Credit Score and Report Overview

Have you ever wondered how your credit score is calculated? Have
you ever asked, but are always given vague answers? I will tell you
exactly how credit scores are determined for Canadian credit
users.
Over the next 4 months I intend to inform, educate and
coach you through on how to increase and maintain your credit
score to at least a minimum of 680. The reason for choosing the
benchmark of 680 is simply because the federal lending guidelines
and policies provide more debt servicing leverage for borrowers
with a score of 680 or more. I want you to have that option when it comes to purchasing or
re-financing your property. It's just one less things to worry about when it comes to the
intricate process of mortgage applications.
Over the next 4 months we will cover topics such as:
1. What is a credit report.
2. What is a credit score and how is it calculated.
3. How to repair, increase and maintain your credit score: The Do's and Dont's.
4. Common myths about credit scores.
Good credit score and overall report = Maximum Opportunities!
Get better mortgage rates; access to more funds for a nicer home.
Saves you thousands in interests.
Allows for faster approvals.
Makes it easier to attain credit.
And can even be the difference in your career.
Beacon Score

Interest Rate

Monthly
Payment

Total Interest
Cost 5 Yr Term

599 or <
680 or >
Difference

5.50%
2.89%
2.61%

$1,831.17
$1,402.86
$428.31

$77,433.02
$40,051.13
$37,381.89

Mortgage
Balance End 5 Yr
Term
$267,562.82
$255,879.53
$11,683.29

*Based on a $300,000 fixed rate 25 yr amortization mortgage with interest compounded semi-annually

You see the difference your credit score can make. There is a significant amount of money you
can save by having good credit. Interest rates is something you cannot control, but your credit
score is. Why not opt to save thousands and provide yourself the best opportunities.
What is a Credit Report

A credit report contains information

about you; DOB, SIN, past/present
addresses, employment, types of credit
issues (credit cards, loans, LOCs etc) and
total amount of inquiries you have made
to obtain credit. A credit report also
details balances along with repayment
history. Basically a lender wants to know
what is the probability that they will be
repaid. Creditors and financial institutions report to the credit bureau every month. There are 2
agencies that receive and compile this data, Equifax and TransUnion. You're probably asking
yourself now, who has access to this sensitive information. Credit grantors, employers
landlords, insurance agents and utility companies all do but only when consent is granted by
you.

Here is an example of a real credit report. This part of the report details the score (not good)
and address. I have omitted their birthdate and SIN.

This part of their credit report

displays the creditors executing
their credit checks along with
his/her type of employment. This
person seemed to be seeking
alternative credit over the past 3
years. There were 4 collections
listed.

In this credit report snapshot it details

the creditor, when you applied for the
credit, limit, balance and minimum
payment along status and the last time
the trade or creditor reported it to
Equifax. Along with making the
necessary payments one if required to
make them on time, this being once a
month. The R2, R3 and R4 mean that it
was 2 months late etc...

What is a Credit Score and How is it Calculated

What is a Credit Score
The credit score is used by lenders to predict the
probability of you repaying your monthly expenses
and mortgage; how credit worthy are 'you'? Credit
scores range from 300 to 900, 70% of Canadians have
a score between 700 and 850. There are 5
components that make up your score; Payment
History, Amounts Owed, Length of credit history, New
Credit and Types of Credit in Use.

How Is Your Credit Score Calculated

The exact breakdown of the calculation for
how the Beacon or FICO score has never
been released, but it is common
knowledge that there are 5 categories,
each weighed and allocated differently to
come up with your score of
creditworthiness;

1.
Payment History 35%
-
Your payment history is the
most important factor in your credit score. Creditors want
to know if you are going to pay them back. So payment
history will usually make up 35% of your credit score.
Your credit bureau payment history takes into account all
payments on all of your consumer debts: your credit
cards, line of credit, car loan, etc. Your credit report
payment history will look at how many accounts you have
that are paid as agreed, how many past due payments you have, whether or not you have any
adverse public records (bankruptcy, judgments, liens, etc.) or collection activities. It will also
calculate the how recent any late payments or collection activities.
2.
Balances or Amount Owed 30%
-
When you apply for credit, the
amount of consumer debt you owe really matters to a lender. If you
are close to maxing out all of your credit cards or your line of credit,
this could be a sign that you are in financial distress, and it means
that you are a higher risk to lendersstatistically speaking. This is
why the amounts that you owe on your debts make up 30% of your
credit score. This part of your credit score will look at the amounts
you owe on each credit card, line of credit and loan you have. It will
look at the number of accounts you have with balances and what
percent you are using of each of your credit limits. If you are using
75% or more of your credit limit on a credit card or line of credit, this
is seen as a sign of trouble and your credit score will be negatively impacted.
3.
Length of
Credit History 15%
-
If you have had
credit available to you for a long time, your credit
report should provide an accurate picture of how
you use it. For someone who has not had credit for
very long, it is difficult to tell if they really know how
to use credit responsibly. Time is needed to get a
true picture of how responsible someone is with
credit. This is why the length of your credit history is
the third most important factor in your credit score calculation. It will usually make up 15% of
your credit score. Your score will reflect how long it has been since you first obtained credit,
how long each item on your credit report has been reporting and whether or not you have
active credit right now. If you have recently obtained credit for the first time, your credit score
will not be very strong. However, if you have been responsibly using credit for many years, this
factor will really work for you. If you have been involved in a bankruptcy, consumer proposal or
debt management program, your credit history will essentially restart whenever you complete
your program (the record of your program also has to fall off your credit report for you to get a
good credit score). Closed creditors will remain on your credit history for 6 years.

