information on your credit report. Even though the credit scoring system looks for different types of credit, you shouldn t go around applying for different types of credit to try to improve your score in this area. Only open credit accounts as you need them. This part of the credit score is likely in place to help identify people who abuse credit or people who apply for every credit card that comes in the mail. If you focus on being responsible with your credit, this part of your score will most likely take care of itself.

7 How To Repair, Increase and Maintain Your Credit (The Do's and Dont's) Credit scores are like report cards for grown-ups. The score you get ranges from 300 to 900. Your score indicates your creditworthiness to potential lenders, banks, landlords, insurance companies, and even to some employers, for instance. The higher your score the better. A score of 700 or better is needed to get the best rates. 1. Get a Copy of Your Credit Report - Make an inquiry, at minimum, once a year, twice is much better. If you are planning on purchasing anything that requires a credit check, keep track of your credit. This is something that is 100% in your control. As a consumer you have ability to make a soft/consumer inquiry to Equifax as many times as you want without it affecting your score. Here is a link getting your report and knowing your score. If something doesn't look right, contact the creditor immediately. Don't wait to report an incorrect or fraudulent transaction. Is there an outstanding collection? Deal with it immediately, and by that I mean pay it. Then argue to get your money back. Do not leave this on your credit report for 2, 3, 4, 5...months dragging your credit score down. No matter what, the collection will not be removed until it's paid unless taken to litigation. Once dealt with it will still take months to recover the points lost and 6 years to fall off your credit report. 2. NEVER Miss a Minimum Payment - Because this attributes to 35% of your overall score, delinquencies have the biggest negative effect on your credit score. If you have overdue bills, make the necessary arrangements with your creditors. They would much rather work with you than file collections against you. If you can't pay it all back, it's better to pay some. The attached image is a statistical analysis of what happens when lenders issue credit to borrowers with lower scores. 78% of all credit that goes unpaid over 90 days late is to borrowers who have a score of 499 or less. If your score is you are going to be 90 days late on a payment less than 1% of the time. Mortgage financing and credit is a numbers game! 3. Don t Close Unused Credit Card Accounts - Got a credit card that you have had ten years and hardly use? Keep it. It takes 12 years history with the same specific card in good standing to crack 800 and

8 enter that top 2% tier of quality credit. Canceling a card can actually assist with lowering your score. Keep the old cards and only use them occasionally so the issuer doesn t stop reporting your information to the credit bureaus. Having a long credit history helps increase your score. Don't jump around to credit providers. Most 'large' providers like RBC Visa, have several different products. There is likely one that will fit your needs. 4. Never Max Out Your Credit Cards - A good rule of thumb is to keep your balance below 75% of your maximum credit limit; even if you pay them off in full each month. For example if you have a credit card with a $5,000 limit, don t carry a balance that exceeds $3,750. It s better to have two cards with balances that are each below 50% of your limit, than to have one card that you consistently max out. NEVER exceed the limit, by even a $1. 5. Don t Look For More Credit - Don't shop around for credit or open several credit accounts in a short period of time. It raises alarms at credit bureaus and financial institutions, especially when you don t have a long-established credit history. Work with you existing creditors, seeing as there is more relevant history they are more likely to work with you, especially if you are looking to resolve some credit hardship(s). Always ensure you give your permission before allowing a credit check. 6. Rule of 2 - Ideally you want to have 2 sources of credit solely in your own name for a minimum of 2 years with at least a $2,000 credit limit. This would be either 2 credit cards or one credit card and a line of credit. Ensure this is in addition to any joint accounts. Joint credit is only reported to the primary credit holders credit bureau. Below is a table outlining how different credit mistakes will affect your credit score. The higher the score the more your score will be reduced. Please note these are approximate amounts. Credit Mistakes How it affect a GOOD score How it affects a GREAT score Maxed-out, maybe over limit -10 to to day late payment -60 to to -110 Debt settlement -45 to to -125 Foreclosure -85 to to -160 Bankruptcy -130 to to 240

