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Of Prime Interest: Paying your bills on time helps maximize your credit rating
Your credit is rated by what is called a Beacon Score—a single number that summarizes your credit situation and shows lenders what kind of risk you’re likely to be as a borrower.
Beacon scores range from 300 to 900. The average Canadian has a beacon near 700.
Only 11 per cent of Canadians rank above 800 and it’s virtually unheard of to see a beacon score near 900.
All you really need is 650 to 700 to qualify for a low mortgage rate. Even a 600 score will get you a decent enough deal if you can prove income and haven’t had any delinquencies for at least a year.
A beacon score of 600 is the average minimum credit score for insured mortgages at low rates with less than a 20 per cent down payment.
If your score is below 600, you are what lenders call a “B” client, meaning there are issues with your credit that banks won’t like.
One out of five Canadians fall under this category, but don’t despair—your credit can be fixed and there are still lenders willing to grant mortgages to the credit challenged.
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 scores on the higher end.
Assuming you want to improve your credit, you should know how the Beacon formula is calculated.
The main criteria are as follows.
Payment history (35%): This also factors in the recent and number of payments over 30 days late, collections, judgments and bankruptcies. A single 30 day late payment can drop your score 15 to 20 points.
Current debts (30%): Considers how much you currently owe compared to 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. Generally you need at least two accounts over one year old.
Type of credit (10%): Bank loans, credit cards and revolving credit all impact you differently.
Credit enquiries (10%): Numerous credit applications in the past 12 months is a no-no. A huge benefit of using a mortgage broker is the need to pull your credit rating only once for once for multiple potential lenders.
The top Beacon score killers are bankruptcies, legal judgements, credit payments over 30 days late, maxing out credit cards and seeking too much credit in a short period of time such as applying for four credit cards in one month.
If you have a lot of maxed out cards, bring them at least below 70 per cent of their limit. Below 50 per cent is better and below 30 per cent is best.
So know your credit score and manage it carefully.