Understanding your credit report


Most people either don’t pay attention to what their credit score is doing or don’t realise that they have the ability to keep track of it.

Why is this important?  When you are about to make the biggest purchase of your life… a home… most people require financial help from their bank.  This is when your credit score hits you in the face!  All your financial nightmares or mishaps will catch up to you and it can soon reduce the excitement of your first home purchase to tears.

What do you need to do before you ask the bank for a mortgage?

  1. The first thing you need to do is to start receiving your report.  There are three agencies which keep track of the information.   You are entitled to 1 free report yearly (additional cost with scores)
  2. Review the information on your report and ensure it is accurate.  If there are any errors or outdated information with the report, contact the offending company (ie credit card company) and have your account corrected.  Follow-up to ensure your credit report now reflects the correct information.
  3. Start reviewing your outstanding debt and start reducing it immediately!  Consumers with higher debt are considered to be high risk. The quicker you pay your debts the better it is for your credit history scores.
  4. Your activity in the last 12 months can have a negative impact on your score.   If you’ve been out there looking for credit (ie. Car loans, credit cards), this can be translated to a higher risk client.   Best to hold off on these activities if you plan to be looking for a mortgage.

 

What does “Credit Score” mean? 

In Canada, credit scores are generated by two private agencies… Equifax and Trans Union.  Since the information is collected separately, it is recommended that you receive reports from both agencies yearly.

Credit Score can also be referred to as FICO, or Beacon, dependent on system agency is using.  Equifax is the most widely used credit score and totals can range from 300 to 900.  The break-up is as follows:

  • 35% of the total score is based on payment history
  • 30% is the amount owed and the available credit
  • 15% is for length of credit history
  • 10% is for types of credit used
  • 10% is for search and acquisition of new credit and inquiries

 

So as you can see there is tremendous weight on payment history and debts owed.  Available credit is important to note.  This is the total amount you can “technically” borrow, whether you take advantage of it or not.  Make sure that this amount makes sense.  If you have a credit card with a $10,000 limit and you only need $5000, have the credit card companies reduce this amount.  All that “available” credit will only hurt your score or the amount you want to borrow for a home.

Equifax published the national average FICO score range which you can see below.   Caution should be used as lenders will make their own determination as to what the minimum score will be for lending money.

You can also see the corresponding delinquency rates based on these scores:

It’s easy to see why lenders use these to evaluate prospective borrowers!

Factors affecting your score!

1.  Credit Inquiries

Each credit inquiry will reduce your score but the overall amount and effect will vary dependent upon your credit status and amount of credit history available.  When shopping for a car or mortgage, ensure you make your inquiries within a short period of time (a week) so that all will be lumped in as one enquiry.  Always verify this information with the lending institute prior to a credit score check being done on your account.

2.    Non-mortgage debt too high

Frequently people have too much non-mortgage debt.  The key is to reduce this and to limit the number of credit cards which you have.  Ensure you make your payments on time as this will effect your score.  Again, persons with limited history will be affected the most by continuous hits to their scores.  Its not just about paying on time each month either.  Ensure you are paying back the interest and the principle amount you borrowed and making progress.

3.  Older credit cards may be better then new ones

The longer you have an account open the better but it is best to use it once in a while.  Opening a new account, transferring a balance to it, and closing the old cards is not the best move.  If there is no fee to keeping it open, then keep the card.  Having a mix of credit is a positive to your score.  (i.e. car loan, credit card, a store credit card, other loan)

4.  Your bank accounts including NSF cheques
5.  Bankruptcy / payments to collection agencies
6.  The types of credit
7.  The length of time you have had credit

Valuable links:

Financial Consumer Agency of Canada

Understanding you Credit Report and Credit Score – Financial Consumer Agency of Canada

TransUnion Canada

Equifax Canada

 

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