Unimor Capital Corporation

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  • Creditworthiness: Why it Matters When Getting a Mortgage

    Creditworthiness: Why it Matters When Getting a Mortgage

    When it comes to obtaining a mortgage, creditworthiness is one of the most important factors that lenders consider when deciding whether to approve your loan application. In simple terms, creditworthiness is a measure of your ability to repay a loan. The higher your creditworthiness, the more likely you are to be approved for a mortgage loan and to receive a lower interest rate.

    Creditworthiness is based on several key factors, including your credit history, income, debt-to-income ratio, and employment history. Lenders use these factors to determine your risk as a borrower and to determine whether you are likely to repay your loan on time.

    Here’s a closer look at each of these factors and why they matter when it comes to obtaining a mortgage.

    1. Credit History: Your credit history is a record of all of your borrowing and payment activity. Lenders use this information to see how you have handled credit in the past, including whether you have made payments on time and how much debt you have accumulated. The better your credit history, the higher your credit score and the more likely you are to be approved for a mortgage.
    2. Income: Your income is another important factor in determining your creditworthiness. Lenders want to know that you have a stable source of income that will allow you to make your mortgage payments on time each month. If you have a high income, you are more likely to be approved for a mortgage, but even if your income is low, you may still be able to get a mortgage if you have a good credit score.
    3. Debt-to-Income Ratio: Your debt-to-income ratio is the ratio of your debt payments to your income. Lenders use this ratio to determine whether you are carrying too much debt relative to your income. If your debt-to-income ratio is too high, it may be difficult for you to get a mortgage, because lenders may see you as a riskier borrower.
    4. Employment History: Your employment history is another important factor that lenders consider when determining your creditworthiness. Lenders want to know that you have a stable source of income, so they look at your employment history to see whether you have a steady job. If you have a stable job with a good salary, you are more likely to be approved for a mortgage.

    In conclusion, creditworthiness is a critical factor when it comes to obtaining a mortgage in Ontario. By understanding the key factors that determine your creditworthiness, you can take steps to improve your chances of being approved for a mortgage loan and getting the best interest rate possible. If you are looking to buy a home, it is important to focus on improving your credit score and lowering your debt-to-income ratio to increase your chances of being approved for a mortgage.

  • How to Get a Mortgage with Poor Credit

    How to Get a Mortgage with Poor Credit

    Faced with high inflation and rising interest rates, more Canadians are finding it difficult to qualify for a mortgage. The problem can seem even worse if you struggle with poor credit. The good news is that even if your credit history is less than stellar, you may not have to put off buying a home, although you will likely pay more for your mortgage.

    Do You Know Your Credit Score?
    One of the biggest mistakes people make before getting a mortgage is not knowing their credit score before applying. Recent reports have revealed that more than 50% of Canadians have never checked their credit scores. If you’re only finding out that you have bad credit when you apply for a mortgage, it may be too late to do something about it.

    What is a Good Credit Score?
    While lenders can set their own minimum credit score guidelines, the following generally applies:

    • 800 or above: Excellent
    • 720 to 799: Very Good
    • 650 to 719: Good
    • 600 to 649: Fair or average
    • Under 600: Poor

    To obtain a mortgage with a Prime lender (banks and credit unions), you will likely require a credit score of 600 or higher. In fact, any mortgage with less than 20% down must also be approved by Canada’s mortgage default insurance providers, i.e., CMHC, who require at least one borrower to have a minimum credit score of 600 or higher. If your score is below 600, you will most likely need to deal with an alternative or private lender, come up with a 20% down payment, and be subject to a higher mortgage interest rate.

    How to Get a Mortgage with Poor Credit
    If you struggle with a bad credit score, there are still ways to qualify for a mortgage loan:

    Increase Your Down Payment Amount
    If you have bad credit, you can improve your chances of being approved for a mortgage by coming up with a larger down payment. While it’s possible to obtain a mortgage in Canada with as little as 5% down, if your credit score falls below 600, you won’t qualify for mortgage default insurance, and a 20% down payment will be required. A larger down payment has other benefits as well. By avoiding the hefty CMHC premiums, you will save thousands of dollars during the life of your mortgage.

