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Credit Score – Should I know my Credit Score

Credit Score by Equifax and TransUnion

Amongst many questions being asked in my practice, this is the most frequent one, and the unequivocal response is always: “Yes, you should.” But I am not stopping the sentence there and I tell my clients: “Yes, you should know your credit score, which is depending on your credit history.” About 75% of Canadian credit histories contain errors and it is good practice to check your own credit history once a year.

This is best done by connecting one or both of the major credit-reporting agencies such as Equifax or TransUnion. Google their mailing addresses, send them a request via mail with copies of two pieces of personal ID (there websites will tell you, which ones are most acceptable by them), and they will mail your credit history directly to your house. Best of all, this service is for free.

If you, however, prefer instant gratification, as seems to be the practice in the connected world, then you can access your credit history immediately on one of the credit-reporting agencies websites. This service will cost you a fee. If you would like to know about your credit score, you may request it there as well, which will cost a bit more, but will contain your credit history at no charge. A little further down, I will go into a few more details on the credit score calculation.

Your credit score is a tool for the lender to objectively establish a measurement for your credit worthiness. The idea is that based on consumers’ past track record of paying back loans and mortgages, it will determine, how likely they are to pay back yet another new loan or mortgage. If your credit history shows financial judgements against you, filed bankruptcies, outstanding payment amounts, and regular late payments, your credit score will be miserable, and a lender will be less likely to extend credit to you. If however, you pay on time, do not carry any credit card balances, and you are only accessing a small percentage of your potential full credit volume, then you are all the way up there with your credit score. Ergo, just paying the minimum payment on your credit cards, although a good start, may not be enough to improve your credit score. Paying down the balances certainly will reward you with an higher credit score.

The credit score scale reaches from 300 points to 900. According to the Financial Consumer Agency of Canada about 30% of Canadians find themselves within the 800 to 900 score bracket.  If you have a credit score higher than 680, you will be able to easily secure the best rate a lender would offer.

Should you range between 600 and 680, lenders are less eager to give you a mortgage and although they will, they will price their risk accordingly and may have slightly higher mortgage rates. So next time, you walk by a bank, credit union, or even my mortgage broker office, please keep in mind that posted rates at the door, are the BEST rates for clients with high propensity to pay back the loan or mortgage without any challenges for collection by the lender.

If you should fall below 600 points, you are considered a “B Client” indicating that you have had some significant problems with your personal financial health. Lenders will definitely raise their interest rate by one or two percentage points, and  if you are closer to 500 points, perhaps by even up to 4% percentage points. A larger down payment for new property to be acquired by you, will be requested as well, thus reducing the risk to the lender. Or in other words, the lender is pricing the risk her institution will take when doing business with you.

There have been mortgage deals done with scores lower than 450, but that is more of an exception, can be costly and requires a significant down payment amount.

Certain types of mortgage deals may require different credit scores, for instance for the self-employed or the purchase of a rental property may require a higher credit score.

Although the exact formula for the calculation of the credit score is not exactly known, we, however, know this much about it weighting:

35% Payment History – financial judgements against you, any collections, how often you have paid later than 30 days. Making one single payment later than 30 days can impact your credit score by about 20 points just like that.
20% Current Debt – what is the proportion of personal debt to total personal credit worthiness
15% Years of Creditor Relationship – it is good advice to have at least three accounts with creditors older than one year
10% Type of Credit – long-term vs. short-term
10% Credit Enquiries – and that is somewhat misunderstood by many; frequent enquiries during a short period of time may indicate that the applicant is in dire straits and needs money, again might indicate; every time a creditor looks at your credit record, you will take a hit on your overall score; thus when shopping for a mortgage or a loan, it is best to consult with a mortgage broker, who then will pull your credit record once and use it for all lenders she is dealing with.
This is how you can influence your credit score with a few smart personal manoeuvres:

Again do not apply for huge amounts of credit in a short period of time
Christmas time and summer vacation time comes and you are pushing your credit card to the limit – DON’T DO IT if you are serious about reaching a high credit score to eventually have access to the best interest rates
Do not pay over 30 days late
Try to bring your credit card(s) down to 70%, better yet lower the outstanding amount to less than 50%; best is, if you cannot pay it off, try to bring your cards to less than 30%. So, do not pay off one card and keep the other two or three cards at close to 100%. Pay them off equally.
Following my advice can significantly improve your credit score within 30 to 60 days.

