Here are my notes from a recent Continuing Education Course held at my office by Beverly Gorman from CMHC – Understanding Credit Reports. Managing credit is important if you are going to be applying for credit. To manage your credit you have to have an understanding of how the credit process works, what exactly is a credit report and what is used to calculate your credit score. In relation to the Home Buying aspect of mortgages, having a higher credit score through responsible credit management can translate to savings with better mortgage rates and terms. The notes below are in abbreviated form from the points gleaned from the presentation. More information is available through the website links below.
5 C’s – capacity, capital, collateral, character, credit history
Capacity – cash flow, gds (gross debt service), tds (total debt service) ratios
Capital – assets, home equity
Collateral – security against the loans
Character – age, spending habits, lifestyle, job security
Credit history – history of credit, LOC (line of credit), credit cards
– payment on time, takes a long time to get rid of negative info, much longer than it takes to build it up with good credit behaviour
2 major Canadian reporting agencies, Equifax and TransUnion – rent check for tenancy (only rentals)
– pulling report gives a better snapshot of the borrower
– pulling your own credit report is a soft hit, no impact to credit score – same about employment and insurance
– consent to pull credit report can be verbal or written, implied if told that report will be pulled
– info to pull – name, date of birth, place of residence – with SIN narrows it down to the individual.
– contains the following: personal info (aka, 3 previous residences, time credit report started, past 3 places of employment, SIN, date of birth), banking info (negative info such as account closed by credit grantor, pulling back credit, NSF charges), credit information (history of credit, loans, leases), public records (liens, family responsibility hits), collection information (judgements, only one collection per account at a time), consumer statement (Bill 152, consumer statement on your credit report for dispute/litigation, put an alert on lost/stolen wallet/purse with phone number), credit report inquiries (any time report is pulled added to the list, hard vs. soft hits that combine multiple same type of inquires into one when done in a couple weeks of another).
– codes used: I installment, O open account, L lease account, C line of credit, R revolving or recurring (credit cards), M mortgage (Equifax reports about 85% of mortgages with info only available to those that give mortgages, no lender info or maturity date to reduce poaching of clients)
– numbers used: 0-9 – 0 too new, 1 pays as agreed, 2 late 31-59 days, 3 late 60-89, 4 late 90-119, 5 more than 120 but not yet a 9, 6 not used, 7 regular payment on consolidation, 8 reposessed, 9 bad debt/placed for collection/bankruptcy
– time frame for negative info (TransUnion in brackets) – six years for most credit transactions, secured loans, banking items, judgements (7), collections, bankruptcy (7), can negotiate to fewer years with consumer proposal (3 years) – no new debt applications when in consumer proposal.
Credit Score – shows the risk for the borrower, scale between 300-900: poor 300-559, fair 560-659, good 660-724, very good 724-775, excellent 776-900
– delinquency rate is 90 days past due, rates increase depending on lack of credit score.
– for CMHC financing, minimum of high ratio scores is 600, some exceptions to the rule but very hard to get
– factors that influence the credit score: payment history (35%), use of available credit (30%), length of credit history (15%), number of recent inquires/new credit (10%), type of credit being used (10%)
– best way to boost score is to utilize up to 35-50% of credit available and pay by the due date.
When is more info needed?
– when 1 + 1 = 3, when something doesn’t add up, appears to be fraud
– Red Flags – credit utilization vs employment/income, employment vs. income, residency vs. employment/income, new credit applications, many inquiries, limited trades can be indication if bankruptcy
Advice to Share on How To Build Up Credit Score
– Newcomers or new clients – get a credit card, small loans, always pay bills on time (in full if possible), open a bank account and use regularly, stable employment/residence, utilize no more than 20%.
– Advice to help/maintain/improve – same as newcomers as well as – pay off quickly, keep balances below the limit, reduce the applications, make contact immediately if having problem making payments.
Advice to share with those with existing credit history: check credit report every year, verify information is up to date and correct, order from both agencies, get errors corrected with institution and agency.
Publications to share with clients:
www.fcac-acfc.gc.ca – Government of Canada – Financial Consumer Agency of Canada – document Understanding Your Credit Report and Credit Score
www.Equifax.ca – Equifax Personal Solutions
www.TransUnion.ca – Trans Union Canada
www.cmhc.ca – Canada Mortgage and Housing Corporation
One more thing, Emily is the name of the computer system at CMHC.