Credit Score Basics
Your Equifax Beacon Score tells lenders how much of a risk you are and therefore determines how muchyou’ll pay for your next mortgage. So it’s important to know what affects it.
Beacon scores range from 300 to 900 (a perfect score). The average Canadian adult has a Beacon near 700.
Many people think you need to be in the 800’s to get great mortgage rates. That isn’t the case. Only 11% of Canadians rank above 800 and it’s virtually unheard of to see a Beacon near 900. All you really need is 680-700 to get the best mortgage rates. Even 600 can get you a decent enough deal if you can prove income and haven’t had any delinquencies for at least a last year.
As of October 15, 2008, 600 is the minimum credit score for insured mortgages. That means you’ll need at least a 600 score to qualify for good rates on mortgages with less than a 20% down payment.
If your score is below 600, you’re what lenders call a "B" client (i.e. there’s issues with your credit that banks won’t like). 1 out of 5 Canadians are in this boat, but don’t despair! Your credit can be fixed and there are still lenders willing to give mortgages to the credit challenged if you have a big enough down payment. We’ve seen deals get done with Beacons as low as 450!
Also keep in mind, the exact score needed depends on the type of mortgage you require. For example, mortgages for the self-employed, or for rental properties, often require higher scores.
Here’s a table showing the approximate effect of different Beacon scores on mortgage interest rates. This is based on our own anecdotal experience and not empirical data. But it gives you a rough sense for how rates go up as your Beacon score goes down.
The best rate
+0.00 – 0.20%
Assuming you want to improve your credit (and who doesn’t?) you should know how the Beacon formula is calculated. Here are the main criteria:
While no one knows the exact formula (except the inventor, Fair Isaac Corporation), Beacon scores are roughly based on:
Component Weighting Notes Payment History 35% Factors in the recency of, and number of, payments over 30 days late, collections, judgments, and bankruptcies. A single 30-day late payment can drop your score 15-20 points. Current Debts 30% Considers how much you currently owe (in absolute terms and compared with your credit limits), how many creditors you owe money to, and how much you could owe if you maxed all your available credit. Age of Accounts 15% The longer your accounts have been opened the better. You generally need at least three accounts over one year old. Type of Credit 10% Bank loans, credit cards, and revolving credit accounts all impact you differently. Credit Enquiries 10% Numerous credit applications in the past 12 months is a no no. This is a big benefit of mortgage brokers, who pull your credit only once for multiple lenders.
Besides the obvious (bankruptcies, judgments, etc.) the top Beacon killers are:
- Payments over 30-days late
- Maxing out credit cards (i.e. using over 70% of a high credit limit)
- Seeking too much credit in a short period of time (e.g. applying for 4 credit cards in one month)
If you have a lot of maxed out cards, bring them at least below 70% of their limit (Below 50% is better. Below 30% is best). Your credit score can jump considerably in as little as a month.
The moral is, know your credit score and manage it carefully. Over 70-80% of Canadians have mistakes on their credit report. Don’t be afraid to check your credit score.