    How to Find More Money for Down Payment

    • Gift from a family member. You can receive a part, or all, of your down payment as a gift from a family member. The lender will require them to sign a gift letter to confirm that the funds aren’t borrowed and that there is no expectation of repayment.
    • Withdraw RRSP funds under the Home Buyers Plan (HBP). If you are purchasing your first home, the government of Canada has a program that allows you to withdraw funds from your RRSP to use towards your down payment. The current withdrawal limit is $35,000. You will have to repay the amount you withdraw into your RRSP, but you have 15 years to do so, beginning in the second year after the year in which you removed the funds.
    • Delay your mortgage application. If you have tapped out all potential down payment sources and are still short, you may have to delay your mortgage application while you save more money. Can you hold off for six months or a year? Consider a side hustle to increase your income and your savings rate.

    Improve Your Debt Servicing Ratios
    In addition to having an adequate down payment and credit score, mortgage lenders must determine if you can afford to make the monthly mortgage payments. To do this, they use two calculations, Gross Debt Servicing (GDS) and Total Debt Servicing (TDS).

    Your total debt servicing (TDS) measures your total monthly obligations as a percentage of your gross monthly income. This includes your mortgage payment (PIT) and any other loans or credit card payments you might have. Your TDS ratio should not be more than 40%, although lenders may accept TDS as high as 44%.

    You can increase your approval chances by lowering your TDS. There are a few ways you can do this:

    Increase Your Income
    I alluded to this earlier but consider ways to increase your income. The easiest is to make more money at the job you already have, by asking for a raise, or getting promoted. If that’s not an option, think about a second job, keeping in mind that a mortgage lender will require you to be off probation before they can use your income for debt servicing purposes. Side hustle income is also great, but it likely can’t be used to qualify for a mortgage.

    Pay Down Existing Debt
    To improve your mortgage affordability, think about ways to free up cash flow by reducing your debt load. Among the worst culprits are huge vehicle loan payments, which have surged to record levels in recent years.

    Avoid Taking on Additional Credit
    You’ve heard the saying, “An ounce of prevention is worth a pound of cure.” It’s easier to say NO to more debt than dealing with the debt you already have (like that massive pickup truck loan.) If you’re in the market for a mortgage, it may be best to avoid taking on other debt. If you do, ensure it will not impact your chances of being approved for the mortgage.

    Go Through a Private Mortgage Lender
    If your credit is so bad that no A or B lender is willing to approve your mortgage application, talk to your mortgage broker about going through a private lender. Private lenders aren’t just ‘bad credit mortgage lenders.’ While they do a lot of bad credit mortgages, they also lend to borrowers who may have decent credit but whose application falls ‘outside the box’ of a bank or credit union.

    Your broker will bring up the private lender alternative before you do. Understand that private lenders charge much higher interest rates than A lenders, but the idea is to deal with them for a year or two and then move the mortgage to a prime lender.

    Obtain a Co-Signer
    If your credit score prevents you from getting a mortgage, another option is to obtain a co-signer. A co-signer must have very strong credit, a solid net worth, and enough income to support the mortgage on their own should the primary applicant fail to make the payments.

    The downside to obtaining a co-signer is that it ties you to that person financially, potentially for several years, in the case of a mortgage. It can also be challenging for the co-signer themselves, as they must include your mortgage PIT whenever they apply for credit, even though they are not making the mortgage payments. For these reasons and more, I don’t recommend using a co-signer, except in rare instances. But it is an option.

    Improve Your Credit Score
    Ultimately, if your credit score is standing in the way of getting approved for a mortgage from any lender, your only other option is to address your low credit score. And while it won’t happen overnight, there are several steps you can take to improve your score.

    How to Improve Your Credit Score
    If you are struggling due to poor credit, there is hope. Here are seven steps you can take to improve your credit score.