4.
New Credit Inquiries 10%
-
If you are
frequently applying for credit, your
creditors want to know. This can mean that
youre in a desperate financial situation,
and this could mean that you are now a
riskier customer to your creditors. This is
one reason why new credit and credit
inquiries compose around 10% of your
credit score. This part of your credit score
will take into account the number of credit
accounts you have opened recently, the
number of recent credit inquiries, the time since any new accounts were opened and the time
since your most recent credit inquiries. This part of your credit score will also evaluate whether
or not you are re-establishing good credit history follow past payment problems.
5.
Types of Credit in Use 10%
-
Creditors are
interested to see if you have experience handling
different kinds of credit. Even though this part of
your credit score makes up 10% of the total, it is the
least significant unless you dont have much other
information on your credit report. Even though the
credit scoring system looks for different types of
credit, you shouldnt go around applying for
different types of credit to try to improve your score
in this area. Only open credit accounts as you need
them. This part of the credit score is likely in place to help identify people who abuse credit or
people who apply for every credit card that comes in the mail. If you focus on being responsible
with your credit, this part of your score will most likely take care of itself.

How To Repair, Increase and Maintain Your Credit (The Do's and Dont's)
Credit scores are like report cards for grown-ups. The score you get ranges from 300 to 900.
Your score indicates your creditworthiness to potential lenders, banks, landlords, insurance
companies, and even to some employers, for instance. The higher your score the better. A
score of 700 or better is needed to get the best rates.
1.
Get a Copy of Your Credit Report
- Make an
inquiry, at minimum, once a year, twice is much
better. If you are planning on purchasing anything
that requires a credit check, keep track of your
credit. This is something that is 100% in your
control. As a consumer you have ability to make a
soft/consumer inquiry to Equifax as many times as
you want without it affecting your score. Here is a
link
getting your report and knowing your score.
If
something doesn't look right, contact the creditor
immediately. Don't wait to report an incorrect or fraudulent transaction. Is there an
outstanding collection? Deal with it immediately, and by that I mean pay it. Then argue to get
your money back. Do not leave this on your credit report for 2, 3, 4, 5...months dragging your
credit score down. No matter what, the collection will not be removed until it's paid unless
taken to litigation. Once dealt with it will still take months to recover the points lost and 6 years
to fall off your credit report.
2.
NEVER Miss a Minimum Payment
- Because this attributes to 35% of your overall score,
delinquencies have the biggest negative effect on your credit score. If you have overdue bills,
make the necessary arrangements with your creditors. They would much rather work with you
than file collections
against you. If you can't
pay it all back, it's better
to pay some. The
attached image is a
statistical analysis of
what happens when
lenders issue credit to
borrowers with lower
scores. 78% of all credit
that goes unpaid over
90 days late is to
borrowers who have a score of 499 or less. If your score is 800 + you are going to be 90 days
late on a payment less than 1% of the time. Mortgage financing and credit is a numbers game!
3.
Dont Close Unused Credit Card Accounts
- Got a credit card that you have had ten years and
hardly use? Keep it. It takes 12 years history with the
same specific card in good standing to crack 800 and

enter that top 2% tier of quality credit. Canceling a card can actually assist with lowering your
score. Keep the old cards and only use them occasionally so the issuer doesnt stop reporting
your information to the credit bureaus. Having a long credit history helps increase your score.
Don't jump around to credit providers. Most 'large' providers like RBC Visa, have several
different products. There is likely one that will fit your needs.
4.
Never Max Out Your Credit Cards
- A good rule of thumb is
to keep your balance below 75% of your maximum credit
limit; even if you pay them off in full each month. For example
if you have a credit card with a $5,000 limit, dont carry a
balance that exceeds $3,750. Its better to have two cards
with balances that are each below 50% of your limit, than to
have one card that you consistently max out. NEVER exceed
the limit, by even a $1.
5.
Dont Look For More Credit
- Don't shop around for credit or open several credit accounts in
a short period of time. It raises alarms at credit bureaus and financial institutions, especially
when you dont have a long-established credit history. Work with you existing creditors, seeing
as there is more relevant history they are more likely to work with you, especially if you are
looking to resolve some credit hardship(s). Always ensure you give your permission before
allowing a credit check.
6.
Rule of 2
- Ideally you want to have 2 sources of credit solely in your own name for a
minimum of 2 years with at least a $2,000 credit limit. This would be either 2 credit cards or
one credit card and a line of credit. Ensure this is in addition to any joint accounts. Joint credit is
only reported to the primary credit holders credit bureau.
Below is a table outlining how different credit mistakes will affect your credit score. The higher
the score the more your score will be reduced. Please note these are approximate amounts.
Credit Mistakes
Maxed-out, maybe over limit
30 day late payment
Debt settlement
Foreclosure
Bankruptcy

