Credit Fundamentals
Credit Fundamentals Pt. 1 – Introduction
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Welcome to Your Mortgage Matters TV, my name is Roger Grubb and I’m your host. I am also the Mortgage Broker here at Mortgage Alliance – Main Street Mortgages located here in Newmarket Ontario. These video sessions have been designed to make your mortgage financing journey smoother by covering topics and providing information to help you make a more informed decision with regards to your next mortgage transaction.
So why is it so important to have a good credit report? Why is it so important to manage and protect your credit profile? Well, your credit report, or your credit profile, helps to determine the pricing you’ll eventually receive when you apply for credit. The better your credit score, the lower your interest rates, the lower your pricing and the more favorably a lender will look upon you as a borrower.
There are several items that go into making up your credit profile: Your payment, your capacity, the length of time you’ve been reported, the types of accounts & the number of accounts and the number of inquiries.
Over the next several sessions we’ll discuss each of these items in detail. We’ll give you special tips and techniques as far as how to manage those items to ensure your credit profile remains relatively high. This way, when you are applying for credit of any type, you’ll always ensure that you will receive the most favorable pricing; which also helps your mortgage professional find ways of lowering your cost of borrowing tremendously.
Your credit score isn’t the only criteria a lender will use to determine your risk as a borrower, but it is an important one. The credit score is a statistical representation of your risk as a borrower. It was developed by the Fair Isaacs Corporation and is used by the two credit bureaus that exist in Canada, Equifax and Trans Union. It is supplied to the lenders and it helps them gage your level of risk as a borrower. It’s a dynamic number and it ranges from 300 to 900.
The way it works is that the closer you are to the 900 level, the more favorable the terms on which you can borrow. The further away you are from the 900 level, or rather, the closer you are to the 300 level on the opposite end of the spectrum means the less favorable terms on which you can borrow, and whether or not you can even borrow at all.
Now that you have a clearer understanding of how the credit scores works and how a lender uses it to help them make the determination, or help them to make the decision on whether or not to lend. In my next video, I’ll be talking more about your payments and how that impacts your score.
Until next time, thank you very much for tuning into Your Mortgage Matters TV. My name is Roger Grubb. Make it a Great day!
Credit Fundamentals Pt. 2 – Payments
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Welcome back to Your Mortgage Matters TV. My name is Roger Grubb and I’m your host. As a Mortgage Broker, my job doesn’t only entail finding you a mortgage that is suitable for your short and long term goals; but it is also to educate you on the mortgage financing process. That way you’ll be empowered to make sound financial decisions when it comes time to arrange your next mortgage.
In the last episode, I gave you an overview of credit: How it works, how it impacts you and the factors that go into determining your credit score. Things like payment, capacity, types of accounts, length of time on the bureau and inquiries.
Today, I’m going to focus on payments.
We all know that when we borrow money we have an obligation to repay the amount borrowed with interest either in full or by installments over time. From the standpoint of the credit bureau, the most important thing you can do to effectively manage your credit is to make your payments ON TIME!
Let me clarify, when I’m talking about your accounts, I’m talking about your credit cards, lines of credit and any king of revolving account that is being reported to the credit bureau. Now I know loans, leases and in some cases mortgages are reported to the credit bureau; however, these have less of an impact on your credit rating than your credit cards and lines of credit and in fact, I’ll discuss this more when we get to the subject of “Types of Accounts”. For now, I’m just referring to the types of accounts where you have the ability to affect the balance.
I came across a situation once where a client had difficulty qualifying for a mortgage he was trying to arrange. He was a successful lawyer who recently made partner at a large law firm. At the time, he was earning a six figure income but was having trouble qualifying for a mortgage. The situation was that when we checked his credit, his payments were always late….he just never had time with his heavy caseload to do his bookkeeping so he would make a large lump sum every three or four months for what he thought he owed. He always paid his balance but because the system is time driven, it showed the he was always late.
Your payment accounts for about 35% of the weighting that goes into your overall score, so this component cannot be overlooked.
My TIP for managing this component is to contact your credit card companies and/or the financial institution that set up your line of credit and have them enroll you for pre-authorized payments for the minimum amount due. This way, you can ensure that you’ll never miss a payment and your credit rating will remain protected.
In the next episode of Your Mortgage Matters TV, I’ll be discussing the second element of your credit profile…Your Capacity. Until next time thanks for tuning in, I’m Roger Grubb…make it a great day!
Credit Fundamentals Pt. 3 – Capacity
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Welcome back to Your Mortgage Matters TV, my name is Roger Grubb and I’m your host. Sometimes the mortgage financing process can be a little scary and intimidating. My role as a Mortgage Broker is to help you thoroughly understand the process. This way you’ll be empowered to make sound financial decisions when it’s time to arrange your next mortgage.