    1. Pay off any unpaid collection items. If you have unpaid collections showing up on your credit report, you need to settle them as quickly as possible. These are debts in such high arrears that the lender has sent them to a collection agency to pursue repayment. Generally speaking, no bank or credit union will lend money to someone with unpaid collections showing on their bureau. If you have multiple collection items, I recommend that you start by paying the lowest balance owed first.
    2. Pay your bills on time. If you have bad credit, continuing to make late payments will only worsen matters. Take steps to ensure timely payments going forward. Remember that most companies report late payments as soon as they are 30 days in arrears.
    3. Avoid making excessive credit inquiries. Each time you apply for credit, it counts as an inquiry on your credit report, and your credit score could drop as much as five or ten points, albeit temporarily. If your account shows multiple inquiries over a short period, say six to twelve months, potential lenders may view it as evidence of credit-seeking behaviour, and cause for concern.
    4. Keep Your Credit Utilization to a Minimum. Credit bureaus, like Equifax and Transunion, keep track of your credit utilization: the percentage of available credit you’re using. For example, if you have a credit card with a $10,000 limit and you carry a balance of $5,000, your utilization is 50%. When your credit utilization exceeds 30%, it’s a sign that you might struggle to manage your credit. Credit utilization is a determining factor for your credit score, so try to pay off balances in full, or at the very least, keep them under 30%.
    5. Don’t close longstanding credit accounts. One of the things that strengthen your credit score is the length of time a credit product has been reported to the bureau. When you close a longstanding credit card or line of credit, it may shorten your history and lower your score. And while it’s often beneficial to reduce the number of credit cards you hold, think twice before closing a longstanding account. If you feel like it’s the best choice, wait until after your mortgage application has been approved and finalized.
    6. Check your credit score regularly. What gets measured gets managed, but it could also be stated that what gets measured gets improved. If you check your credit report regularly, you can take corrective action if you notice any downward trends. You can also proactively correct errors and check your account for fraud.

    How Do I Find a Lender Who Will Approve My Mortgage?
    If you’re looking for a mortgage and are concerned about your credit score, your best bet is to consult a mortgage broker. Mortgage brokers have access to dozens of lenders, not just the big banks. They can shop your application to alternative and private mortgage lenders, in addition to the banks and credit unions, giving you the best chance for approval.

     

  • What is a Good Credit Score?

    What is a Good Credit Score?

    Have you ever been surprised to find that you were turned down for credit, or that you had very little credit history at all? Even if your credit history is rock solid, it’s important to know what goes into determining your credit score. Understanding how your credit score is measured will help you improve it and keep it in good standing.

    What is a Credit Score?
    A credit score is a summary of an individual’s entire credit history and serves as an indicator of their ability to meet their financial obligations. Your credit file is a fairly complex document that’s full of various codes and data. The credit bureau provides an ongoing analysis of that data, summarizing it into an easy-to-decipher 3-digit score, allowing lenders to assess the overall quality of your repayment history, before deciding to dig deeper.

    For example, an excellent credit score may indicate that no further investigation is necessary, an average score might suggest a deeper review, and a poor one could mean a summary denial. In short, credit scores make life easier for the people and agencies we do business with, but not necessarily for us. Because of this, it’s important to keep a close eye on your credit score, so you can fix what’s broken before it becomes a problem.

    How Important is Your Credit Score?
    We generally tend to only think about credit scores when it’s time to borrow money. It might be for a car loan, a new credit card or credit card limit increase, or even a mortgage. Credit scores matter in the approval process of nearly any type of loan, but they can also affect the interest rate you pay. The best rates are usually reserved for those with the best credit scores. So, generally speaking, good credit scores translate into lower interest rates.

    Other Uses for a Credit Score
    But there are situations apart from borrowing, where credit scores are important. Employment is one. Prospective employers routinely pull credit reports on their new hires, often to determine if they’ll hire them at all. Insurance companies will run credit checks on new customers, and the resulting score can have an effect on the premiums they’ll pay.

    Nowadays, just searching for an apartment to rent can result in your credit being checked. Running a credit report before approving your lease application has become standard procedure for many landlords and property management firms. Sooner or later, when you need that new loan, mortgage, or new apartment, the strength of your credit will become very important.

    Who Keeps Track of Your Credit Score?
    In Canada, there are two companies that maintain your credit score. One is Equifax, the other is TransUnion. Anytime a change is made to your borrowing account, your lender sends the information to Equifax and/or TransUnion. This could be to report a credit limit increase, a regular or late payment, or the payment of your account in full.

    Some lenders will send your information to both credit bureaus, some only deal with one or the other. For this reason, your credit score can vary between Equifax and TransUnion. Both companies also use a slightly different algorithm to determine your score, which can also result in a slight variance, although it’s not usually significant. While you have little control over which credit bureau your lender chooses, it’s important to be aware that there are more than one, and that either (or both) could be used.

    What’s Considered a Good Credit Score?
    Now that we know who measures your credit score, and why it’s so important, let’s take a look at what is considered a good score in Canada. Because the parameters have changed somewhat in recent years, it’s not always clear what is considered a good credit score anymore.

