You and your credit score
Mortgage Merit | Issue #2 | November 25, 2005
Applying for mortgages can actually decrease your credit score - but there is a solution
You, as a consumer, are encouraged to shop around for the best prices available on the products you wish to purchase. Smart, right? In most cases yes, but when it comes to shopping for credit, especially mortgages, this is not the case.
Any time you apply for credit, your credit bureau score, your Beacon is researched from one of three credit bureaus. Equifax and TransUnion are the two major reporting bureaus in Canada and both use a similar system to produce credit data on those applying for a loan, line of credit, credit card or mortgage. All financial institutions, credit card companies or other loan companies report regularly to a credit bureau, providing information on your credit. Are you paying on time? Do you pay only the minimum payment required? How much of your credit line are you using? These are the three more important factors that can affect your Beacon score. The Beacon scoring model rates you on a score of 300 - 900, 900 being the best. The credit score model is used to predict your credit management behaviour for 12-24 months. One late payment can lower your score up to 70 points and give the impression that your behaviour is not trustworthy for up to two years in the future. What these models do not take into account are life-altering changes that we all go through.
Another important reading the credit bureaus report is how much of your available credit is in use. The lending industry smiles upon you only using 20% of all available credit. If you are "maxed" on your credit cards but are paying them on time, this can lead a lender to think that you are a high risk for advancing further credit such as a new mortgage. But, it should also be noted that using no credit at all could be detrimental to your credit score. If you have little credit history you can have a high Beacon but there is no pattern to predict future behaviour. One very important form of credit many of us use is not reported to the credit bureaus. Your mortgage payments are not reported, and most people pay their mortgages first and let other bills wait. Keep in mind however; consistent mortgage payments are noted and used to paint your credit picture.
Multiple credit inquiries can also negatively affect your Beacon score. You are encouraged to shop around for the best prices you can attain, but its also important to shop for the best mortgages possible. Each time you apply for a mortgage, your credit score is investigated and each investigation reduces your credit score. So, it makes sense to have one investigation initiated to find the best mortgage. A mortgage broker armed with your credit information can "shop" multiple lenders to find a mortgage that fits your needs. It is also important to note that a mortgage broker can, and will, interpret your credit score on an unbiased basis.
For the thousands of Canadians who have bad credit, there are solutions. If a lender has reported incorrect information about your credit, you can correct it. Also, there are ways to rebuild your credit. For instance, a bankruptcy need not follow you and your credit profile for life. Having had to declare bankruptcy for many is devastating both emotionally and financially. But, today you are able to rebuild your lives and credit by sound financial planning and using credit meagerly and wisely. Obtaining a low limit credit card and paying the balance on time will help re-establish good credit behaviour. Opening a savings account and contributing on a monthly basis will boost your credit pattern greatly. Combining these two simple steps not only improves your Beacon, but also can assist when applying for a mortgage by providing a sum for a downpayment.
It is advised that consumers do an annual "check up" on their credit. You can check your credit health by phone, on-line or in person. Forms of mistaken identity can be corrected with official documentation. The credit bureaus can also investigate the lender with whom you have a problem and consider extenuating circumstances, thus correcting a negative report.
Mortgage brokers work for their clients, that is how they make a living. One large misconception is that brokers collect fees from their clients. In most cases, not true. The lenders pay the broker. Your broker will work hard and assist you in attaining your goals without negatively affecting your all-important Beacon score. Each time you visit a traditional lender, such as a bank, to apply for a mortgage, your credit score goes down. Once again, a broker only gathers the information once and then will use it to shop at up to 30 lenders on your behalf.
Sherry Jenkins is a Mortgage Consultant with Mortgage Intelligence. Phone: 804-3694 or www.mortgage-choice.ca.