Take the time, perhaps after declaring your personal taxes at the beginning of the year, and review your credit history; assure your report contains the correct data, and if not, contact the credit-reporting agency. There website will help you with that. Use some of the suggestions above and be smart about your credit habits, which will influence your access “cheap money”.

Written by Franz Gerber, February 2014, http://www.franzgerber.ca/2014/02/09/credit-score/

Many Canadian home owners do not have a Credit Strategy. Canada’s household debt-to-income ratio shot up to 163.4% in the second quarter of last year, meaning that the Canadian debt ratio is worse than that of our neighbours to the South. Recent increases indicate homeowners are not acting on warnings about unsustainable debt levels. The debt-to-income ratio in Canada is now higher than it was in Britain and the US preceding housing busts that hit both of those countries.

What will YOU do, if interest rates change – Think Credit Strategy

Let me explain a bit more about the debt-to-income ratio: For each dollar a Canadian makes and before any income taxes are paid, the average Canadian owes $1.63. Deduct taxes from your income, food and transportation, and general living expenses, and about 30% for housing, and quickly you will see how challenging it can be to pay off your debt.

Assume the interest rates are moving upward, and again, and then a bit more, and out of a sudden it will take much longer to pay off your debt. Some folks may not even be able to pay off their debt at all and become debt delinquent. This can have a severe domino impact on the housing market, which in addition will impact your own personal credit history.

Is your personal debt load at a level, where you have become reliant on appreciating real-estate prices and low interest rates? Are you accumulating high priced debt month after month?

Now imagine that markets change: Interest rates are going up in correlation with sinking real-estate prices. This is a scary scenario for many, who have invested into their own homes, have accumulated other debt such as car loans, credit card debt, and perhaps even a second mortgage on their home.

Are you prepared or will you be surprised?

Have a Credit Strategy game plan – consolidate and refinance your debt load to manageable payment amounts without strangling yourself.

I can assist in planning your Credit Strategy with valuable advice.

Every so often I am approached by my clients for a Line of Credit drawn on their home, or expressed in more technical terms, drawn on their home’s available equity. Although they have heard about Lines of Credit, they are not quite sure what they are and how they work. That is where a mortgage broker comes in handy with advice and a lending strategy for you and your family.

A Line of Credit is a contract with a bank or another lender. The arrangement describes the maximum amount of funds a borrower can draw on the Line of Credit at any time without exceeding the maximum amount. A lender may want to secure the Line of Credit against the equity in your home, thus the Home Equity Line of Credit. The security of real property provides the lender with strong collateral for the arrangement in case the borrower is unable or not willing to pay back the funds drawn on the Home Equity Line of Credit.

Typically, these types of arrangements are used for individuals, who do not have a predictable income stream such as someone who is self-employed. In such a case income can fluctuate from month to month. A Home Equity Line of Credit is the perfect vehicle to secure cash-flow at a very low interest rate, and with the advantage of only having to pay interest on the balance drawn rather than the full amount of a conventional bank loan. The full amount or any balance of it is available at any time the borrower needs the funds.

Lenders will offer Lines of Credit at the bank’s prime rate plus one quarter percentage point or if you are deemed an higher risk an additional one percentage point on top of the bank’s prime rate.

The loan amount established is based on the available equity in your home. If you are mortgage free, yet have unpredictable cash-flow throughout the year, a Home Equity Line of Credit may be readily available to 65% of the property value at the time of contract negotiation. An experienced mortgage broker will be able to find you an even higher Loan to Value ratio exceeding 65%.

If you have a current mortgage, yet, need a Home Equity Line of Credit, a mortgage broker can help you to make an arrangement with a lender and secure a Line of Credit for you as a second mortgage up to 70% or 75% total Loan to Value, meaning the total amount of first and new second mortgage as compared to the current market value of your property.

The Rule of Thumb here is that the closer the agreed upon maximum amount of the Home Equity Line of Credit approaches the 100% mark, the higher the interest rate becomes, because the risk of the lender increases proportionally.

