Poor Credit History?
The majority of Canadians make their regular monthly loan payments on time and are generally confident about their credit rating. However, with the increase in identity theft or a potential loss of income, it becomes prudent for every consumer to make periodic checks on their credit history and correct any mistakes - before the need for a credit facility or for a mortgage renewal. Canadian household debt rose 2.4% in the last year and now approaches $1 Trillion which represents an average debt to income ratio per person of 119%. At the same time, residential mortgages outstanding rose by 10.9% during the year. Managing debt and maintaining a good credit history becomes even more important as the real estate boom moderates, refinancing to reduce payments no longer becomes an option and as the economy continues to loose jobs – 4,000 jobs were lost in June alone. The manufacturing sector in Ontario has been particularly hurt by the rising value of the loonie.
A consumer’s credit rating is reflected by a 3 digit numeric score. It is a remarkably accurate predictor as to whether a loan will go in default or not. With a credit score of 700 or over, there is only a 2% probability that a mortgage will go in default. A score of 599 or less indicates a 49% probability that the borrower will default on their loan payments. The interest rates being offered by lenders reflect this probability.
A poor credit score can many times be avoided by a relatively simple understanding of how a credit profile is generated.
1. The regularity of the minimum monthly payment history on a credit card, line of credit, car payment or similar makes up 35% of the total credit score. A pattern of late payments and/or current overdue payments is not good. Recent late payments indicate a current cash flow problem rather than if they had occurred, say, 24 months ago. The fact that an outstanding balance is always paid in full rather than paying the minimum payment makes little difference to the score!
2. The amount of credit used as a percentage of the total available credit makes up 30% of the final score. That percentage should be 30% or lower. Low balances with several credit facilities are better than high balances on a few. Too many credit cards can also be detrimental.
3. 15% of the credit score comes from the length of time that accounts have been opened. Opening new accounts and closing seasoned accounts will cause a negative impact.
4. The type of credit used makes up 10%. Finance company accounts will be scored lower than credit obtained through banks or department stores. If most of the accounts are funded by a finance company it is an indication that the consumer cannot qualify for bank financing.
It should be noted that services or goods purchased on deferred payment terms are usually financed through a finance company.
5. Inquiries made on a credit report make up 10%. Only inquiries which are authorized by the consumer for the purpose of obtaining new credid will be counted. In this regard, a consumer looking for new credit facilities over a short time period represents a higher credit risk, especially if the present credit facilities are currently at their borrowing limits. Promotional or administrative inquiries shown on the credit report do not adversely impact the score.
6. When applying for a mortgage loan there are some important “No Nos”.
1. A bankruptcy which included the repossession of the residence will seriously limit the option of finding a mortgage. It takes 7 years for this to be purged from a credit report. A creditor proposal has a similar outcome as a bankruptcy.
2. Non payment of family responsibility, i.e. child support etc. indicates that there will be insufficient funds to make mortgage payments. Similarly if wages are garnisheed.
3. Unresolved judgments or unpaid collections are required to be resolved. This can create a problem when small debts are registered at the credit bureau and the debt may not be known to the consumer until it unexpectedly shows up when applying for a mortgage.
4. Identity theft is increasingly becoming a problem. Most major credit granters have sophisticated computer systems which track each consumer’s spending habits and will often highlight an abnormal purchase and call the consumer for confirmation. Nevertheless, problems do occur that can temporarily ruin an otherwise stellar reputation.
Credit scoring does help lenders to make quick credit decisions and speeds up the lending process. However, in order for the process to work effectively, it is a wise precaution to check the credit report and eliminate any irregularities. It also pays to know your score – in advance!
For a copy of your credit report, contact the 2 major Canadian credit reporting bureaus which are:
Equifax: Tel; 1 800 465 7166 or Email;
TransUnion: web site www.tuscores.ca