    Let’s take a look at the different levels, and how they are categorized:

    • Excellent = Score of 800 or above
    • Very Good = Score between 720 and 799
    • Good = Score between 650 and 719
    • Fair or Average = Score between 601 to 649
    • Poor = Anything below a score of 600

    How to Interpret Your Credit Score
    So, what do these different levels mean? For example, what’s the difference between having a good score and a very good score? The impact of your credit score on an application can vary, but with all else being equal, we can draw some general conclusions from the categories described above.

    If your credit score is above 800, for example, you likely won’t have any difficulty obtaining credit, and the lender will often provide an approval quickly, without requiring additional documentation. Between 720 to 799 (very good), approval is still very likely, but you may not qualify for the best rates the lender can offer. If your score is good (between 650 and 719), you may not qualify for certain products, depending on where your score falls in the range. For example, some premium credit cards have a minimum credit score requirement for approval. If your score falls below 650, most lenders will want to dig deeper into your credit history, to find out why the score is not as strong.

    Based on what they find, they may decline your application, or require you to provide a co-signer or additional security. Generally speaking, a credit score of less than 600 (poor) will be insufficient in order to obtain a mortgage. There are lenders who will consider your application; however, you may be subject to much higher interest rates.

    As you can see, a higher credit score means greater flexibility, and freedom when borrowing. Not only does it make it easier to be approved for a loan, a job, or an apartment, but an excellent credit score will also mean that you’ll pay less for whatever it is you’re buying.

    Tips for Improving Your Credit Score
    If you want to improve your credit score, there are a number of things you can do. Here are some tips that can help you better your credit score, with the first one being the most important:

    Pay Your Bills on Time
    Your ability to repay your loans is the most telling aspect of your credit score. Late payments are recorded and stay on your record for several years. If you pay late repeatedly, you are likely to see a rapid decrease in your score.

    Keep Your Balances Low
    Don’t max out your credit cards, or lines of credit. When you are close to your available credit limit, it sends up red flags and can lower your score. If you cannot pay off your credit card in full every month, try to keep the balance below 50% of your credit limit. A high credit utilization ratio will lower your overall score.

     Build Credit History over Time
    The further back it goes, the better. A long credit history (if it’s a good one) will strengthen your score. Think twice about closing a paid-off credit card that you no longer use if it’s your earliest source of credit.

    Hold Various Types of Credit
    You don’t want all of your credit to be in one category. Mix it up a little. Credit can include credit cards, lines of credit, car loans, RRSP loans, and mortgages. The variety of revolving credit and installment credit can help reinforce your credit history and show that you can handle different credit situations.

    Only Apply for Credit You Need
    Every time you apply for a credit product, your score drops ever so slightly. The more credit inquiries you have in your recent history, the more credit hungry you look, and the lower your credit score will be.

    Check Your Credit Report Frequently for Errors
    With so many parties reporting your credit information to the bureau, a simple keystroke error could result in a late payment being recorded where there was none. While it’s possible to dispute the information and get the lender to change it on your credit report, the process can be a real hassle. You should check your credit report periodically for errors.

    Following the above steps should help you improve your credit score, however, be patient, as it can take time. You may need 60 days before seeing any improvement, and it could take longer than four months to see substantial improvement.

    You Need to Use Credit to Get a Credit Score
    You may be very responsible with your finances. You don’t use credit cards, always preferring to pay with cash. If you are living debt-free, then you may find that your credit score isn’t as good as it could be, and it could mean a higher interest rate on loans you are approved for.

    If you don’t make use of credit, then there is no payment history with which to establish a score. And although debt-free living is beneficial in many ways, it, unfortunately, won’t help your credit score. Since the most important factor is your payment history, you need to be making payments on something in order to have a good score.

    What Is a Good Credit Score in Canada and Why it Matters?
    Maintaining a good credit profile is an important part of your financial health. And while there are many things to consider, the most important step you can take is to make all of your payments on time. As for your actual credit score, higher is better, but you don’t need to have a score over 800. As long as your score is over 700, you’re unlikely to be denied credit due to the score itself. If your average credit score is below 700, there are steps you can take to improve it.

    Look after any unpaid collection items or judgements that are impacting your credit. If you have accounts that are in arrears, it’s important to bring them up to date as soon as possible. If you have revolving credit, such as a line of credit or credit card, make sure you are at least making the minimum payment each month. Failing to do so will impact your credit score negatively. If you’ve never ordered a copy of your credit report, you can sign up through Borrowell or Credit Karma and get your free credit report. If you do, you’ll be well on your way to building a strong credit history.

