Credit 101
All borrowers should be familiar with 'credit 101'. Understanding how your credit functions and why it's an important factor which licensed mortgage brokers/lenders assess is an essential step to securing a fantastic mortgage.
Credit 101 involves both your credit score, credit report, and any relevent information regarding your credit.
Credit 101 Overview
Your credit score, including your credit report, are significant factors in determining whether you're a suitable borrower to lend to.
Mortgages are a significant investment and lending risk - lenders must ensure they follow guidelines and protocols to protect not only themselves, but borrowers as well.
Continue reading below for information regarding all things 'credit 101'!
How Is My Credit Score Calculated?
There are two credit bureaus which exist in Canada: Equifax and TransUnion. These credit bureaus are responsible for using formulas to compile your credit score based off your financial history and any relative data.
There are two main complex algorithms these credit bureaus may use when calculating your score:
- ‘FICO’ (Fair Isaac & Company) score [the first broad-based consumer rating in the lending industry and the most widely used algorithm]
- Beacon (Pinnacle) score [an offshoot of the FICO scoring method, also very common]
What Do Credit Algorithms Base Their Scoring Off Of?
Algorithms are responsible for the behind the scenes work of analyzing a credit score, but there are still some easy-to-understand factors you should be aware of.
Here are 5 main factors that contribute to the calculation of your credit score:
- Payment History (35%) - Whether it be for a credit card or a mortgage, when you borrow money, you are expected to make payments on time. Any time you don’t pay the minimum payment on time for your loan, it negatively affects your credit score. This factor has the heaviest weight on your credit score calculation because it is a direct display of your likelihood to fall behind on bills, or even default on your loan.
- How Much Is Owed (30%) - Your outstanding debt is important because it shows the lender how much debt you carry in comparison to your credit limit. Lenders may assess your current debt ratio (total debt/total assets) to determine your spending habits and likelihood of repaying your loan on time.
- Timeline of Credit History (15%) - How long have you been growing or maintaining your credit? This process generally begins for most people with being approved for their first credit card. If you don’t have a lengthily credit history, it may make you appear less reliable in comparison to someone who has years of experience with credit.
- Credit Applications (10%) - The type and number of credit applications you’ve applied for can both affect your credit score. Diversifying the type of credit you maintain has been shown to have a positive impact on your score; with that being said, if you are applying for numerous credit accounts (and being denied!) it may raise red flags and negatively impact your credit score.
Some ways to diversify your credit include having revolving credit (such as a credit card, personal line of credit etc.), and/or an installment loan (such as a mortgage, car loan etc.)- Inquiries (10%) - If your credit score isn’t optimal, making extra inquiries into where it stands may negatively impact you. This especially rings true if you’ve conducted inquiries on your standing within a short period of time because it has the potential to look like you’re trying to ‘shop around’ for the best rating.
- How Much Is Owed (30%) - Your outstanding debt is important because it shows the lender how much debt you carry in comparison to your credit limit. Lenders may assess your current debt ratio (total debt/total assets) to determine your spending habits and likelihood of repaying your loan on time.
I Know My Credit Score, But How Does It Compare?
You may already know your credit score – maybe it’s 358, or 612, or even 880!
But what do these numbers mean?
Your score is determined to be within a range of 300 to 900 with Equifax, or 300 to 850 with TransUnion. Most credit models will follow the same rating scale, with a small variance in range for each category.- 800 – 850 EXCELLENT - Considered a low-risk borrower.
- 740 – 799 VERY GOOD - Considered a low to mid risk borrower.
- 670 – 739 GOOD - May or may not be approved for a loan depending on the circumstances and application.
- 580 – 669 FAIR - The minimum requirement for most prime lenders is a score of 650 for purchases, or 680 to refinance (some exceptions may apply). If you’re within this category, you bear a higher risk for being denied a loan.
- 300 – 579 POOR - For an individual with a credit score between 500-550, alternative (B Lending) or private lending may be an option.
- 740 – 799 VERY GOOD - Considered a low to mid risk borrower.
How To Get A Better Score
As discussed above, it's important to pay attention to what the lenders are assessing regarding your credit.
Reach out to myself, Kyle Benzies (licensed mortgage broker) for a chat about your credit; I’d love to assist you with mortgage solutions so that your credit report WOWS the lenders.
I work with transparency and am proud to offer mortgage services with super clear communication. I'm a very experienced licensed mortgage broker; if you have questions about your credit report, debt consolidation, Home Equity Line of Credit (HELOC), or even refinancing, I'm here to help!
For a no-risk chat to discuss your credit and mortgage options, give me a call!
***other conditions may apply to anything listed above. The information provided on this page should NOT be implicitly relied upon, and may not be 100% up to date. It's best to contact us for the most current conditions/program offerings for first time buyers***