Oftentimes, as we move through the mortgage pre approval process with our clients, they end up confused about their credit score. They check the score themselves using one of their banking apps or Credit Karma and the score reads 780, but when we pull their beacon score, they are so frustrated that often their score is lower.
Here are the straight goods: Every credit information provider has a different algorithm for calculating credit scores. They all scrape information from the internet in different ways and they all come up with a different number in the end. It’s also super important to remember that credit scores fluctuate monthly. My personal credit score can land between 750 and 850 depending on the month. If I’ve had someone pull my credit because I needed a new credit card, or if my husband and I have been shopping for a rental property and the bank and a broker each pull my credit report, the number drops.
It’s important to understand what a credit score is, how it is calculated and what it means if you intend on applying for credit for a home purchase in the future.
- Credit Score 101
- Why Do Credit Scores Differ?
- Data Used To Calculate Credit Score
- Tips & Tricks To Improve Your Credit Score
- Credit Score Recap
What is a credit score?
Credit scores range between 0 and 900, and give the lender an idea of the likeliness that you will pay your bills on time. The information from these credit reports comes from one of 2 credit reporting agencies in Canada, Equifax or Transunion. Not every lender will report to both of these agencies, and even if they do, they may report the information a different times. As such, the credit application that you’re using to determine your credit score could have different information than another application.
Credit scores are based on 3 things:
- The balances (or amounts owing) on your current credit cards
- Your credit history, meaning, are you paying your bills on each credit item each time they come due?
- The number of creditors checking your credit
Typically consumers with a credit score that is higher are general indications of a consumer who has been responsible with their credit and their credit history in the past. Often they have maintained reasonable balances on their current credit cards and payments, ensuring they're diligent about not having creditors pull their credit too often.This in turn, translates into creditors (banks, lenders, etc) having higher confidence and viewing you as a low risk borrower.
Why Do Credit Scores Differ?
Although there are a number of factors that can change how a credit application reflects your credit, here are the most common reasons that your credit score may differ between apps.
Differences between credit bureaus: Not all creditors or lenders report to both credit bureaus in Canada (Transunion and Equifax) In many cases, they're only reporting to one of them, or in some situations neither of them! Creditors and lenders can also report to bureaus at various different times, this results in one being more up to date and current, while the other is behind and not current.
Different weighting in credit scoring models: As mentioned above there are 3 main factors that going into determining your credit score. How quickly you pay your bills, how high your current balances are and how many creditors are pulling your credit. But, there are lots of other factors as well, how long have you had established credit? Have you previously had a bankruptcy or consumer proposal? Each factor is weighted differently in the models, so although they are similar there will be small changes as each factor is accounted for in that applications specific algorithm.
Types of Data included in credit scoring calculations
The lending world will use different models for different purposes. For example, the rules are much less stringent to purchase a car than they are to purchase a home. Because some models will include data about cell phones and past mortgages and some won’t, you can’t always compare models and think that you’re comparing apples to apples.
Additional Tips to Improve your credit score and home buying purchase power
While your credit score is important, it is not the only factor necessary when it comes to buying a house. Actually, it’s not even the most important factor. Income is everything when it comes to buying a home. Anyone with credit about 680 (and even 600 by exception) has access to rates until 2%. What the lenders really want though, is to see your ability to pay the mortgage monthly.
Many clients are very upset worrying about the difference in a credit score between 780 and 800. Here is the truth, this just doesn’t matter when it comes to achieving credit.
Here are the best things you can do to keep your credit score right where it needs to be:
- Pay your bills on time. This includes your cell phone, your utility bills, your cable bill, your HSBC credit card. Everything.
- Keep your credit balances at 60% of the limit. You’re better off to have 2 cards with $10,000 limit’s and balances of $5,000 than one card with a balance of $10,000.
- Maintain at least 2 types of credit, with a LIMIT of $2000 minimum at all times.
- Even if you don’t like credit, use it and pay it off each month. (Reminder, there is no interest charged if you pay it off each month).
Credit Score Recap
You will have different credit scores in different applications because the inputs and weightings from the credit agencies are not consistent between the applications. As much as it is very important to understand and maintain a great credit score, Canadians with credit over 600 have access to rates under 2%.
Contact our mortgage impact partner
Renée Huse Mortgage Broker 403-804-5465
Spire Mortgage Team | powered by MMG Mortgages
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