Credit Score Frustrations - Tips and Advice
Your credit score has the ability to make your life difficult and take away your dreams of owning a home. The average Canadian credit score is 720. Scores range from 300 to 900; the higher the number, the easier it is to obtain credit. This blog will examine some of the aspects of credit scores that don’t seem to make sense and cause a lot of frustration for the consumer.
Imagine this scenario:
You are a university graduate. You are financially smart, so you paid off your student loans right after university and you have never had a credit card or line of credit. You have a stable job with the city making $60,000 a year. You have saved up 10% down, you have no debts, and you want to buy a small condo. Guess what…no bank will give you a mortgage because you don’t have a credit score.
Now imagine this:
You are a high school graduate and not really financially smart. You have 3 credit cards, with money still owning on all of them, and you also have car loan. You work in retail and make about $35,000 a year. You saved only 5% down and want to buy a new condo. Guess what…you are approved for your mortgage right away!
As ridiculous as the above examples are, they actually happen. The credit system in Canada can be frustrating and confusing. Here is another example that does not make sense: If you have 5 different credit cards and think you want to lower your available credit by canceling one or two credit cards because it might help you get a mortgage….you’re wrong. Cancelling a credit card will actually lower your credit score.
TIP - Get a credit card (even if you don’t need one) and pay it off. Credit scores are calculated based on “payment history”. So if you have never had a credit card, then you don’t have a payment history, and thus you have no credit score….and can’t get a mortgage. Even if you don’t need a credit card, it would be a good idea to get a credit card and make a few payments to at least have a credit history.
More Frustration: “Soft hit” vs “Hard hit”
If you are checking your own credit score, it’s called a “soft hit” and it will not reduce your credit score. However, if different banks or other institutions are checking your credit score, then it’s called a “hard hit” and your credit score will go down if they all check in a short period of time.
Example: If you are looking for a mortgage and you go to 4 different banks and they all check your credit score, then all of a sudden you will have a low credit score and you can’t get a mortgage! How frustrating is that! You can pay your bills every month, but just because banks are checking your credit history, your score goes down. Ridiculous.
TIP - Don’t let banks check your credit score when you are shopping for a mortgage. Obtain your own report and then take that to the bank. Only after you have chosen your bank should you allow that one bank to check your credit score.
Understanding Your Credit Score
If you want to purchase a home and you need a mortgage, the first step would be to make sure you obtain a copy of your credit score. You can order a FREE copy of your credit score at equifax or transunion. (But they also let you pay to get the report quicker - so look for the FREE link - It’s not as visible as the link to pay).
What is used to calculate my score?
* Payment history - Indicates whether you have made your credit card payments, loan payments and other payments on time
* Amounts owed - Compares how much you owe to your credit limits with various lenders
* Length of time in file - Indicates how long you have had credit accounts
* New credit - Shows how often you are looking for new credit and how you handle accounts you have recently opened
* Type of credit - Considers the type of loans you have - car loans, lines of credit, credit card balances
Wouldn’t it be great if there was a credit system that made sense?
Things are less frustrating for consumers when they make sense!
ByTheOwner.com
October 22nd, 2009 at 7:40 pm
Great write up, yes it is very frustrating how the credit system works. It takes forever for them to update your credit profile..and as soon as they have a credit report from a lender that is late it is reflected right away! Doesnt make any sense. Perhaps by the owner could come up with a private system which private home buyer and seller can go to, to see the profile of many Canadians. I bet you could do a better job.
December 4th, 2009 at 8:38 pm
Au contraire, the “free credit report” to which we are supposedly “entitled” specifically *does not* include your credit score. I just got mine back from Equifax and it was completely useless….told me stuff I already knew such as the credit limit on my credit cards, junk like that. Here’s what the equifax report says:
“Credit Score: The credit score is not part of your credit file. It is dynamic and changes with each activity on your file or as time goes by and the file ages. It is not physically kept on the credit file but is calculated every time the file is accessed.”
Okay, so why not give me the score for this specific time that it is being accessed….?? duhhhhh….
O Canada, kept in the dark and treated like mushrooms, same as it ever was…..
February 16th, 2010 at 2:35 am
Great article, thanks for sharing and I’ve boomarked this page.