That’s the takeaway from a national survey released this week by Rates.ca, which found half of Canadians aren’t aware of the mortgage options available to them.
Not only that, but Canadians are lacking in some other basic mortgage trivia, with an astounding 9 out of 10 respondents not knowing that mortgage interest is charged semi-annually:
28% think interest is compounded monthly;
17% think it’s bi-weekly;
17% think it’s annually;
28% just have no idea.
Should we be concerned?
Dustan Woodhouse, President of Mortgage Architects, and a former active broker who has written multiple educational mortgage books, thinks so.
“Sounds about right. We know about what we pay attention to, i.e., The Kardashians,” he wrote to CMT. “The material concern in this is how easy it makes it for the government to over-regulate the industry, with clients blaming the banks—rather than the appropriate parties. This disconnect is deeply concerning.”
Perhaps even more concerning is the fact that only four out of 10 Canadians (39%) know they can avoid paying default insurance on their mortgage if they make a down payment of 20% or more.
With default insurance running anywhere from 4–5.85% of the mortgage value, we’re talking some serious dinero being spent—potentially unknowingly and unnecessarily.
So, what can be done? Woodhouse admits there are no simple answers, but says making mortgages more tangible to borrowers would be a good place to start.
“The root issue is making mortgages interesting and relevant to clients more often than when they need one,” he said. “It needs to be all about housing, not simply mortgages.”
Paul Taylor, President and CEO of Mortgage Professionals Canada, agrees.
“Unless you deal in mortgages, you only talk about them, generally, once every five years,” he said. “I’m sure at the time of signing, the borrowers understood what their payment obligations were and the schedule; after that, the rest of the information provided was likely filed under ‘nice to know but not relevant enough to me to retain.’”
Making the Case for Mortgage Brokers
With a growing trend towards “do-it-yourself” online mortgage shopping, we wondered if these survey results reinforce the need for mortgage brokers in guiding uninformed borrowers about their mortgage options.
“Big time…more than ever brokers are required,” Woodhouse said.
Taylor added that the stats “clearly demonstrate the need for professional and impartial advice at the time of purchase/renewal/refinance. And while some may suggest they are comfortable purchasing online without counsel, I think we can see that is inadvisable in almost all cases.”
Taylor pointed to the UK as an example. Following the crash of 2008, he noted the country adopted several policies by 2014, including disallowing borrowers to be able to self-declare income, and requiring mortgage consumers to be provided mandatory advice on mortgage products.
“The last point, I think, would likely begin to receive international discussion/attention if online sales begin to increase too quickly given the data this survey demonstrates,” Taylor said. “Given the size of these loans, the personal liability and the potential interest-cost difference for as little as a quarter-point in interest, I expect there may be some scrutiny on consumer outcomes for these self-serve options.”
Additional Survey Tidbits
The Rates.ca survey revealed some additional interesting findings about Canadians’ knowledge gap when it comes to financial products, including:
Nearly 7 out of 10 Canadians (68%) aren’t aware that interest on credit cards is calculated daily.
30% admitted they are unlikely or somewhat unlikely to make the minimum monthly payments on their credit cards.
40% of respondents admitted to not knowing their credit score.
43% said they felt comfortable negotiating their mortgage over the internet.
And 94% believe schools should place greater emphasis on teaching financial literacy.
Whether through ads or our own experiences dealing with banks and other lenders, Canadians are frequently reminded of the power of a single number, a credit score, in determining their financial options.
That slightly mysterious number can determine whether you’re able to secure a loan and how much extra it will cost to pay it back.
It can be the difference between having a credit card with a manageable interest rate or one that keeps you drowning in debt.
Not surprisingly, many Canadians want to know their score, and there are several web-based services that offer to provide it.
But a Marketplace investigation has found that the same consumer is likely to get significantly different credit scores from different websites — and chances are none of those scores actually matches the one lenders consult when deciding your financial fate.