  • Inside the Mortgage Approval Process

    Inside the Mortgage Approval Process

    Documents Required to Get the Best Mortgage Rate

    So, you’ve found the perfect home, you put in an offer and it’s accepted­­—with the condition of financing, of course. Now it’s time to seal the deal and this boils down to money. So you call your lender to finalize the mortgage. That’s when you’re going to get hit with a list of paperwork that’s required for your application. Below is a list of paperwork that you may need to complete your mortgage application:

    Personal information: Age, marital status, number, and age of kids.

    Employment details: This includes proof of income (such as T4 slips, copies of your last two paystubs, personal income tax returns, Notice of Assessments from CRA for the last two tax filing years, and a letter from your company stating your position, length of employment and salary).

    If self-employed you’ll need to provide: Incorporation documents, if applicable, as well as financial statements for the corporation for the last two to three tax years. You’ll also be required to submit full personal tax returns as well as CRA Notice of Assessments for both the corporation, as well for you personally. The lender may also ask to see portions of your books, such as your General Ledger or Profit & Loss statements. Talk to your accountant or bookkeeper for these reports.

    Other sources of income: Typically this is a statement on your part, but the lender could ask for back-up documentation. Other income can include pension, rental income, part-time work, etc. You’ll probably be asked for copies of your tax returns, or copies of paystubs or rental income documentation.

    If you already own property: A copy of the mortgage statement on your current property and a copy of last year’s property tax statement and, perhaps, this year’s up-to-date property tax statement.

    Current banking information: Including bank, branch, accounts, and balances.

    Verification of your down payment: This can be a snapshot of a bank account where the money is currently deposited, or a letter from a family member stating that the money is a loan or gift.

    Consent to run a credit history search: Every lender will either verbally ask for permission (and then obtain your Social Insurance Number) or ask you to sign an authorization form allowing them to pull your credit history.

    List of debts (otherwise known as liabilities): This is where people sometimes opt to exclude a few items owed, but you need to resist this urge. Your credit history will show all outstanding money owed, so be upfront and honest. Provide a list of what is owed, to whom you owe it to and what monthly payments, if any, you put towards paying down the debt. The list should include student loans, credit card balances, car loans, monthly lease (or lease-to-own) arrangements and personal loans.

    Copy of the listing: You will need to print off a copy of the listing and include this in your mortgage documentation package.

    Copy of purchase document: You will need a copy of the document you signed to buy the home. Known as the Agreement to Purchase and Sale, it’s the document that states the address, what’s included/excluded and the price, deposit, and down-payment you agreed to.

    Condo documentation: If you’re buying a condo or strata-townhome, you’ll also need to include the condo corporation’s financial statements and status certificates.

    Rural property: You’ll need to include the certificate for the well and/or septic tank if you’re property isn’t on municipal water and sewer.

    If you want to reduce your stress during the financing phase of your home purchase, and you don’t want to or can’t submit all this information prior to finding a property then consider gathering up all this documentation ahead of time. Just having all the documentation at the ready will reduce your workload and free you up to concentrate on last-minute requests.

     

  • Is Your Credit Score Good Enough to Buy a Home?

    Is Your Credit Score Good Enough to Buy a Home?

    Three little digits can make a big difference when you’re trying to get a mortgage you can afford.  Whether you can land a mortgage with a low interest rate or even get any home loan at all often comes down to three little digits: your credit score.  Does your credit score need some help? And could it keep you from buying a home? Let’s find out.

    How do credit scores work?

    Canada has two main credit bureaus — Equifax and TransUnion — that collect and share data about how you’ve used credit in the country.  These private companies draw up credit reports that summarize your activity and use it to assign you a credit score.  Lenders like banks rely on your credit score to tell if you’re a good investment.

    Credit bureaus assess a lot of information in their reports, such as:

    • How long you’ve had a credit card
    • Whether you miss payments
    • Whether you stay close to your credit limit
    • The number of times you apply for credit
    • The size of any outstanding debts

    Credit scores range from 300 to 900 and they play a big part in being approved for a mortgage.  A higher score means you’re managing your credit well and making payments on time.  A lender will be more likely to let you borrow their money.  A low score suggests you’re a risk, so you could be refused outright.

    When your credit score is decent but not spectacular, a lender will compensate for that risk by saddling you with a higher mortgage rate.  A higher interest rate means a higher monthly payment and steeper total interest charges over the life of the loan.

    How do I know if my score is too low?

