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Laura's Tips for Improving or 
Establishing Your Credit Score

You will first want to see what, if anything, the lenders are saying about you.  That kind of information is contained in your credit report at each of the three major bureaus: Equifax, Experian and Trans Union.  You are entitled to a free annual look at your reports from AnnualCreditReport.com.

Credit reports are used to create your credit scores, the three-digit numbers that lenders typically use to gauge your credit worthiness.  Lenders may also look at the reports themselves, as may landlords, employers, insurers and utility companies who use credit to evaluate applicants.

Can you have a credit report if you have never had credit? Maybe

Somebody else’s information could be mixed in with your report, either through a credit bureau mistake or because of identity theft; i.e. someone using your personal information to open bogus accounts.

If that’s happened to you, you will need to clean up your credit report before trying to apply for new accounts.  The Federal Trade Commission’s identity-theft site has information that can help.

You need to know that the two most important factors in your scores are:

•  Whether you pay your bills on time.
•  How much of your available credit you actually use.

It’s essential that you pay all your bills on time, all the time.  In fact my personal rule is that I pay my bills on-line the day they arrive in the mail or earlier.  Some companies will email you a reminder when your invoice is issued.  If it is easier for you, set up automatic payments or reminder systems so that you are never, ever late.  All it takes is a single missed payment to trash your credit scores – and it can take seven years for the effects to completely disappear.  Better yet is to pay your bills early and ahead of the due date.

You also don’t want to max out any of your credit cards ever, or even get close.  Keeping your credit use less than 30% of your credit limit (10% is better) will help you get the best possible scores – and should help keep you from getting over your head in debt as well.  Of course it is absolute best if you can pay off your statement completely every month.  What I do is log onto my bank every Friday and pay off what is due on my credit card.  Then it doesn’t feel like a huge payment and it also shows on my credit that I pay things early or ahead of the due date.  Paying your bill in full each month is the best way to keep your finances in shape and build your credit at the same time.

The fastest way to establish a credit history if you don’t have one is to “borrow” another’s record, either by being added to a credit card as a joint account holder or by getting someone to co-sign a loan or credit card for you.  Use it and pay off immediately even before the statement is issued.  This takes a big commitment from someone else to help you as you can mess up their credit if you are delinquent with payments.  Plus they can mess up yours if they don’t pay what they owe if you share the card.  Make sure it is well discussed and that you are ready to both commit to paying the card off in full each month.

Having a co-signer can allow you to qualify for loans you might not otherwise get.  The loan will show up on your credit report and, if you pay it off responsibly or better yet very quickly, will help boost your credit scores.  In fact if you know someone that would be willing to co-sign to help you borrow the money, you can let them keep the money borrowed and pay the loan off completely in a month or two.  Make sure you are able to do that when setting up the loan.  Once again it must be someone you completely trust.  This is a great way for parents to help their children develop a credit rating.  If you default, however, you won’t be the only one who suffers.  The co-signer has basically promised to make good on this account, so any delinquencies will show up on their credit report as well.

If you can’t get a regular credit card, apply for the secured version.  These require you to deposit money with a lender; your credit limit is usually equal to the deposit.  Screen your card issuer carefully.  To be frank, there are a lot of bad guys in this particular niche of the credit world.  Some charge outrageous application or annual fees and punitively high interest rates.  Your credit union, if you have one, is a good place to look for a secured card.  You can also check Credit.com, CardTank.com or Bankrate.com’s list of secured credit card issuers.

Ideally, the card you pick would:

•  Have no application fee and a low annual fee
•  Convert to a regular, unsecured credit card after 12 to 18 months of on-time payments
•  Be reported to all three credit bureaus

If the issuer doesn’t report to the credit bureaus, the card won’t help build your credit history.  To get the best credit scores, you need a mix of different credit types, including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans mortgages).

Once you’ve had and used plastic responsibly for a year or so, consider applying for a small installment loan from your credit union or bank.  Keeping the duration short – no more than a year or two – will help you build credit while limiting the amount of interest you pay.

Beacon of FICO Scores
Beacon or FICO scores are a single number that summarizes your credit situation and shows lenders what kind of risk you’re likely to be as a borrower.  The article below is a basic overview of their importance.  I hope you enjoy!

Beacon Score Basics for Mortgage Hunters
Your Equifax Beacon Score tells lenders how much of a risk you are, and hence it determines how much you’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.  If you would like to always like the power to negotiate the best mortgage rates then keep your score over 700.  Even 600 can get you a decent enough deal if you can prove income and haven’t had any delinquencies for at least a year.

As of October 15, 2008, 600 is the minimum credit score for insured mortgages.  That means you will need at least a 600 score to qualify for good rates on mortgages with less than 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 480!  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 anecdotal experience and not empirical data.  But it gives you a rough sense for how rates go up as your Beacon score goes down.

Beacon Score  Interest Rate
700+  The Best Rate
680-699  +0.10 – 0.20%
650-679  +0.30%
620-649  +0.40%
600-619  +0.50%
580-599  +1.5%
540-579  +2.00%
500-539  +3.5%

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:

Payment History = 35% of the weight of your score.  Factors in the regency of and number of payments over 30 days late, collections, judgements and bankruptcies.  A single 30-day late payment can drop your score 15-20 points!

Current Debts = 30% of the weight of your score.  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% of the weight of your score.  The longer your accounts have been opened the better.  You generally need at least three accounts over one year old.

Type of Credit = 10% of the weight of your score.  Bank loans, credit cards, and revolving credit accounts all impact you differently.

Credit Enquiries = 10% of the weight of your score.  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, judgements, etc.) the top Beacon killers are:

•  Payments over 30 days late
•  Maxing out credit cards (i.e. using of 70% of a high credit limit)

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.


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