Should you find yourself in a situation where you have accumulated high balances on your credit cards and are carrying high interest rates, needing a new vehicle, perhaps even have a line of unsecured debt, yet you are working hard, but have unpredictable income streams, consider the following:

Consolidate the current debt under an Home Equity Line of Credit umbrella. This arrangement can have a fixed and a variable portion meaning that your current debt balance can be secured at a fixed rate, which can be less than the bank’s prime rate, and in addition secure a variable portion for future cash-flow needs.

Your variable portion of the Home Equity Line of Credit can be used as a flexible account for repayment amounts at any time and if money is required to pay off new credit balances, it is much cheaper to draw from the Home Line of Credit to do so, than to carry expensive credit card balances.

As a side effect of your debt consolidation efforts, you will be able to improve your credit score by paying down short term credit card balances and converting them into one long-term debt commitment.

Also consider to use a Home Equity Line of Credit for automobile purchases and financing rates, which can come at a  much lower interest rate than what may be charged to you at the average car lot.

Buyer Beware: A Home Equity Line of Credit does take a lot of personal spending discipline and judgement of your personal spending habits in general.  Remember that you eventually will have to pay back the borrowed funds and that a Home Equity Line of Credit is a vehicle of financing, and not a lifestyle.

Written by Franz Gerber, March 2014, http://www.franzgerber.ca/2014/03/01/home-equity-line-of-credit/

When it comes to sources of funding for mortgage loans, there seems to be confusion amongst prospective mortgage clientele, even with the mortgage broker customers, who are re-investing into the real-estate market by purchasing larger homes, town-houses or condominiums for their families. The paradigm seems to be influenced and manifested by advertisement and learned behaviour. When you think lending, most of you will be thinking about large banks. Not quite so.

Funding for a mortgage loan can be sourced from many origins:

• Bank
• Credit Union
• Monolender
• Private sources
• and even from the Seller of the subject property in form of a Vendor-Take-Back Mortgage

What is a Monolender?
Frequently my clientele ae asking me about the term Monolender. Who or what are they? What will happen, if they cease their business operations?

Monolenders are lenders, who solely focus on lending money with real-estate as secured collateral, thus mortgage. They do not have a retail outlet in form of a branch office in a retail corridor, and mostly deal with mortgage brokers directly. Think of them as wholesalers of mortgage loans. They specialize in mortgage loans only – no savings, no credit cards, no car loans. Just mortgages.

Specialized Lending
Often they even specialize in certain geographic areas, even in the type of collateral. Because they pursue this special activity, they have specialized in particular skills, providing expertise beyond what is usually expected from corporations, whose businesses are spread across many disciplines.

Be as it may, the most important factor to me as a mortgage broker is that I am dealing with highly specialized lending professionals. When in need and things are not going well for a client, I can reach decision makers within the organizations via the shortest and most efficient path. This helps save time, often money, and reduces the stress level of my clients.

As mortgage brokers we realize enhanced customer service to us as brokers and to our clientele in equal amounts. Monolenders are excellent at creating innovative products, programs and services and are most proficient in risk management.

But what if they cease business? Remember you are not depositing money, you are receiving their money. It is they, who concern themselves with receipt of their loan payments on time and in full. Think about it this way: If Uncle Ernie gave you a loan, and he passes a way tomorrow; what would happen?

Many times a Monolender may offer interest rate quotes at a 0.1% lower rate than some of the large lenders, because they are specializing, mitigating their risk, and they have no major real-estate expenses retaining a rather small, but specialized staff.

A 0.1% lower interest rate can save you as much as $1,200 over a 5 year term on a $250,000 mortgage. Wouldn’t you want to save this kind of money?

Compare quotes and discuss the timely thematic of the Monolender with your Mortgage Broker. It can save you money to deal with a relatively unknown, small lender and you may be able to avoid restrictive contract terms.

Think about this: If you were to go for brain surgery, would you want your General Practitioner to perform the procedure or would you rather have a specialized brain surgeon operate on you?

Author, Franz Gerber, March 2014, http://www.franzgerber.ca/2014/03/12/monolenders