‘That’s so strange’
We had three Canadians check their credit scores using four different services: Credit Karma and Borrowell, which are both free; and Equifax and TransUnion, which charge about $20 a month for credit monitoring, a plan that includes access to your credit score.
One of the participants was Raman Agarwal, a 58-year-old small business owner from Ottawa, who says he pays his bills on time and has little debt.
Canadian company Borrowell’s site said he had a “below average” credit score of 637. On Credit Karma, his score of 762 was labelled “very good.”
As for the paid sites, Equifax provided a “good” score of 684, while TransUnion said his 686 score was “poor.”
Agarwal was surprised by the inconsistent results.
“That’s so strange, because the scoring should be based on the same principles,” he said. “I don’t know why there’s a confusion like that.”
The other two participants also each received four different scores from the four different services. The largest gap between two scores for the same participant was 125 points.
The free websites, Borrowell and Credit Karma, purchase the scores they provide to consumers from Equifax and TransUnion, respectively, yet all four companies share a different score with a different proprietary name.
Credit scores are calculated based on many factors, including payment history; credit utilization, which is how much of a loan you owe versus how much you have available to you; money owing; how long you’ve been borrowing; and the types of credit you have. But these factors can be weighted differently depending on the credit bureau or lender, resulting in different scores.
So, which credit score is giving Agarwal the clearest picture of his credit standing?
Marketplace learned that none of the scores the four websites provide is necessarily the same as the one lenders are most likely to use when determining Agarwal’s creditworthiness.
We spoke with multiple lenders in the financial, automotive and mortgage sectors, who all said they would not accept any of the scores our participants received from the four websites.
“So, we don’t know what these scores represent,” said Vince Gaetano, principal broker at MonsterMortgage.ca. “They’re not necessarily reliable from my perspective.”
All consumer credit score platforms have small fine-print messages on their sites explaining that lenders might consult a different score from the one provided.
‘Soft’ vs. ‘hard’ credit check
The score that most Canadian lenders use is called a FICO score, previously known as the Beacon score. FICO, which is a U.S. company, sells its score to both Equifax and TransUnion. FICO says 90 per cent of Canadian lenders use it, including major banks.
But Canadian consumers cannot access their FICO score on their own.
To find out his FICO score, Agarwal had to agree to what’s known as a “hard” credit check. That’s where a business runs a credit check as though a customer is applying for a loan.
Lenders are contractually obligated not to share a copy of the report FICO provides with the customer. They can only discuss the information and provide insight.
A hard check comes with risk. Unlike the “soft” check Agarwal agreed to from the four websites, a hard check could negatively impact his credit score.
As Credit Karma’s website explains, “Multiple hard inquiries in a short period could lead lenders and credit card issuers to consider you a higher-risk customer, as it suggests you may be short on cash or getting ready to rack up a lot of debt.”
Mortgage broker Vince Gaetano offered to do a hard credit check for Agarwal, as if he was applying for a loan, so he could learn his FICO score.
Agarwal took him up on the offer and was stunned to learn his FICO score was 829 — nearly 200 points higher than the lowest score he received online.
“Oh my god!” Agarwal said when he heard the news. “I am really happy, but totally surprised.”
Doug Hoyes, co-founder of Hoyes, Michalos and Associates Inc., one of the largest personal insolvency firms in Canada, was also surprised by the disparity between Agarwal’s FICO score and the other scores he’d received.
“How can you be poor somewhere and fantastic somewhere else?”
Marketplace asked all four credit score companies why Agarwal’s FICO score was so different from the ones provided on their sites.
No one could provide a detailed answer. Equifax and TransUnion did say their scores are used by lenders, but they wouldn’t name any, citing proprietary reasons.
Credit Karma declined to comment. However, on its customer service website, it says the credit score it provides to consumers is a “widely used scoring model by lenders.”
‘A complicated system’
The free services, Borrowell and Credit Karma, make money by arranging loan and credit card offers for customers who visit their sites. Borrowell told Marketplace the credit score it provides is used by the company itself to offer loans directly from Borrowell. The company could not confirm whether any of its lending partners also use the score.
