Your Credit Score, also known as a Beacon Score, tells lenders how much of a risk you are, and hence it determines how much you'll pay for your next mortgage. So it's important to know what affects your credit.
Beacon scores range from 300 to 900 (a perfect score). The average Canadian adult has a Beacon near 720.
Many people think you need to be in the 800s to get great mortgage rates. That is not the case. Only 11% of Canadians rank above 800, and it is virtually unheard of to see a Beacon near 900. All you really need is 720 or above to get the best mortgage rates. Even 680+ can get you a great deal.
If your score is below 650, you are what lenders call a "B" client (i.e. there are issues with your credit and banks consider you to be a higher risk). 1 out of 5 Canadians are in this boat, but don't despair! Your credit can be fixed.
Here's a table showing the approximate effect of different Beacon scores on mortgage interest rates. It shows how rates go up as your Beacon score goes down.
Beacon Score
| Interest Rate
|
| 720+ | the BEST Rate
|
700-719
| +.020% |
| 657-699 | +.065%
|
620-674
| +1.20% |
| 560-619 | +2.50% |
| 500-559 | +3.50% |
Assuming you want to improve your credit (and who doesn't?) you should know how the Beacon formula is calculated. Here are the main criteria:
Component
| Weight
| Notes
|
Payment History
| 35%
| Factors in the number of payments over 30 days late, collections, judgments, and bankruptcies. A single 30- day late payment can drop your score 15-20 points.
|
Current Debts
| 30%
| Considers how much you currently owe (in absolute terms compared with your credit limits), how many creditors you owe money to, and how much you could owe if you maxed all your available credit. |
| Age of Accounts | 15%
| The longer your accounts have been opened the better. You generally need at least 3 accounts over 1 year old. |
Credit Inquires
| 10%
| Bank loans, credit cards, and revolving credit accounts all affect you differently. |
Type of Credit
| 10%
| Numerous credit applications in the past 12 months is not good. This is a big benefit of mortgage brokers who pull your credit only once for multiple lenders. |
Besides the obvious (bankruptcies, judgments, etc.) the top Beacon killers are:
- Payments over 30-days late
- Maxing out credit cards (using over 75-80% of a high credit limit)
If you have a lot of maxed out cards, bring them at least below 50% of the limit - below 30% is best. Your credit score can jump considerably in as little as a month.
The moral of this story is: know your credit. Over 70-80% of Canadians have mistakes on their credit report. Don't be afraid to check yours!
To order your credit report from Equifax, click here.
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© 2008, 2009 Blair Armstrong - All Rights Reserved - Reproduction, copying or distribution of any information contained herein is strictly prohibited.