In the last episode of our series on credit, we discussed the impact your payments have on your credit score and the importance of ensuring that your payments are on time and up-to-date.
Today, I’m going to focus on capacity
So, capacity basically is a measure of how you utilize the credit you have been given. Again, to clarify, in the section when I’m talking about your accounts, I’m only talking about your credit cards, lines of credit and any accounts where you have the ability to affect the balances.
I encountered a situation once where a client had been declined for a mortgage from her financial institution. When I met with her, she couldn’t understand why she wasn’t able to qualify for a mortgage. She had great income, savings and ALWAYS paid her bills on time. It turns out that while her payments were up-to-date, she was “maxed out” on ALL her credit cards; which negatively impacted her credit score.
The rule of thumb is: Whatever your credit limit is on your credit cards or lines of credit, DO NOT exceed 70% of this number. For example, if you have a credit card with a $1000.00 credit limit, DO NOT use or carry a balance of more than $700.00. Your capacity accounts for 30% of the weighting that goes into your credit score, so it’s important to manage the amount you spend AT ALL TIMES.
In the next episode of Your Mortgage Matters TV, I’ll be discussing the third element of your credit profile: Your Duration. Until next time, thanks for tuning in, I’m Roger Grubb. Make it a Great Day!
Credit Fundamentals Pt. 4 – Duration
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Welcome back to Your Mortgage Matters TV, my name is Roger Grubb and I’m your host. If you are a first time homebuyer, chances are you’ll have quite a few questions relating to the mortgage financing process. There may be questions even if you’ve been through the process as an existing homeowner. As a Mortgage Broker, my role is to help you thoroughly understand the process and address any questions or concerns you may have about mortgage financing. This way, you will be empowered to make sound financial decisions when it’s time to arrange your next mortgage.
In the last episode of our series on credit, we discussed the impact capacity has on your credit score; and the importance of ensuring your balances remain below 70% of your credit limits.
Today, I’m going to be talking about Duration!
Actually, duration refers to the length of time that you’ve held a particular account and how long that issuer of credit has reported you to the Credit Bureau. The idea behind this is that the longer you’ve held an account, the more of a track record you’ve developed with the lender. This helps in the decision to lend, or not to lend to you, because your repayment habits are easier to predict the longer you’ve been able to maintain an account.
Sometimes what happens is that credit card company “B” sends you an offer to transfer your balance from credit card company “A” where your had a credit card for 10 years. Because credit card company “B’s” interest rate of 1% is much better than the 19% you are paying with credit card “A”, you accept the offer to transfer the balance and immediately close credit card “A”.
The problem is that the 10 years of history you have built with credit card “A” is now destroyed, which means you now have to rebuild that history with credit card “B”.
My tip today is to certainly take advantage of the opportunity to reduce your cost of borrowing; however, be careful not to close out any account where you’ve accumulated a significant amount of history as this could prove disastrous. Duration accounts for 15% of the weighting that goes into your credit score.
In the next episode of Your Mortgage Matters TV, I’ll be discussing the fourth element of your credit profile: Your Account Types.
Until next time, thank you for tuning in. I’m Roger Grubb. Make it a Great day!
Credit Fundamentals Pt. 5 – Types of Accounts
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Welcome back to Your Mortgage Matters TV, my name is Roger Grubb and I’m your host. For most people, their home represents their single largest asset and conversely, their mortgage is their single largest financial obligation. My role as a Mortgage Broker is to not only help in obtaining a suitable mortgage to meet your short and long term goals; but to find effective solutions to reduce your cost of borrowing AND to educate you on strategies to eliminate your mortgage faster.
In the last episode of our series on credit, we discussed the impact duration has on your credit and the importance of maintaining a track record. Today, I’ll be focusing on the Types of Accounts.
Your account types are broken down into three main categories and are identified on your credit report by a letter.
I Represents Installment accounts where the amount owing is repaid in regular installments until the full balance is paid. These types of account are usually Loans and Leases.
R Represents revolving accounts where the balances can be paid in full or in part AND you can re-access the amount loaned to you, provided that there is available credit. These are usually credit cards and lines of credit; and
M In some cases, Mortgages
Throughout this series, I have focused on the Revolving accounts mainly because they have more of an
impact on your credit score. The installment accounts and (where applicable) mortgages do contribute to your score; however only to a lesser degree. In most cases, loans, leases and mortgages only impact your credit score if you happen to miss making a payment.
While there is no limit on how many accounts and account types you can have, you should only maintain the number of accounts that are practical to manage. Just be sure that it is a healthy mix and that you are able to manage them based on your current income and cash flow.
In the next episode of Your Mortgage Matters TV, I will cover the fifth and final element that factors into your credit score: Your Inquiries. Until next time, thank you for tuning in. My name is Roger Grubb. Make it a Great day!
