Credit 101

Learn about your Credit and Credit Score

Your credit is not a mystery. We can help uncover where you stand.

Your credit — and credit score — can impact your mortgage savings and access to products for a better fit for your situation:

• Better rates on a conventional mortgage.
• Required minimum scores for some lenders and products.
• More likely to get mortgage approval or have an exception granted (every situation is unique).

When it comes to your credit, there are things you have control over and some things you don't. But it's not a complete mystery — you can find out what shape your credit is in to know exactly how it will affect your mortgage loan application, and even update your credit file if there's a mistake.

Our friendly, expert brokers know mortgages inside and out. They easily answer your questions (check out our Credit FAQs, too) to help you solve your credit puzzle. Connect with us online, over the phone, or at one of our convenient store locations. It's just that easy to get your best mortgage help.

What is a Credit Score?

Your credit score and rating are produced and compiled by Equifax, a credit bureau, to help you estimate your general credit position, and to provide banks and lenders with information to assess whether or not you're a good (low) credit risk.

Using FICO scores (mathematical formulas created by Fair Isaac & Company) and/or Beacon (now Pinnacle) scores, Equifax crunches the numbers from your credit report and spits out a score somewhere between 300 and 900. A low score says you're a bad credit risk; a score of 700 or higher puts you in the financial driver's seat.

Keep in mind that if you subscribe to a credit report by a credit bureau, you're likely seeing your Pinnacle score. Mortgage lenders, however, typically use your FICO score for your application approval, which can be lower based on its gathering and scoring methods. It doesn't necessarily mean that your FICO will affect your mortgage approval negatively, though this fact sometimes catches people unaware if their credit score is right on the line for approval from a lender.

Here are the factors Equifax considers when calculating your credit score and an estimate of how heavily each factor is weighted.

Understanding your Credit Bureau Report

The higher your number or Pinnacle score, the better your credit rating. The purpose of this score is to provide lenders with a prediction as to the credit risk you represent based on your past behaviour.

Here is what your score is based on:

1. Past Performance – 35%

• The fewer late payments you make, and the fewer judgments, liens or collections you have, the better.
• Late payments are time-sensitive. More weight will be given to recent occurrences of late payments as opposed to those two years or older.

2. Outstanding Debt/Credit Utilization – 30%

• Low balances on several cards are better than high balances on a few cards.
• It is ideal to keep the maximum charged to the credit cards at or below 70% of the available credit. Your score will be adversely affected once you exceed 80% of the available credit on those cards.

3. Credit History – 15%

• The longer the credit accounts have been open and in good standing, the better.

4. Types of Credit in Use – 10%

• Finance company accounts like BestBuy and HBC cards score lower than traditional banking or retail accounts.
• Deferred payment options (i.e. buy now and pay later) are interpreted as a potential future risk.

5. Inquiries – 10%

• Having too many inquiries over a short period of time can be perceived as 'shopping for credit' and be indicative of high risk.
• If you carry a good credit score to begin with, inquiries will have little to no effect on your score.

Interpreting your score — it's not who you are, but how you pay

• Credit scores range from 300 to 900 with Equifax, and 300-850 with TransUnion.
• The average consumer has a score of 650 to 725. A score over 780 is considered excellent.
• Most prime lenders require a score of at least 650 for a purchase, or 680 for a refinance. There can be exceptions down to 600 with some lenders on very strong applications.
• Alternative lenders have varying minimum scores, some 500-550 and others with no minimum requirement. They will consider your overall repayment history, along with the other application details.

It's interesting to note that your net worth or your annual income is not part of your credit score calculation. There is no fundamental reason why a groundskeeper should have a lower credit score than a surgeon.

The reporting system is not perfect, so make sure to verify the information on your credit bureau report. If you find an error, you can take steps to dispute an item on your file.

For Equifax, you can call them at 866-349-5191 or visit their website to submit a dispute. TransUnion is another Canadian credit bureau to contact. You may need to contact both Equifax and TransUnion, as they don't communicate or transfer information.

For more info about Credit Reports, see our Credit FAQs.

What can you do to build your Credit Score?

• Pay your bills on time. Delinquent payments and collections can have a major negative impact on a score.
• Keep balances low on credit cards and other "revolving credit." High outstanding debt can affect a score.
• Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix — it probably won't raise your score.
• Pay off debt rather than moving it around. Also, don't close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.
• Make sure the information in your credit report is correct. It won't affect your score to request and check your own credit report. If you find errors, contact the credit reporting agency and your lender.

How to check your Credit

Visit www.consumer.equifax.ca to order your report and score for a fee. And yes, you can repair your own credit. Most people, however, find that they do not have the time, persistence, knowledge, or patience. An option is to choose to have a professional handle the debt consolidation process instead.

How to repair damaged Credit

We recommend debt consolidation over bankruptcy. In the vast majority of circumstances, the best course of action is to consolidate your debts, lower your monthly payments, and re-establish control over your finances.

Bankruptcy - the hard way out

Filing for bankruptcy has very serious consequences. Once you have filed for bankruptcy, your credit bureau will carry this record for at least six years, making it very hard to re-establish your credit. Additionally, many of Canada's lenders will never loan you money again if they have suffered a loss due to your bankruptcy filing.

There are lenders that will provide mortgages for clients that have been:

• Discharged for 2 years
• And have 1 year of re-established credit with 2 methods of trade (a credit card and a loan, or 2 credit cards)

After bankruptcy, it can be a challenge to re-establish your credit. The best path forward is to get a secured credit card. A secured credit card requires you to provide funds upfront to the credit card provider. If you default on the credit card, the credit provider keeps these funds.

Re-establishing Credit

To apply for a secured credit card, visit Capital One for their process. For more information about your Credit Rating, how to manage or improve your score, and what factors may affect it, check out our Credit FAQs.

Does credit concern you? We can help.

Our expert True North Mortgage brokers can help you pull all the right pieces together — including your credit score — to get your best mortgage rate and product.

When you apply with us — online, over the phone, or at a nearby store — we don't pull your credit until you provide your consent, and when we do, you'll be able to hold your rate for up to 4 months (depending on the lender).

And with us, your mortgage pre-approval is fast and convenient — and you'll gain a wealth of knowledge about how lenders see your application and how you can improve your credit if you'd like an even better rate in the future.

Have more questions? We can quickly help determine your situation so that you know where you stand, with unbeatable service that gets your approval done right, on time.