If you’re like the overwhelming majority of Canadians, you probably think your credit score isn’t all that important. Well, I’m here to tell you that you’re wrong.
Between lenders being forced to implement increasingly austere criterion and the recent changes to our mortgage regulations, not since the days of your university application have three little numbers been so important.
Let’s begin with this. According to a recent TransUnion poll, 56 per cent of credit card holders admit they don’t understand how their credit score is compiled. In other words, they don’t understand the very system that’s allowed them to have a credit card in the first place. And why would they? More than half of Canadians have never even bothered to check their credit score. Once they do, only 14 per cent continue to keep up with their score on a regular basis.
Tougher Credit Assessment
Equifax, one of Canada’s main credit bureaus, has just recently announced that mortgage brokers will be required to use its most recent FICO credit score formula (the ominously dubbed “Beacon 9”) to calculate whether potential borrowers are credit worthy. The question is whether this will place increased emphasis on credit, and, as a result, make the possibility of qualifying for a mortgage that much harder. Another consideration is whether those with multiple trade lines (credit cards, lines of credit, loans and so on) that are almost maximized will end up with poorer scores.
Equifax maintains that Beacon 9 simply calculates the credit score based on more files such as mortgages and telephone services. In many ways, this poses an ironic conundrum; to get a good credit score you’re served well having a mortgage. But you can’t get the mortgage unless you already have an excellent credit score to begin with. Growing up my friend had a word for situations like this; pickle. As in, if you want a mortgage but don’t have one to help build your credit, you’re in a bit of a pickle.
Tougher Mortgage Requirements
It was only recently that the Office of the Superintendent of Financial Institutions (OSFI) – Canada’s top financial regulator – decided to introduce new capital requirements for federally regulated mortgage insurers. Due in large part to the country’s sizzling housing markets (which we all know means Vancouver and Toronto), OSFI is hoping the new regulations will better reflect the risks associated with these real estate hotbeds. This means confirming that borrowers are truly worthy of the credit they’re seeking.
As reported in The Financial Post, the result of these changes is that OSFI has forced mortgage insurers to look through a broader aperture when assessing risk and determining how much money should be set aside to cover the loan. This includes any outstanding loan balance, the amount of time left to fully repay the mortgage, and the borrower’s credit score. It is a self-preservation tactic for insurers dealing with high price-to-income ratios.
The new mortgage qualification “stress test” that came into effect in October 2016 made mortgages more expensive for lenders, especially the bulk insured mortgages. Now, we anticipate that this cost will be passed along to the borrowers. We have seen a couple of lenders starting their pricing of rates based on the borrower’s credit score, and I think more lenders may follow.
Improve Your Score
The average range of the elusive Beacon 9 score falls somewhere between 300-850, though anything below 600 is considered a credit risk. Somewhere between 680-720 will be required for a mortgage loan, but what you should be aiming for is anything over that.
Improving your score takes time, but following these tips should help:
1. Pay your credit cards faithfully and on time.
2. Never max out your credit cards.
3. Keep your credit card debt at 70% or lower of your maximum.
4. Do not use a single credit card for all your transactions; instead diversify your revolving credit with more than one card.
5. Never over borrow or go above your limit.
6. Check your credit regularly.
7. Get an annual credit report from Equifax or TransUnion.
Educating yourself on your credit score and how it affects your other financial affairs is an increasingly critical step to being financially literate. Particularly for young people, single parents and those who historically have been late to bare their financial kanines, your credit score is a first step to taking a bite out of the debt-free life you richly deserve.