KNOW YOUR CREDIT SCORE!

Credit scoring has an enormous impact on your financial picture. It can mean the difference between getting a good interest rate on your mortgage loan, or whether you even qualify at all. As a mortgage broker, it is imperative to be well-versed on the factors that influence your credit score, and have the ability to guide you to take simple, yet very important steps to clean up your credit or work with you to put you on the right path to obtaining an A-status loan at some point in the future.

We all know that good credit translates into lower rates for you, the consumer. We take the initiative to know how to communicate the nuances of credit scoring to you, we know how to work the system to your advantage.  

The Five Factors

What the credit scoring model seeks to quantify is how likely you the consumer is to pay off your debt without being more than 90 days late on a payment at any time in the future. Credit scores can range between a low score of 300 and a high of 850. The higher your score is, the less likely you are to default on your loan. Only a rare one out of approximately 1,300 people in Canada has a credit score of above 800. These are the slam-dunk clients who walk away with the best interest rates. On the other hand, one of eight prospective home buyers are faced with the scenario that they may not qualify for the loan they want because they have a lower score, between 500 and 600.

Here is a simple chart to give you the tiering structure and what it means to the Lender, where your mortgage may be placed. 

720 and over: Wonderful! You are at the top of the best rates and terms offered to you.

700-719: Excellent score. You are a very desirable borrower.

680-699: Good credit. You should be in good shape to buy.

660-679: OK credit. Don’t look for other exceptions.

640-659: Borderline. OK if everything else is strong.

620-639: Weak. The rest of your life must be perfect.

600-619: Difficult. Needs some work, or a special program.

Below 600: Trouble! Try to fix up your credit!  

These scores comprise of Five Factors listed below. I will list these in order of importance, just as your Lender will look at the score:

Payment History: 35 percent impact. Paying debt on time and in full has a positive impact. Late payment, judgments and charge-offs have a negative impact. Missing a high payment has a more severe impact than missing a low payment.

Outstanding Credit Balances: 30 percent impact. The ratio marking the difference between the outstanding balance and the available credit is important here. Ideally, you should keep your balances below 10 percent of the available credit limit.

Credit History: 15 per cent impact. This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area.

Type of Cr edit: 10 per cent impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards only.

Inquiries: 10 percent impact. This quantifies the number of inquiries that have been made on your credit history within a six-month period. Each hard inquiry can cost from two to 50 points on a credit score but the maximum number of inquiries that will reduce the score is 10. Eleven or more inquiries in a six-month period will have no further impact on the borrower’s credit score.

One thing that is important to remember is that a computer does not take any personal factors into consideration when it calculates these scores. When we pull a credit report, it is simply today’s snapshot of your credit profile. This can fluctuate dramatically within the course of a week, depending on your own spending activities. We make you aware of this when you enter into the mortgage loan process, and we will let you know that it’s not in your best interest to go out on a shopping spree during the mortgage loan process. You need to make sure you are not creating a negative impact on your score while the Lender is reviewing it.

Dealing with Challenges

Typically, a person with a bad credit score is in this position because they lack structure in their life. There are, or course, cases where health has been a factor, or perhaps there’s been a layoff or fluctuation in employment, but for the most part, there are individuals who lack the discipline to pay their bills on time or curb their spending. As mortgages brokers, we become the Knight in Shining Armor that provides our clients with a simple roadmap to get them back on the right track.

Now let us explain some examples of dealing with less than perfect credit scores which should improve their credit score.

Let’s say we have a client who needs to do a stated income loan, but they have a credit score of 664. They have a concentration of credit card debt on one card; let say $17,000 on a card with a $20,000 limit. At the same time, they have four or five additional credit cards, all with a zero balance. We advise the client to distribute the debt over the cards that are available to work with. This changes the ratio of debt to available credit and can cause the credit score to pierce through that magical threshold on our chart, and put them in the 680-699 category of having good credit. Another thing to take into consideration in a case like this is the percentage that each of the five factors weigh in on the resulting credit score.

Let’s say we have a client with a credit high (the maximum debt allowance on all cards, combined) of $20,000. They have one card that is used for business purposes that is pushing the limit. We advise the client to get two new cards, each with a $5,000 limit, and once again, spread the debt out over the cards leaving a 30 percent margin of available credit on all the cards. We explain to the client, that yes, this will affect the factor of credit history, but this specific factor only affects the overall score by 15 percent. The big difference once again, is the resulting impact on the credit balance factor, which has a 30 percent influence on the overall score and can cause the overall calculation to pierce through the next level on our chart.

Conversely, we advise our clients not to close any existing credit card accounts, even if they are at a zero balance. Some people think the are doing themselves a favour by having fewer cards, and they lose out on the credit history factor. Even if the client does not have a good rate on those old credit cards, they are rewarded for having the long-term credit history.

These are just a few examples of what we can advise you to do while you are in the mortgage loan process. If you are disappointed by the fact that you cannot get the A-status loan up front, we will let you know that we will be monitoring rates and your specific loan scenario on an ongoing basis and will advise you when you will have the opportunity to turn this situation around.