How it affect a GOOD score

-10 to -30
-60 to -80
-45 to -65
-85 to -105
-130 to -150

How it affects a GREAT score

-25 to -45
-90 to -110
-105 to -125
-140 to -160
-220 to 240

Common Myths About Credit Scores

Because the top secret formula has never been released there are common myths that are
floating around about the ones credit score, here are the top 5.
1.
Too Many Credit Cards Will Hurt My Credit Score
- Actually, cancelling healthy active cards
or accounts hurt more as all of the payment history
is lost along with the type of credit granted. The
average Canadian has 10 credit sources, having
more does not hurt as long as you pay on-time.
Along with paying on-time your should observe the
rule of maintaining a balance at no more than 75%
of the limit. Applying for new credit every week will
lower your score more.
2.
Using Credit to Build a Credit Score
- Remember to keep your balances lower and
manageable. The credit bureau only receives reports regarding your balances and payments.
Making your payments on-time builds your credit history strength and score.
3.
My Utilities and Internet are Paid On-time Every Month
These
providers only check your credit to determine creditworthiness.
They don't report your payment history to the bureau. On the
flipside, they only report when you DON'T pay. The other
organizations that only report upon default are municipalities and
ICBC. Pay your traffic tickets and bylaw infractions.
4.
Checking My Score Will Decrease It
- There
are two types of inquiries, soft and hard. A soft
inquiry occurs when you pull your own credit
report. Credit card companies also pull soft
inquiries when marketing pre-approval offers. A
hard inquiry happens when submitting loan or
credit card applications. A hard inquiry is one
that is triggered by the applicant. Soft inquires
do not affect the credit score. A consumer can
pull their own credit score as many times as
they wish without repercussions. Hard inquires
affect the score slightly. These inquires are
included in the calculation done for credit scoring. Recording the number of inquires a
consumer has on the credit report allows potential lenders to see how often a consumer has
applied for new credit. This can be a precursor to someone facing credit difficulty. Too many
inquiries could mean that a consumer is deeply in debt and is looking for loans or new credit

cards to bail themselves out. Another reason for recording inquires is identity theft. Hard
inquires not made by you could possibly be an identity thief opening accounts in your name.
Inquires are required to remain on the credit report for at least a year. Most creditors,
however, disregard any that have been on the report for over six months. Hard inquires remain
on the report for two years. Soft inquires only appear on the report that you request from the
credit bureaus and will not be visible to potential creditors. Hard inquires appear on all credit
reports. All inquires disappear from the report after two years. Only individuals with a specific
business purpose can check your score. Creditors, lenders, employers and landlords are some
examples of approved business people. The inquiry only appears on the credit report that was
checked. For example, if a landlord uses Experian to check the creditworthiness of an applicant,
the credit check will only appear on Experian's report, not TransUnion or Equifax. To limit the
number of soft inquires made on your credit report, contact the credit reporting agencies and
request that they remove your name from marketing distribution lists.
5.
There is Nothing I Can Do Once a Payment is Late
- Creditors are always willing to work with
you if there is a late payment. If notified in a timely manner a late payment can be easily
removed, just don't make a habit of it.
Summary
GET CREDIT FIT. Having and maintaining good credit is a process.
Like getting in and staying in shape, it doesn't happen overnight.
It's something you need to continuously work at, nurture and track.
In the banking and finance sector you, as consumers/borrowers,
have absolutely ZERO control over how the lenders and the Bank of
Canada will adjust the interest rates or if an employer will
absolutely 100% be granting you a raise on a yearly basis or what
the real estate market trends are currently doing. You do however
have absolute 100% control over you credit history and score. Treat
it like a loved-one; always check on it, keep it forever (credit cards
especially) and don't cancel/open others. Increase the limit through the years and feed it
regularly (use the credit and re-pay it). Without (strong) credit you will not be able to purchase
items that require a soft or hard credit check and poor credit will only give you access to higher
rates. If you have no credit it will be impossible to get a mobile phone, new car or even rent a
home, let alone buy a new home. By building and maintaining your credit you will ensure that
you have given yourself the best chance at obtaining credit and the lowest possible mortgage
interest rate.
For a comprehensive (no charge) review of your credit report please contact me.
HALLETT MORTGAGE powered by Dominion Lending Centres
M: 604-616-2266 | F: 1-888-618-6363 | E: michael@hallettmortgage.com
W: hallettmortgage.com | T: @Hallettmortgage