    Plenty of third-party services and a few banks will give you a free look at your credit score online.  Other companies will ask you to sign up for a paid service that may have other benefits, like credit monitoring and support.  According to Equifax, most lenders smile when they see a score of 660 or higher.  Anything above 760 is excellent. Anyone with a score below 560 will struggle to get a decent interest rate and may not get a loan at all.

    Each lender has different standards, and those standards can change depending on what’s happening in the mortgage market.  Some private lenders won’t be as demanding as major banks but may offer far worse deals to compensate. These “subprime” lenders work almost exclusively with people who have low credit scores.

    If your credit score needs work, you’ll want to carefully consider whether the cost of a higher interest rate is worth it. You may decide it’s better to delay your home purchase to give yourself time to improve your score.

    How do I raise my score?

    The easiest way to bring up your credit score quickly and snag that mortgage is to obtain copies of your credit reports from the major credit bureaus and make sure everything on them is accurate.  Canadians are entitled to a free look at their credit report at least once per year from both Equifax and TransUnion.  If you find any mistakes, dispute the errors so they can be removed.

    Paying bills on time, even if it’s just the minimum payment, is one of the most important factors.  Contact your lender right away if you fear you might miss a payment, and don’t skip a payment even if it’s in dispute.

    Try not to use too much of your available credit.  The federal government suggests using a third or less of what you could be using, even if you always pay off the balance.  Paying down your credit cards to cut your credit utilization can give your credit score a nice boost.

    Another option is to enroll the help of a free credit monitoring service. You’ll get instant access to your score and be able to check your credit history regularly.  You have a few other options — like using different types of credit rather than just credit cards, keeping old accounts active and trying to limit the number of credit checks — but these basic steps will put you well on your way to home ownership.

  • Credit Reporting 101

    Credit Reporting 101

    Your credit file contains information on all of your credit accounts submitted to the credit bureaus, including balances, limits, payment history, etc…, as well as identification information such as your name, address, age, social insurance number, marital status, spouse’s name and age, number of dependents, occupation, and employment history.

    What is a credit score?

    In Canada, credit scores range from 300 up to 900 points, which is the best score you can have. According to TransUnion, 650 is the magic middle number – a score above 650 will likely qualify you for a standard loan while a score under 650 will likely bring difficulty in receiving new credit.

    Lenders who pull your credit bureau file may see a slightly different number than you see when you pull your own file. This is due to the fact that each creditor applies a specific set of risk rules, giving and taking points for different purposes or preferences. This proprietary method of scoring will make a difference in the final calculation. The score you pull for yourself is calculated using an algorithm created for consumers that approximates these different formulas, and should still be in the same numerical range as the lenders’ scores.

    How long is information kept on my credit file?

    Actual inquiries made by credit grantors minimum of 2 years, however it may only affect you credit for the last 12 months
    Credit history and banking information 6 years from the last activity date
    Bankruptcies 6 years from the date of discharge (1st bankruptcy)
    Judgments, foreclosures, garnishments 6 years from the date filed
    Collections 6 years from the date of last activity
    Secured loans 6 years from the date filed
    Credit counselling, consumer proposals, orderly payment of debt (OPD) 3 years from the date settled or completed

    How can a low credit rating affect my life?

    Credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate your credit behaviour and assess your creditworthiness.

    1. Applying for a loan. Your credit score will be a big factor into the decision of whether you are approved or denied your application for more credit. Your credit score will also affect the interest rate and credit limit offered to you by the new credit grantor – the lower your credit score, the higher the interest rate will be and the lower the credit limit offered – the reason for this is you are considered more of a credit risk.

    2. Applying for a job. A potential employer may ask your permission to check your credit file and based on what they read, they may decide not to hire you due to your poor credit history. Yes, having bad credit could cost you a job!

    3. Renting a vehicle. When you sign an application to rent a car, the rental company can check your credit history to determine what their risk may be when they loan you their property. So although you are not applying for credit, the application documents you sign provide your written permission to access your credit information.

    4. The same is true when applying for rental housing – the landlord may assess your tenant worthiness and their risk by factoring in your credit rating and score, and they could pass you over for someone with a better credit rating.

    What information is used to calculate my credit score, and what factors will lower my score?

    If you have tried looking on the consumer reporting agencies’ websites, you have seen they provide very little information as to how your credit score is calculated. They believe this information is proprietary and therefore their ‘secret’. They do, however, provide a list of the main factors which affect your credit score:

    1. Payment History
    Equifax says: “Pay all of your bills on time. Paying late, or having your account sent to a collection agency has a negative impact on your credit score.”
    TransUnion says: “A good record of on-time payments will help boost your credit score.”