9 Common Myths About Credit Scores Because the top secret formula has never been released there are common myths that are floating around about the ones credit score, here are the top Too Many Credit Cards Will Hurt My Credit Score - Actually, cancelling healthy active cards or accounts hurt more as all of the payment history is lost along with the type of credit granted. The average Canadian has 10 credit sources, having more does not hurt as long as you pay on-time. Along with paying on-time your should observe the rule of maintaining a balance at no more than 75% of the limit. Applying for new credit every week will lower your score more. 2. Using Credit to Build a Credit Score - Remember to keep your balances lower and manageable. The credit bureau only receives reports regarding your balances and payments. Making your payments on-time builds your credit history strength and score. 3. My Utilities and Internet are Paid On-time Every Month These providers only check your credit to determine creditworthiness. They don't report your payment history to the bureau. On the flipside, they only report when you DON'T pay. The other organizations that only report upon default are municipalities and ICBC. Pay your traffic tickets and bylaw infractions. 4. Checking My Score Will Decrease It - There are two types of inquiries, soft and hard. A soft inquiry occurs when you pull your own credit report. Credit card companies also pull soft inquiries when marketing pre-approval offers. A hard inquiry happens when submitting loan or credit card applications. A hard inquiry is one that is triggered by the applicant. Soft inquires do not affect the credit score. A consumer can pull their own credit score as many times as they wish without repercussions. Hard inquires affect the score slightly. These inquires are included in the calculation done for credit scoring. Recording the number of inquires a consumer has on the credit report allows potential lenders to see how often a consumer has applied for new credit. This can be a precursor to someone facing credit difficulty. Too many inquiries could mean that a consumer is deeply in debt and is looking for loans or new credit

10 cards to bail themselves out. Another reason for recording inquires is identity theft. Hard inquires not made by you could possibly be an identity thief opening accounts in your name. Inquires are required to remain on the credit report for at least a year. Most creditors, however, disregard any that have been on the report for over six months. Hard inquires remain on the report for two years. Soft inquires only appear on the report that you request from the credit bureaus and will not be visible to potential creditors. Hard inquires appear on all credit reports. All inquires disappear from the report after two years. Only individuals with a specific business purpose can check your score. Creditors, lenders, employers and landlords are some examples of approved business people. The inquiry only appears on the credit report that was checked. For example, if a landlord uses Experian to check the creditworthiness of an applicant, the credit check will only appear on Experian's report, not TransUnion or Equifax. To limit the number of soft inquires made on your credit report, contact the credit reporting agencies and request that they remove your name from marketing distribution lists. 5. There is Nothing I Can Do Once a Payment is Late - Creditors are always willing to work with you if there is a late payment. If notified in a timely manner a late payment can be easily removed, just don't make a habit of it. Summary GET CREDIT FIT. Having and maintaining good credit is a process. Like getting in and staying in shape, it doesn't happen overnight. It's something you need to continuously work at, nurture and track. In the banking and finance sector you, as consumers/borrowers, have absolutely ZERO control over how the lenders and the Bank of Canada will adjust the interest rates or if an employer will absolutely 100% be granting you a raise on a yearly basis or what the real estate market trends are currently doing. You do however have absolute 100% control over you credit history and score. Treat it like a loved-one; always check on it, keep it forever (credit cards especially) and don't cancel/open others. Increase the limit through the years and feed it regularly (use the credit and re-pay it). Without (strong) credit you will not be able to purchase items that require a soft or hard credit check and poor credit will only give you access to higher rates. If you have no credit it will be impossible to get a mobile phone, new car or even rent a home, let alone buy a new home. By building and maintaining your credit you will ensure that you have given yourself the best chance at obtaining credit and the lowest possible mortgage interest rate. For a comprehensive (no charge) review of your credit report please contact me. HALLETT MORTGAGE powered by Dominion Lending Centres M: F: E: [email protected] W: hallettmortgage.com