Many people do not realize the effects of a bad credit rating until it costs them their dream home, or perhaps the ability to maintain a healthy financial lifestyle. The following information, including the MUST READ TIPS, will play a key role in safeguarding your financial future.
Lenders report your payment history to companies such as Equifax & TransUnion. These companies then use your credit information to document & statistically determine your likelihood of successful loan repayment. They calculate how big of a risk you are to lend to, based on your past and present payment patterns.
This information is made available for lenders to access, once you give your permission. You can also contact either credit reporter to view your own personal Credit Report. This way you can ensure the information that they are reporting is accurate.
When mortgage brokers and banks need your credit history, they contact a credit reporting company to pull your Credit Bureau. This is similar to the credit report you order for yourself, however, in addition to your Repayment History, it also includes your Beacon Score. The Beacon Score and Repayment History are explained in more depth below.
Credit companies use the information provided by lenders to determine your level of risk. This risk is given a number called a Beacon Score. The score is usually determined by a computer-based system which takes into account the following components:
10% - Applications for new credit or credit inquiries…also referred to as ‘hits’ to your credit or credit seeking
10% - Type of credit (credit cards, bank loans, etc.)
15% - How long accounts have been opened and established for
30% - Current debts
35% - Late payments, bankruptcies, collections and judgments
This computer system will then calculate a Beacon Score ranging between 300 and 900, with 900 being the highest possible score. Keep in mind that the higher your score, the less of a risk you are considered to be and the better financing terms and interest rates you will be offered.
In addition to Beacon Scores, there are also individual scores for each of your individual credit accounts. These scores range from 0-9, which numerically score your Repayment History. Your Credit Bureau/Report contains letter-number combinations, such as R1 and I2. These combinations tell lenders about your history and the types of credit that you use. The different types of credit are known as Revolving Credit or Installment Credit.
Revolving Credit (R): Revolving accounts vary each month depending on how much you use them. Common examples include credit cards, charge cards, lines of credit and department store cards.
Installment Credit (I): Installment accounts have set amounts that have to be repaid each month. In these cases you will have arranged to borrow a specific amount of money up front with an agreement to repay the loan in set payments amortized over a specified period of time. Examples of installment credit include car loans, student loans and mortgages.
If your account is up to date and you have paid the monthly requirement as agreed, there is a 1 recorded for that month. If you miss one payment there will be a 2 showing for that month, meaning you owed two payments for that period. When the account contains a 9 (I9 or R9), the lender will either file for a judgment or sell the account to a collection firm who will continue to pursue the debt.
Check Your Credit Report - You can contact Equifax and request a copy of your Credit Report by calling 1-800-465-7166 or by visiting www.equifax.ca. It is your responsibility to ensure that your Credit Report is accurate. If you find an error, report it to Equifax immediately.
Stay Informed - Carefully read all credit contracts that you sign, as they are not all created equally. For example, some lenders classify payment as “late” the day after it is due, while others allow a grace period of up to 30 days. The small print can make a significant difference on your Credit Report and your Beacon Score.
Set up Automatic Payments - Set up automatic payments through your bank to ensure you do not lose track and accidentally miss a payment. It will be one less thing on your “to do” list.
Pay Down Debt - Your credit balances should not exceed 70-80% of your available limits. If you are using more than that, it is a warning sign to lenders that you are relying too heavily on your credit to meet your financial obligations. Pay down your debts, and if possible pay for more items upfront. Alternatively, if you have equity in your home, you may be able to refinance your mortgage and use that money to reduce your other obligations. Make sure that your balance does not exceed the credit limit; this will definitely negatively affect your Beacon Score.
Be Careful Authorizing Credit Inquiries - Most people think that it’s alright to shop around for the best mortgage rate or to fill out a lot of credit card applications for free incentives like T-shirts, etc. By doing this, your Beacon Score can be lowered due to the number of inquiries into your credit history.
Be very careful who you give permission to pull your credit. Make sure it is absolutely necessary to proceed to the next step.