    2. Delinquencies
    Equifax lists: “Serious delinquency; Serious delinquency, and public record or collection field; Time since delinquency is too recent or unknown; Level of delinquency on accounts is too high; Number of accounts with delinquency is too high.”
    TransUnion lists: “Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections.”

    3. Balance-to-Limit Ratio
    Equifax says: “Try not to run your balances up to your credit limit. Keeping your account balances below 75% of your available credit may also help your score.”
    TransUnion says: “Balances above 50% of your credit limits will harm your credit. Aim for balances under 30%.”

    Ok, so avoid maxing out your credit – because if you don’t really need more credit you’ll be able to get it, and if you do really need it then you are more of a risk.

    4. Recent Inquiries
    Equifax says: “Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself by taking on more debt than you can actually repay. A flurry of inquiries will prompt most lenders to ask you why.”
    TransUnion says: “Avoid excessive inquiries. When a lender or business checks your credit, it causes a hard inquiry to your credit file. Apply for new credit in moderation.”

    There are two types of Credit Bureau file inquires: “hard inquiries” such as an application for new credit, which will lower your score; and “soft inquiries” such as requesting your own credit report, and businesses checking your file for updates to your existing credit accounts for approving credit limit increases, for example – these will not appear on your file or lower your credit score. So be careful to only apply for credit you really need.

    5. Length/History of Accounts
    Equifax says: A “common negative score factor… [is the] length of time accounts has been established is too short”
    TransUnion says: An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.”

    Having a longer history on your credit accounts earns you more points, so avoid closing your accounts if you may need them in the future. A good credit history is built over time – sorry, but there is no quick fix for this one.

    6. Variety of Credit Accounts
    TransUnion says: “A healthy credit profile has a balanced mix of credit accounts and loans.”

    Having a mix of credit products (credit card, retail store card, line of credit, car loan, etc…) will procure more points on your file than having only one type of credit, such as only credit cards.

    7. Too Many Accounts
    Having a lot credit accounts, especially if many of them carry balances, is another warning sign of financial distress, so if the Credit Bureaus think you have too many, they will deduct points.

    Other “derogatory” factors which negatively affect your credit rating and the Credit Bureaus don’t like to mention to you are:

    1. Errors
    One of the major causes of point loss to your credit rating are bureau reporting errors. Errors can be delinquent accounts reporting on your file that do not belong to you, late payments that were not late, and credit that is created from identity fraud – therefore not your credit. The Credit Bureaus are paid by the creditors who pull credit bureau files and in turn who report to them. Credit reporting is done electronically, and Credit Bureaus accept the information they are sent without any investigation into the accuracy of the information. Therefore, is it critical that you pull your credit bureau file at least once a year. Only you will know when there is an error on your file, and it is up to you to have the credit bureaus fix it.

    Look for these common errors:

    • Wrong mailing addresses
    • Incorrect Social Insurance Number
    • Signs of identity theft
    • Errors in your credit accounts
    • Late payments
    • Unauthorized hard inquiries

    If there is an error on your file you must contact the Credit Bureau, then it is up to the Bureau to investigate your complaint and to verify the information contained in your file by contacting the reporting creditor. When contacted by the Credit Bureau, the reporting creditor will have to verify the item they have placed on your file. You are entitled to be part of that process. Check your credit again 30-60 days after disputing errors. If any of the disputed inaccuracies remain, contact the creditor to further your dispute and determine if the item can be taken off your credit profile.

    2. Moving/Time at Address
    As previously discussed, a large number of credit file requests within a short period due to moving will lower your credit score. But on top of that, the length of time at your current address will influence your score, so try not to move a lot as it will affect your credit rating. The longer you remain at one address, the more points you receive.

    3. Changing Employment Frequently
    The longer you stay at a job, the higher points your credit score receives. You are seen as having a secure job and therefore being a secure, less risky credit consumer.

    4. Having No Mortgage or Housing Information
    The Credit Bureaus assign certain points for those who have mortgages and those who rent, and deduct points for those whose housing situation is unknown to them. As soon as you pay off your mortgage, the reporting account is removed from your file and you are in the unknown category, which will actually remove points from your credit rating! Credit card and other credit account history will remain on your account even after being paid off and closed, but unfortunately a paid mortgage does not benefit your credit rating. Imagine, you own your own home and that does not benefit your credit rating – does that even make sense? Also, not all mortgages report to the Credit Bureaus.

