MORTGAGES VANCOUVER  
Tips, Advice, and Explanations from a Vancouver Mortgage Broker  

Posts Tagged ‘what is a bad credit score’

But My Credit Score is Over 700!! I Thought That Was Good Credit!

Saturday, September 26th, 2009

This is a complaint that I hear from people from time to time. They pull their own credit score, see a number over 700 and assume that they have good credit. Then, when they talk to me, I tell them they likely won’t qualify for a mortgage due to credit history and they nearly fall off their chair.

The media has done a good job of getting out there what a good credit score is. 700 as a “beacon score” is, by all accounts, a very good score. However, there are two other elements to credit that need to be looked at other than the score:

1. Credit Depth

2. Credit Breadth

CREDIT DEPTH:
This is where a lender looks at an account and sees how long you have had a credit record. If you only have 4 months history with your only credit card, your score may be 750 but that is meaningless. We call this a “forced beacon,” and lenders want to see a long track record of good payment, not just a high number.

CREDIT BREADTH:
This refers to the number of credit accounts you actively hold. Having multiple accounts doesn’t hurt you! In fact, look at it this way: if you have 1 visa account, and you go on vacation and miss a payment, you are delinquent on 100% of your available credit facilities. However, if you have a visa, mastercard, and car loan, and you slip up on one payment, you still have other unblemished accounts to bolster your score. So, having multiple types of credit is also helpful: car loan, visa, mastercard, etc… Now, there is a limit here: too many, and you may screw up as management of the accounts becomes difficult, but too few, and one slip up will have that 700 score down to 530 before you even realize you are late.

Just having a high score isn’t enough, and people often get hung up on the number rather than the underlying credit, and you can be sure, the lenders look at more than just the number.

How Credit Scores are Calculated

Wednesday, June 10th, 2009

On every mortgage application, one of the first questions we hear from the lender is: can you send me their credit score. More and more borrowers are becoming aware that the manner in which they have handled their bills, over the past 5 years, has a material impact on their terms and rates on mortgage financing today. Just because a debt that went bad due to a divorce was ultimately paid, the effect can be long lasting, embarassing, and detrimental to future credit applications.

A nice breakdown of how credit scores are calculated came across my desk today and I wanted to post it so that people can see how their score is establisehed (or harmed):

FACTORS                                    WEIGHT          POINTS
Past Payment History               35%                   315
Credit Utilization                        30%                   270
Length of Credit History           15%                   135
Types of Credit in Use              10%                    90

Inquiries                                        10%                   90
TOTAL                                          100%                 900

In Canada we refer to this as your “Beacon Score” but in the USA it is more common to hear it referred to as a “FICO Score”

So, what does this all mean?

Past Payment History: Well, this one is obvious. If you miss a payment, it will show up on your credit and will have a VERY detrimental effect. However, in order to qualify as a “missed” payment, you needn’t be a day or week late. You must be really late. You have be one full payment cycle late before it shows up. So, if your bill is due on the 15th of June, and you forget and don’t pay it until the end of June, it is likely not going to show up on your credit bureau. However, if you miss the June 15th payment, and then miss the next one on July 15th, it absolutely will show up!

Credit Utilization: This the percentage of available credit being used. However, the credit score is calculated by a dumb computer so it doesn’t really do this calculation well. For example, if you owe $450 on a visa with a $500 limit then to the computer that does the scoring, that means you are utilizing 90% of your available credit. This is a very high percentage, and your score will suffer for it. However, if you owe a $450 on a $5,000 visa, it will have a positive effect on your score as the computer will see you are using less than 10% of available credit (even though the amount owing is the same). So, how you allocate your debt is important. It is far better to spread it out over several accounts, than load up one card. Then again, if you pay it off every month in full, you never have to worry about this.

Length of Credit History: The longest that an item remains on your credit is 72 months or 6 years. Each “Trade Line” or account reports the number of months reporting, and the longer the better. This can be important because people may have a Sears card they forget about that has 72 months reporting of good usage (even though they never ues it) and they always say, “should I cancel it?” I wouldn’t. That long lasting, but still current, account has a very positive impact on your score that can help mitigate other areas you may not score as well on.

Types of Credit in Use: Certain types of credit are worse than others. For example, finance companies (Wells Fargo, Citibank, etc…) score low, whereas visa cards and revolving credit facilities score high. Also, the number of recently opened accounts has an impact.

Inquires: This is the most misunderstood portion of the bureau, but one that people guard jealously. The more “inquiries” (companies looking at your credit score) the lower your score. However, you can see this accounts for only 10% of the score. Also, the folks operating the credit bureau don’t want to hamper you from shopping around, so all applications done within a 7 day period (for a similar type of account – mortgage versus finance company, for example) count as 1. More will show up, but the impact on your score is minimal. Also, you are allowed to have inquiries! Just because an inquiry was on there, doesn’t mean your score is low. However, if you apply at TD for a visa, RBC for a loan, a finance company for a secured card, and then Hydro pulls your bureau as well, you can expect it to drop. How much? Even then, it might be a few points. If you score well in other areas, you shouldn’t even be given this a thought. However, if you are re-building your score, you should monitor this carefully.

SCORES AND INTERPRETATION:

Minimum = 300
(Lowest I’ve ever seen is 393)

Maximum = 900
(Highest I’ve ever seen is 826)

Average = 660
(More likely 660-680)

A good score = 680+

A great score = 700+

So that should give you a good primer on what scores mean, how it is calculated, and what you can do to preserve yours.

Your credit is like your reputation: it takes years to build, and only a couple stupid moves to tear it all down…