A new credit card offering $200 in store credit, getting approved for a car loan or getting prequalified for a mortgage – all require a credit check. Should you be worried? Let’s look at how credit score is calculated, how credit checks work and how you can protect and increase your credit score. We specialize helping Canadian’s rebuild their credit and get approved, learn about our strategy here.
Taking control of you’re your finances by understanding credit score.
Your credit score breaks down into five major components and reflect the last seven years of your borrowing history.
Credit Repayment History
35% – This is the biggest piece of your credit score – do you make your payments on time? The simplest way to improve here is to make sure at least your minimum payments are made on time. Below I will share my favourite strategy to make sure you are always on time.
The most common reason for credit repayment history being damaged is phone bill and credit card disputes.
15% – This piece of credit is based on how long you have had your accounts. A young adult with two years of history will have a more fragile credit score than someone older with long history on their accounts. This is why is it important to establish your credit as soon as possible.
10% – Court orders, bankruptcy, consumer proposals, judgements, or collections. Anytime a public record is created about a debt you owe. The best way to protect yourself is to make sure your debts never reach this point. Being aware and proactive can save you years of credit rebuilding. *Note* Bankruptcy, consumer proposals and outstanding debts may only make up a small portion of your credit score but they have an extreme impact on how lenders will look at your file.
30% – Credit utilization is based on how close to your credit limits are you. In our experience credit utilization is the most common area where clients have damaged credit. A common example would be having a credit card for gas and groceries with a low limit. If you have a $500 limit credit card and spend $450 every month you could be dropping your credit score over 100 points! As soon as your cards report above 50% of the limit your score starts to drop.
*TIP* Your credit cards report to the credit bureau once a month – they generally report in the middle of the month. Even if you pay off your card in FULL every month you could be seriously damaging your credit score.
*Solution* Pay down any cards or lines of credit with balances that go above half of your limit multiple times a month.
10% – Last and almost certainly least. Having your credit pulled does impact your credit, but likely far less than you think. Each inquiry or pull will only move your score a few points.
Five strategies to protect your credit
- Making sure all your bills are paid on time. If you find yourself worrying about being tight on cash, I highly recommend creating a budget. I know I know, the idea of budgeting is up there with watching paint dry… but it is the first step to changing your finances and lowering your stress. We have a budgeting tool if you need some help with this.
- Keep your credit utilization in check. For those who do not struggle controlling spending I suggest increasing your limits where needed. The goal is to have a limit that is at least two times what you will spend in any one month. If this does not work for you, I suggest paying down your balance multiple times a month.
- Don’t close too many credit cards or lines of credit too quickly. If you are changing banks I suggest keeping your old cards around for at least 6 months and gradually closing the accounts after you have replaced them.
- Pay off disputed bills as soon as you can. Even if you know the phone company is wrong pay them right away if at all possible. Their decision making will not be influenced by whether or not you have paid but not paying could damage your credit score in a major way for seven years! Below I will breakdown how a disputed card can affect your score.
- Do not fear credit inquiries. They will generally impact your score two or three points per pull. Did you know that related credit pulls within a 20 to 44 day window only impact your score once? Let’s say you are shopping for a car and on one weekend three dealerships assess you for financing. Three inquiries will appear on your credit but your score will only drop from one pull!
A special mention about credit checks.
Credit is pass or fail at lender – Think of credit checks like going to McDonald’s and getting a Big Mac combo. If you do not have health issues (bruised credit) and do not do it too often you should not have any issues.
Credit scores – when should you be cautious?
Why are we concerned?
Are you going to pull my credit? It is a question we here often. Where does the concern come from? We have all been taught that our credit is important, but many of us have never been taught how it works. Where did we learn to fear credit pulls so much while many of us have no idea how seriously we can be impacted by utilization.
Over the years I have noticed that most Canadian’s have learned from their banks to avoid credit pulls at all costs. I have always wondered if this is a tactic to make us less likely to walk across the road and talk to another bank.
What impact does your credit score have when qualifying for a mortgage?
If your credit score is under 650
The best course of action would be taking active steps to improve your score and be very cautious about having it pulled. Major banks and credit union options will be very selective below 650. You can obtain a free report form Equifax that does not hurt your credit. https://www.consumer.equifax.ca/personal/products/credit-score-report/
Credit score is between 650 – 680
I would suggest working on improving and protecting your score. There are a reasonable number of lending options but you will face some challenges that can be avoided with small credit improvements. Clients in this range are most vulnerable to swings in credit score from high utilization.
Credit scores between 680 – 740
Here you will generally have access to most lending programs. The most restrictive program I have seen in Canada requires a 740 score for real estate investors.
With a credit score above 740 you generally do not need to be concerned about your score as long as you continue to maintain good habits.
A 900 beacon score
A perfect score but sadly there are no bonus points for perfect credit. You can think of credit score like a height requirement to go on an amusement park ride, it is generally pass or fail.
Did you know?
You can have a good credit score but still be auto declined by lenders? In addition to your score there is something called the substance of your report. This is why we always suggest getting pre qualified before buying or refinancing a home.
As an example – a borrower with a 780 score but a consumer proposal (even discharged) on their bureau will be declined by the big red bank nearly 100% of the time.
What we do differently to help you
At Kirkwood & Brennan Mortgage Group we operate a little differently. We make sure that we complete a full review for every client we prequalify. While we collect a mortgage application, we reverse engineer the mortgage file from the documents backwards. By using your mortgage documents (think paystubs, job letter etc.) to build a mortgage application and seeking the best lender policies based on your situation we can guarantee a better experience. We do this to be proactive and to catch any issues before you are in the middle of financing. This leads to a wider range of options for the lowest overall cost and a stress free process. Our focus is helping you reach financial freedom faster – here we show you how to reduce your mortgage cost by over 15%
If we catch any issues we will give you advice and build a plan to overcome the challenges you are facing.
While I think it is a good decision to be cautious of having your credit pulled, I believe it is more dangerous to not know the health of your credit bureau. Lowering your score 2 or 3 points to get advice to improve your score over 100 points is often worthwhile.
If you only remember one thing from reading this
When you open the mail and your cell phone company has charged you an extra $50 and you KNOW its wrong. Please do not make the mistake of not paying it because it is not fair. If you cannot afford the charges call your phone company and ask for a delay of payment, some sort of deferral, a payment plan. It does not matter but its important that you make your payment on time if at all possible. You can still dispute the charge! The alternative is something we see far too often…
Being right does not change the consequences.
If you do not pay your bill on time (even if its wrong) it will impact your credit. We have seen hundreds of clients haunted by this, the stories all have three players…an incorrect charge, an unconcerned company and a frustrated client. If you can prove the company is wrong, get the company to admit it and finally get them to submit paperwork to Equifax and TransUnion you can get the late payments removed… this can be extremely difficult.
These issues are so common that lenders are far more forgiving of phone bill late payments but that does not reduce the impact to your credit score.
Ultimately you must ask yourself… is not paying this charge worth damaging my score for seven years, risking a collection agency harassing you and potentially increasing your future credit card, line of credit and mortgage interest rates? (To be clear I am not suggesting that you just pay an unfair charge and forget about it! Fight the charge with everything you have! Just don’t let it sit unpaid and ruin your credit).
If you have questions we are always here to help!
Scott Brennan – Scott@KBMortgages.ca
Keaton Kirkwood – Keaton@KBMortgages.ca