    5. Having High Revolving Credit Balances
    When you have high balances that are rotating between different credit accounts, this is a warning sign that you could be in financial trouble and therefore you could be considered a credit risk.

    6. Having No Debt
    Believe it or not, having no debt is also bad for your credit score! Here we go again – if you don’t need to borrow money creditors will be trying to throw it at you. If you do need to borrow money and have no debt or debt history well, you will have a harder time of it. If you do not have a history of credit use on your file to provide something for creditors to evaluate, they will see that as a risk, and you will be deducted points on your score for not having credit accounts.

    Tips to Raise Your Credit Score

    1. Correct errors, and track your report for future errors. Order your credit file from each bureau at least once per year.

    2. Lower your balances. If your debt levels are above 50% of your available limit, create a payment plan to reduce your balances.

    3. The biggest “tip” to having a good credit rating and a high credit score is to continually use credit and to repay that credit on time all the time. Set up automatic payments to help with this.

    4. If you have no credit history, or need to rebuild your credit, open a secured credit card account. You pay a deposit, which sets the limit of your card, then use it like a regular credit card. The secured credit card provider reports your payment habits to the credit bureau(s), so you will be able to gain points with an account in good standing.

    5. Look over our list, read your credit report, and identify any areas that could be improved for a higher credit rating.
    Remember, “your credit rating is not a reflection of your personal worth – it is merely a credit reporting tool” – Margaret H. Johnson. The good news is your credit rating is like your self-esteem, sometimes in your life it will be high and sometimes it will be low – however, you can always rebuild it over time!

     

    ~ Adapted from Debt Canada

  • Discover How Your Credit Score is Calculated

    Discover How Your Credit Score is Calculated

    Credit scores are based on a calculation system derived by FICO (Fair Isaac Corporation):  a company that developed a rating system to apply to your credit report that predicts how good or how risky you are with your credit.

    Scores are between 300 and 850 and just like your high school report card, the higher the number the better your score. There are five categories within the model that have specific weightings:

    Payment History: Your payment history makes up 35% of your credit score. It scores on how you’ve repaid your credit cards and loans. Missed or late payments and collections lower your score. Bankruptcy, credit counselling, settlements and liens also lower your score.

    What You Owe: The amount you owe is 30% of your credit score. The amount you owe on credit cards, credit lines and other revolving credit is compared to your total credit limit. On loans, the amount you owe is compared to the original amount borrowed. If you owe more than 75% of your total credit limit, your score drops.

    Length of Credit History: The length of time you’ve had and used each account is 15% of your credit score. The amount of time since the last activity on the account makes up part of this score.

    New Credit: The new credit section is 10% of your score. It consists of recent credit inquiries and the time since the inquiries were made. The new credit section also scores on accounts recently opened and the time since they were opened. An important part of this score is how you’ve rebuilt your credit after credit problems.

    Types of Credit Used: The type of credit used is 10% of your credit score and reports on the types of loans or revolving credit you’ve used.

  • Understanding Your Credit Report

    Understanding Your Credit Report

    A credit report is a history of how consistently you pay your financial obligations. It is created when you first borrow money or apply for credit and is built over time. The companies that lend or collect money or issue credit cards (banks, finance companies, credit unions, retailers, etc.) send credit reporting agencies specific and factual information about their financial relationship with you. Details, such as when you opened up your account, timeliness of your payments and if you have gone over your credit limit, are shown in full.

    Although this information is confidential, you have the right to see your credit report and no one else can have access to the information in the report unless you allow it. Typically, when you apply for a loan, a credit card or even a mortgage you will need to allow this organization to check your credit history. It will include the following account types:

    • Revolving accounts (credit cards & credit lines)
    • Installment accounts (loans)
    • Other accounts (cell phones)
    • Collection accounts

    If you would like to obtain a copy of your credit report you can contact a credit-reporting agency such as Equifax or TransUnion Canada. When you receive your credit score it’s important to make sure that the information is correct. If the score is lower than you were expecting, review your history and see where you may be able to improve.

    Tips to remember to improve your credit:

    • Make sure you have a credit history: you may not have a score because you do not have a record of owing money and paying it back. One way to build a credit history is by using a credit card.
    • Always pay your bills on time.
    • Don’t go over 50% of the limit on your credit card.
    • Apply for credit in moderation.