I am always asked about specifics on my client’s credit report. Not a file goes by where someone doesn’t have a question or aren’t sure about something. This post was put together to give you a good overview of all things that make up your credit rating and how the information is interpreted from a lending perspective. It will help you manage and raise your credit score for future borrowing needs.
Do I have more than one credit score?
There are many different scores that are used, below are the main ones to know about.
ERS (Equifax Risk Score) is primarily used for credit card applications and predicts the likelihood of a serious delinquency (90 days past due or worse) within 12 months.
CRP (Canadian Risk Protector) is used for car loans primarily and predicts the likelihood of serious delinquency (90 days past due or worse) within 24 months.
BEACON 9.0 which is now called FICO 8 as of Dec 18, 2018 is the one most relevant to mortgage and home financing. In a nutshell, this score dives deep into many things that gives lenders much more accurate data to work due to more predictive power. It includes trended data such as repayment on telco accounts, mortgages, reflects current market trends, evaluates lines of credit separately from other revolving credit instruments due to their differences in usage by consumers, enhanced evaluation of new-to-credit populations and much more. One thing to note is that it gives a less severe delinquency rating to consumers who ‘go bad’ on isolated accounts. So that one-time bad experience with the Brick or Rogers won’t send your credit score into the dumps. The range for credit scores is 300 – 900. Most lenders like to see a minimum of 650-680 score for A lender financing and anything below that typically falls under a B lender. Credit score is NOT the only thing lenders look at when evaluating someone for a mortgage and many have their own internal scoring systems as well.
What makes up your credit score?
Payment History (35%)
Looks at how well you repay all types of credit from loans to credit cards, mortgages and credit lines and yes, cell phone accounts. One isolated incident is not a big factor but many folks have that one card from university and then decide to tell Rogers or Bell to go fly a kite and avoid the final bill. Then they wonder why I tell them they have a low score. Keep in mind negative trades/accounts on your report must be purged after 6 years but they are still there before that and lenders will always ask for a reason why things went south. So keeping a record of disputes helps to back your story.
Utilization (30%)
Looks at your limits and the percentage of how much of them are outstanding from month to month. Generally keeping them under 30% utilization is a good way to avoid any negative impact to your score. Pay your bills and don’t borrow from Peter to pay Paul. Clients that are always at the max (or over their limit) on credit lines and/or cards always have a lower score and lenders do not like it and will want them brought down before closing. Always try to pay cards off or at least keep the balances under 30%.
History (15%)
This is how long you have had a history on file with Equifax, typically the longer the history the higher the weighting, newer generations and new-to-credit applicants have lower scores because of this. If your clients are young and are thinking of buying, a pre-approval is a great way to ensure we put them on the right path to a stronger score faster.
New Credit (10%)
Are you a credit seeker? Lenders watch for this and is accounted for in the mix. It’s one thing to have accounts open and active but not used, however from time to time they look at how much new credit is being added to the report which include inquiries. Lenders do not like seeing a bunch of new credit occurring all at once, they often want to know why and it automatically raises flags and questions are asked. New credit is important from time to time but apply for new credit sparingly.
Credit Mix (10%)
As it implies, they are looking at the ‘whole enchilada’ as it relates to various types of credit that make up your report. These are (R) Revolving (I) Instalment (O) Open (L) Lease (C) Line of Credit. So if you are credit card only type of borrower that will affect the score, so getting a loan or a new mortgage certainly will help boost the score by diversifying the mix. This also can have a negative effect on your score if you start to close active accounts that you don’t use as it can alter the mix.
How long does data stay on my report?
People always ask me “when do things ‘fall off’ my credit report?”
Below is a list of the timelines. Some provinces have different timelines.
- Inquiries – 3 years from date posted
- Judgments – 6 years from Date filed (PEI – 7 years)
- Collections – 6 years from date of last payment
- Trade Items – 6 years from date of last activity
- Previous High Rates – 6 years from date reported
- L/S Trade Item- 6 years from date reported
- Bankruptcy – 6 years from date discharged (If none, 7 years from date filed)
- Multiple Bankruptcies – 1st purges 14 years from discharge, (additional purges – 14 years from discharge)
- Secured Loans – 6 years from date filed
- Banking Items – 6 years from date reported
Will too many inquiries affect my score?
There is a big myth out there that if you are shopping for a mortgage (or getting pre-approved) and apply via various lenders that your credit score will be affected. This is not the case provided they occur within a 45-day period. The inquiries will show up individually from each mortgage lender on your report but will only be considered as one pull (hard hit) against your report. Keep in mind, other loan requests such as car loans, credit cards etc., are treated as separate pulls or hard hits and will affect your score.
A soft hit/pull is an inquiry without the intent to extend credit and will not affect your score, but will show on your list of inquiries. There is a rolling number on your credit report that shows how many times your lender/credit card cos are pulling a bureau on you and the history of these as well. They typically use these inquiries (or soft pulls/hits) to extend marketing offers to you by way of increased credit or new credit offerings.
Does my bank report on the 1st of the month?
It is virtually impossible from a data perspective for all banks, credit card co’s, telco’s etc to report your monthly repayment history on a specific date. Therefore the way your data is updated and sent to the credit agencies is dynamic and is happening all the time on different reporting dates.
Is it true Mortgage Brokers have more information?
Banks typically rely on one score only and their own internal data and scoring systems that they have on file. Whereas, Mortgage Agents and Brokers have a full spectrum of credit data and scores per individual and this can be very useful in solidifying a better/faster mortgage solution for clients. I have been on both sides of the fence working as a specialist for over 20 years for two of Canada’s big banks, and I am blown away at the breadth of data I now have access too as a licenced Mortgage Agent. It’s a win for you when we have the full picture before the bank does to offer more informed direction as to how to proceed for financing.
What about my employment information?
Equifax Canada is working on incorporating current employment and income/salary data for use in income verification into their reporting. Currently it shows only the names of your current or previous employers you noted over the years when applying. Equifax Workforce Solutions, in the U.S. has 296 million employment records that represent, according to the company, “approximately one-third of the working population in the United States.” It may be even more than that. In the U.S. a wide range of employers send employment and salary data about their employees to Equifax, including 75% of the country’s Fortune 500 companies, 85% of the federal government workforce, entire state governments and agencies, courts, colleges, and thousands of small businesses nationwide. There was no mention of what time frame to expect this coming to Canada.
What are Fraud Alerts?
As fraudsters are getting more and more sophisticated, it is wise to know what you can do in the event you fall victim to identity theft. Let’s not discredit the fact that your whole life lives on your smartphone these days as well so it’s not a bad idea to know what to do and watch out for. A fraud alert is a notice that is placed on your credit report that alerts credit card companies and others who may extend you credit that you may have been a victim of fraud, including identity theft. Think of it as a “red flag” to potential lenders and creditors.
Fraud alerts are free to place with Equifax. To place a fraud alert on your Equifax credit report, you can create a myEquifaxTM account online; call Equifax at (800) 525-6285; or download this form to request a fraud alert by mail.
Transunion has a great article on things to watch for and how to report a Fraud Alert with them.
I know this is a long post, but so many Canadians know very little about their credit report and it’s only when they come to me for a pre-approval or a new mortgage that something comes up that they never thought would affect them. I hope this information might help you be more proactive moving forward for when the time comes you need a mortgage, car loan or new line of credit.
When in doubt, give me a shout and i’ll try to answer all of your credit report and score related questions.
Until the next post…
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