As credit has become more and more abundant in our society, your credit report, and thus your credit rating, has become more important in your daily life. Your credit rating affects all aspects of your financial activities when it comes to borrowing money. Your credit rating also has the ability to affect the job you get, the apartment you rent and even the ability to open a bank account.
Your credit report itself is simply a listing of all of your debt. Here in Canada, the two main credit-reporting agencies are Trans Union and Equifax. Both agencies have a credit history file on anyone who has ever borrowed money. Every time you borrow money or make a payment on a loan or credit card, the lender then reports the information about the transaction to these two agencies. In addition to credit information, you will also find liens and judgments on your credit report, as well as your address and possibly your work history. The accumulation of all of this information is called your credit report.
The information on your credit report varies based on your creditors and what they have reported about you. Potential lenders and others, such as employers and cellphone providers, view your credit history as a reflection of your character. Whether we like it or not, our financial habits have a lot to say about the way in which we choose to live our lives.
The credit score, or beacon score, is a number that gives mortgage lenders an idea of your lending risk. Credit scores range from 300 to 900; the higher your credit score the better. The mortgage products and interest rate that you will qualify for are often determined by your credit score. Generally speaking, the lowest beacon score that lenders are willing to work with is 600. If your credit score falls below 600, insured financing (Canada Mortgage and Housing Corporation and Genworth, needed for financing properties at higher than 80 per cent loan to value) will generally not consider the application. The average credit bureau score I see is in the 650-700 range, and anything above 700 is exceptional.
However, lenders do consider a lot more than just the beacon score. Other things they consider are how long you have had credit products, the size and type of product, and any past missed payments (to a certain extent). So even though a person might have a 760 beacon score, if the only trade line on their credit bureau is a $500 credit card, and they are applying for a $400,000 mortgage, their credit history may not suffice.
Another thing that I see quite a bit, are people that are in excellent financial health but have no credit history. There are sometimes ways around this, though. Some lenders will review “other” sources of credit history, such as phone, utility and other kinds of regular bill payments.
If someone has a damaged credit rating, there are often still alternatives. Mortgage brokers have access to numerous private lenders that that are ready and willing to lend to people with bad credit. However, it does come at a price. The interest rates are generally much higher (currently 8-10 per cent versus 3.5 per cent for someone with good credit history), and there are upfront costs, as well. But if it is the only alternative available, while costly, it can provide an opportunity to rebuild one’s credit during the private loan term so they can refinance through a conventional lender at the end of the term.
One thing that many people do not know is that you have the legal right to obtain a copy of your credit report. A mortgage professional can help you obtain a copy of this report and go through it with you to verify that all of the information is true and correct.
The good news is that your credit report is a working document. This means that you have the ability, over time, to repair any damaged credit and increase your credit score.
Dean Bala is a mortgage broker and Realtor working out of the Creston Valley Realty office in Creston. For more information, he can be reached at 250 402-3903 or dean_bala@yahoo.com.