What is a Credit Score and Why Care?
A great credit score can save you thousands on your mortgage.
The best Canadian mortgage rates may be hovering at under 3 per cent, but lenders reserve the best mortgage rates for buyers with excellent credit, and lately they've been paying stricter attention to buyers' credit scores. So if you're shopping for a mortgage, you need to pay attention too.
In Part 1 of this two-part series I'll show you how credit scoring works.
Canada Credit ScoreYour credit score is a numerical figure that represents the level of risk you will pose to a potential lender. In Canada, the main credit reporting agency used by mortgage lenders is Equifax (some lenders also use Transunion). Equifax issues a score on a scale from 280 to 850. This is known as the Beacon score. Over 750 is considered very good, and under 630 is getting into dangerous territory.
You may also have heard of the FICO score. That's the most widely used credit scoring model in the US. Under both models, the higher the score, the lower the risk profile.
Credit ReportIn addition to creating a credit score, Equifax and Transunion also produce a credit report (also called a credit bureau) that discloses your credit history. The credit report is generated from the information provided by credit grantors/businesses that have given you credit.
Your history summarizes the types of credit you use currently or have used in the past, including credit cards, car leases, personal bank loans, lines of credit, student loans and any other loans or credit you have applied for or used in the last seven years. It also shows your payment history for each of these trade lines as well as any public records such as collections, bankruptcies or consumer proposals.
The Five Factors of Credit ScoringThe exact formula for determining credit score is proprietary and is not publicly disclosed (think of it like the recipe for KFC's 11 herbs and spices). However, we do know what FICO uses as five main factors of credit scoring in the US, how each is weighted, and most important, how they are evaluated. The Equifax calculation is likely very close. These are the five factors.
Why Should I Care?Obviously, if you need a mortgage to purchase a home a good credit score is critical for determining what your mortgage rate will be... and if you qualify for a mortgage at all!
If you need to qualify for mortgage insurance because you are putting down less than 20%for the purchase of your home, our country's largest mortgage insurer, CMHC, recommends a minimum credit score of 600. If your credit score is 600 or less and you're putting up less than 20%, you will likely not qualify for a mortgage because CMHC won't approve it.
If you're putting down 20% to 40% of the purchase price (borrowing 60 to 80 per cent) and don't need the CMHC insurance, you'd better have a score of at least 580 to be considered for a mortgage from a standard bank/lender. Generally, the lower your score and your downpayment, the higher the likelihood that you will either get approved for a higher-rate mortgage or not get approved at all.
Your credit score affects more than just your mortgage.In addition, banks, financial institutions, finance companies and credit card companies use credit scoring to grant:
lines of credit
On top of that, landlords use credit scoring to screen prospective tenants, and employers use credit scoring to determine whether to hire a job applicant or promote a prospective employee, especially if the position involves management or financial responsibility. So building a good credit rating will make life easier on several fronts.
How Do I Get My Credit Report or Find Out My Credit Score?Apply for a copy of your credit report at Equifax's and Transunion's websites at:
It's free, and it's the first step to making sure you get the best mortgage rate going.
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