Credit Score the First Element

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Your credit score is the first element that is looked at when one applies for financing. You can say that it is the lifeblood of your financial profile. In Canada, we have two main credit reporting agencies. They are Equifax & Transunion. Both agencies gather and build profiles on Canadians and use that information to determine one’s credit score. Credit bureaus are run through an algorithm that was developed by Fair Isaac & Company. The FICO Score as it is called is a complex & secretive algorithm that takes into account various factors in one’s financial/credit profile to determine what kind of a credit risk you are to the lending institution.

FICO Algorithm is currently in Revision 9. It uses a sophisticated modeling technique to mine trends in recent consumer data. The FICO score is currently in its 27th year of use and is the No.1 predictive metric used by lenders. Although both Equifax and Transunion both use the algorithm they each have changed what it is called. For example, Equifax will call it a beacon score whereas Transunion will simply call it a FICO score. in essence, both metrics are the same. Credit scores range from 300-900 and in Canada when you apply for a mortgage the Magic number is 650+. As long as you meet that criteria your mortgage application will be looked at favorably.

In the event that you have a lower credit score than that Banks will grant credit to lenders as low as 600 however it is frowned upon and it is only done under certain circumstances. Once you drop down below the 600 thresholds you fall into Alternative lender territory. Alternative lenders specialize in mortgages that are considered subprime and play an important role in the mortgage industry. To compensate for the risk these lenders will require clients provide much more equity and charge higher interest rates than what a conventional lender would charge.

A series of factors play into the algorithm, although it is a secret and FICO does not reveal these factors. Based on our experience and what we have been able to compile from thousands of clients. North East has reverse engineered the algorithm and thus giving our clients an upper hand in managing credit and your score.

So what impacts your credit score? And how can you improve your chances of securing a mortgage? The factors that have the greatest impact on a credit score are as one might think are collections, judgments, and bankruptcies. However, a great many people have bureaus free of these three culprits and yet continue to have substandard credit scores. As we have identified. The main reason why credit bureaus are low in Canada is the overutilization of Credit. Just because A lender gives you a limit of $10k does not mean that you have to use it all. Over limit or using credit to the max will impact your score by 50-90 pts depending on the overall strength of the report. I have seen cases that a credit bureau was hit by over 100 pts just because the client went over by 30$ on a credit limit.

Other factors that will ultimately impact your credit score are how well you pay your bills. People get hung up on paying off bills in full and sometimes missing the deadline to pay the minimum payment. It is imperative that you respect the deadline to pay the minimum payment. Sometimes even going over for a few days can have an adverse effect on your credit profile. It is better to pay the minimum then nothing at all.

Items to watch to improve your credit score…

  1. Balance with respect to limit. Keep it to a max of 45-50% of the limit
  2. Always pay the minimum payment by at least 2 days before the due date.
  3. Limit the number of inquiries that creditors make to a max of 1-2 per year.
  4. Stay vigilant and monitor your credit profile regularly every 6 months ideally
  5. Guard your identity to make sure that it is not compromised
  6. Stay on top of any letters you receive from collection agencies

By following these few simple points you will be able to have a great credit score and facilitate your chances of getting approved for mortgage financing. I hope that you found this post helpful.

For any comments or questions please do not hesitate to contact me

Terry Kilakos

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