Canada's Condominium Magazine
Do you know your credit score? If you do, you’re in the minority. A Canadian fintech lender says that most of us don’t know our score, or how we can improve it. Borrowell, an online lender, said that it would now provide people with free, “no-obligation” access to their credit scores. Considering how important a good credit score is when approaching a bank for a loan, it is a little surprising to learn that more than half of Canadians have never checked their score, and only 14 per cent do so regularly. In a statement, Borrowell said that it would provide consumers with an updated score every three months so they can monitor their progress. More information can be found at the company’s website.
This new easier access to credit scores comes just as one of the main credit bureaus, Equifax, announced that mortgage brokers in Canada would now be required to use its newest FICO credit score formula for calculating clients’ creditworthiness, Beacon 9. Brokers are saying that the “primary delinquency score,” as it is referred to by Equifax, could make it harder for some of their clients to qualify for a mortgage, in part because it places more emphasis on credit utilization. This means that if people with several different credit cards and loans are close to their limits they could end up with a poorer score. But Equifax has said that this is not the case, and Beacon 9 places no higher weight on credit utilization than previous versions. Equifax says that the main difference is that Beacon 9 calculates the credit score based on more files, notably mortgages and telephone services.
While Equifax may deny that credit utilization is given more importance in Beacon 9, a product sheet states that Beacon 9 more “appropriately” evaluates consumers with few credit accounts. “In general, thin files score much lower than previous versions of Beacon.”
The reality is, in today’s world a person has to use credit to qualify for more credit. Those consumers who pride themselves on always paying cash when they shop, never borrowing, will quite likely end up with a low credit score. It isn’t that they couldn’t pay back a loan if they had one, it’s just that there’s no way to measure the risk. It is not uncommon for consumers who do not have active credit cards to run into difficulties when applying for a mortgage.
The normal range for a Beacon score is 300–850, but anything below 600 is bad. You will have trouble borrowing money with a score below 600 as you are deemed to be a bad credit risk. With a score between 601 and 720, you will be able to get a loan, but you will probably pay more interest. A score above 720 is considered excellent.
You can improve your score by—what else?—borrowing more money and paying it back. To do this, you need both an installment-type loan, such as a small loan from a credit union, and a revolving loan, such as a credit card. Get one of each and pay them back faithfully, and the credit score will improve as the months go by. It is also recommended that we keep more than one main credit card active. If you use a single card for all transactions, it will actually have a negative impact on your score. It’s better to have several cards, use them judiciously, and pay them off quickly. Making timely payments on multiple forms of credit is considered beneficial. Closing down old credit cards one no longer uses, like the ones given out by stores, is therefore considered detrimental to one’s credit score.
Of course, a person who borrows too much money in a short time is also considered a risk. Every time a person makes an application for new credit, the ensuing credit search by the lender is recorded by Equifax and stays on your record for two years.
The main components of a credit score are
- Payment history: the record of how you have handled your debts over the years. Failures to pay on time are red flags to potential lenders.
- Length of credit history: the longer you have been using credit, the easier it is to tell whether you are a good credit risk.
- Late payments: all late payments have a negative impact on your score, even if the amount is small.
- Debt burden: the amount you owe, the different kinds of debt you have, and the way you handle it all, are an indicator of your overall creditworthiness. A person with many different debts and a spotless record of paying them off will be considered more creditworthy than a person with few debts but a poor payment history.
- Credit utilization: this is the ratio of your debt to your credit limit. Generally, a lower utilization, meaning that you are not close to the maximum on any of your cards, is better.
- Types of credit: the more varied a person’s use of credit has been, the more likely he is to understand how credit works, and to manage it well.
- Credit enquiries: if a large number of lenders request to see your credit profile within a short time, it could drag your score down.