Credit Fundamentals Pt. 6 – Inquiries
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Welcome back to Your Mortgage Matters TV, my name is Roger Grubb and I’m your host. One of the crucial mistakes that people make when choosing a mortgage or a mortgage professional for that matter is basing their decision on who can get me the lowest rate without considering the costs. My role as a Mortgage Broker is to not only help in obtaining a suitable mortgage to meet your short and long term goals; but to find effective solutions to reduce your cost of borrowing AND to educate you on strategies to eliminate your mortgage faster.
In the last episode of our series on credit, we discussed the impact the types of accounts you may have, has on your credit and the importance of maintaining a healthy mix of account types. Today, I will be focusing on: Inquiries.
An inquiry is a record of anyone to whom you have given permission to check your credit report so that they can determine your credit worthiness in order for them to provide services to you. Basically, they want to make sure that you are a person who lives up to your obligations when you contract for services. Usually, there are two forms of inquiries:
- A hard inquiry, where the record of the inquiry remains on your credit report so that anyone who checks your credit in the future will be able to see the previous entries; and
- A soft inquiry which does NOT leave a record that is visible to others. It is only visible if you checked your credit report yourself.
The difference is that a Hard Inquiry actually takes points from your credit score, whereas a Soft Inquiry does not reduce your credit score.
If you are applying for credit anywhere; such as a mortgage, credit card, loan, opening a bank account, applying for insurance, obtaining a cell phone or renting an apartment then chances are that you have provided your permission to the provider of the service to check your credit which counts as a Hard Inquiry.
There is a misconception that too many inquiries causes damage your credit rating. While the greater number of inquiries do reduce your overall credit score; it is important to remember that it is not as detrimental as most people have been led to believe.
Firstly, the degree to which the inquiries reduce you score is directly related to your existing credit score. For instance, if your credit score is 700 and someone does a credit check, then the amount of points your score will lose is a lot less than that of someone with a score of only 550.
Secondly, if you’ve been shopping around for a mortgage or a loan for example, it’s not uncommon for you to make several applications with several different financial institutions. With each application comes a credit check which could potentially lower your credit score. The good news is that Equifax and Trans Union have recognized this practice and now groups the inquiries that have occurred in a relatively short period of time and counts them as one.
This means that should be no fear of the impact of a number of inquiries on your credit. Of course, a good Mortgage Broker can do your shopping in a more efficient and cost effective way when applying for a mortgage.
There you have it, Inquiries in a nutshell. In the next episode of Your Mortgage Matters TV, I’ll wrap up the series on credit by summarizing and highlighting the tips and strategies that will help you build and maintain a solid credit profile. Until next time, thank you for tuning in. I’m Roger Grubb, make it a Great day.
Credit Fundamentals Pt. 7 – Conclusion
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Welcome back to Your Mortgage Matters TV, my name is Roger Grubb and I’m your host. Over the last six sessions of our series on credit, we’ve covered the basics of credit management. We’ve talked about the credit score: How it’s used and why it is important to maintain a good credit score at all times. We’ve also talked about the five elements that go in creating that credit score and what we can do on an individual basis to influence the score and also how to ensure that the credit score, along with your overall credit profile, remains favorable at all times.
The reality is that we live in a credit driven society where more and more service providers are relying on our credit ratings to make decisions on whether or not to do business with us. They also use our credit ratings to help them to determine how much to charge us for the use of these services.
In the case of a mortgage, the rate that you negotiate, and ultimately the amount that you pay, is directly related to your credit rating. All else being equal, the better your credit, the lower your rate and the lower your payments; whereas the worse your credit rating, the higher your rate and the higher your payment and that is IF you’re able to get a mortgage at all.
So here are my tips for making sure your credit rating, your credit profile and your credit score remains favorable.
- Ensure your payments are made ON TIME by setting up Pre-Authorized payments for ALL your credit accounts
- Make sure you utilize and or carry a balance of LESS THAN 70% of your credit limit on your revolving accounts
- AVOID closing our accounts had you’ve had for a significant amount of time in favor of newer accounts
- KEEP several accounts active to a maintain a mix of account types i.e. loans, credit cards and lines of credit; and lastly
- LIMIT the number of credit checks companies obtain on you. Where possible, obtain a credit report yourself and provide it to them. This counts as a Soft Inquiry which doesn’t cause you to lose points off your score
Where possible, subscribe to a credit monitoring service which will give you a regular update of your credit report from the credit bureau. This way you will have the opportunity to make changes, if necessary, before you need to apply for credit.
For more information on how to safeguard, monitor and improve your credit, please contact me or a member of the Man Street Mortgages team or visit our website at: www.mainstreetmortgages.ca
Until next time, thank you for tuning in to Your Mortgage Matters TV. I’m Roger Grubb. Make it a Great Day!
