Those with sub-680 scores who are looking to buy a home either require a co-signer with good credit or a solid plan to lift their credit score above the magic 680 mark. Some lenders will accept lower credit scores, but that leniency is often paired with higher interest charges and/or upfront fees.
Poor credit scores often involve job loss, business failures, poor investments, poor health, divorce, easy access to credit cards and eventual bill payment neglect, all resulting in stress and the need for retaking control of personal finances.
For Generation Z and other Canadians new to credit, obtaining a first loan or credit card effectively means their every action and move in the credit market is being scrutinized. They enter the credit game where positive behaviour (paying bills on time and in full) is rewarded and negative behaviour (neglecting to pay minimums, delaying payments) puts the borrower on a path that may lead to future credit privileges being rescinded.
But there is good news: A sustained series of positive actions in time can restore credit scores to healthy levels. Here’s how the credit system works, how to maintain a high score and how to lift a low score higher.
High Score, Low Stress
Credit scores are assigned based on “predictive analytics,” a data science technique that mixes data mining, artificial intelligence, statistics and other types of analysis to predict behaviour.
The two major credit report providers in Canada are Equifax and TransUnion. Equifax Beacon Scores range from 300 to 900 (https://www.equifax.ca) with higher scores being more desirable. TransUnion’s Empirica Scores go as high as 850+. Lenders generally use a borrower’s credit history, FICO score (http://www.fico.com) and other information to calculate a credit score.
Here are some of the major determinants of a borrower’s credit score, with potential weightings:
- Payment History (35%) If you are making your obligatory payments on time, excellent. If you have missed a payment, how long did it take for you to eventually pay? Thirty, 60, 90, 120 days or more? The longer a payment remains in arrears, the more detrimental the impact. Get back on track as soon as possible.
- Credit Utilization (30%) Experts advise that you use no more than 30 percent of your available credit. On a credit card with a limit of $5,000, as a rule try keep the monthly balance below $1,500. That said, lenders need to see that you have a track record of taking on and paying off debt. Paying off the balance on your credit card or line of credit will strengthen your score as will a track record of on-time consistent mortgage payments.
- New and Existing Credit (25%) Your account history can be used to predict future credit behaviour. Once you start applying for new credit, such as a mortgage loan, the mortgage agent will need your authorization to pull a credit report. The credit report request is considered a hard inquiry, which temporarily lowers your credit score. Seeking other types of credit, say a car loan at the same time will further lower your score. Being hungry for credit will work against you. However, credit report providers understand that when seeking a mortgage you may make several inquiries within a 30-day period. Those inquiries are considered one hard inquiry (https://www.fico.ca). It doesn’t have the negative impact that seeking diverse types of credit at the same time has on your score.
- Type of Credit (10%) Having different types of credit can be positive. Having a car loan, mortgage and revolving line of credit -- if consistently paid on time -- enhances your credit score.
- If you have a credit score that is lower than 680, start with setting up automatic bill payments or pay your bills a few days before they are due to ensure they are received by due dates.
- Pay off credit card balances every month. If you can’t afford to pay down more than the minimum payment, consider getting a personal loan or using a credit line to pay off card balances. One or two credit cards is all most of us need.
- If you are struggling with bill payments, consider credit counselling or refinancing your home to consolidate debt.
- If you had the unfortunate circumstance of filing for a first bankruptcy, it will stay on your Equifax report for 6 years from the date of discharge and on a TransUnion report for 7 years in Ontario. You will have to rebuild your credit one on-time payment at a time. For a mortgage, you may need a private lender through a brokerage and/or may require a co-signer.
- Check your credit score twice a year. When you check, it is considered a soft inquiry and has no impact on your credit score. Ensure the information is correct as you can dispute details with proof. Simply contact Equifax or TransUnion.
Susan Williams is a mortgage agent in Toronto with Mortgage Architects. For help you with all your mortgage and refinancing needs, email her at susan.williams@mortgagearchitects.ca.
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