“So there are many different types of credit scores in Canada … and they’re calculated very differently,” said Andrew Graham, CEO of Borrowell. “It’s a complicated system, and we’re the first to say that it’s frustrating for consumers. We’re trying to help add transparency to it and help consumers navigate it.”
From Agarwal’s perspective, the credit companies are simply using the scoring system as a marketing tool.
“There should be one score,” he said. “If they are running an algorithm, there should be one score, no matter what you do, how you do it, should not change that score.”
The FICO score is also the most popular score in the U.S. Unlike in Canada, Americans can access their score easily by purchasing it on FICO’s website, or through FICO’s Open Access Program, without any risk of it impacting their credit rating.
FICO told Marketplace it would like to bring the Open Access Program to Canada, but it’s up to Canadian lenders.
“We are open to working with any lender and their credit bureau partner of choice to enable FICO Score access to the lender’s customers,” FICO said in an email.
Hoyes, the insolvency expert, suggests instead of focusing on your credit score, a better approach to monitoring your financial status would be to shift attention to your credit report and ensuring its accuracy.
All four websites Marketplace looked at provide credit reports to consumers.
A credit report is the file that describes your financial situation. It lists bank accounts, credit cards, inquiries from lenders who have requested your report, bankruptcies, student loans, mortgages, whether you pay your credit card bill on time, and other debt.
Hoyes said consumers are trying too hard to have the perfect credit score. The fact is, some activities that could boost a credit score, such as getting a new credit card or taking on a loan, aren’t necessarily the best financial decisions.
“My advice is to focus on what is better for your financial health, not what is best for the lender’s financial health.”
He said paying off debt and increasing savings is a better idea than focusing solely on the factors that can increase your credit score.
You focusing on this one metric, that isn’t the same thing the lender is using anyways, is really pointless, and I think it leads to bad decisions.– Doug Hoyes, Hoyes, Michalos and Associates Inc.
He points to billionaire investor Warren Buffett, the third richest person in the world, as an example.
“Would you rather lend to Warren Buffett, who’s got … cash in the bank but has a lousy credit score because he’s never borrowed and hasn’t built up any history, or some guy who has five credit cards and he constantly … moves the balance from one to the other and keeps his utilization under 20 per cent?”
The real estate, mortgage and auto lenders Marketplace spoke with said they look at more than just your credit score before making a lending decision. They also consider things like your income, your history with their company, the size of a downpayment, and other factors not reflected in your score.
For Hoyes, those factors are much more important than a three-digit number.
“You focusing on this one metric, that isn’t the same thing the lender is using anyways, is really pointless, and I think it leads to bad decisions.”
The good news, according to Borrowell CEO Andrew Graham, is that if you’re doing things like paying your bills on time and not maxing out your credit cards, you will see improvement in whatever credit score you track.
Brokers must be willing to take on the role of educator when preparing the next generation of homebuyers to apply for a mortgage. A recent survey by Refresh Financial found that only 41% of Canadians know their credit score, and 20% are too scared to even find out their score.
Millennials (those born between the early ’80s and mid-’90s) and generation z (those born from the early ’90s to mid-2000s) are particularly anxious about their credit history and uninformed about how to build good credit. Thirty-nine per cent of millennial and gen z respondents said they were more stressed about their credit score than they were a year ago, and 25% admitted they’re not sure what makes up their credit score. In addition, a third of 18- to 34-year-olds said they believe their credit score is holding them back from making important life choices such as purchasing a home.
Not all consumer debt is bad but it’s wise to be cautious: expert
Increasing the amount of consumer debt isn’t necessarily bad as long as it’s affordable, according to Matt Fabian, director, research and industry analysis, at credit research company TransUnion.
TransUnion studies Canadian debt and produces a report every quarter. Their latest report is for the second quarter, ending June 30. In an interview, Fabian said the study is providing an overview of debt in relation to how fast income rates are rising and household net worth is increasing.
“Our study this quarter suggests that Canadians are still increasing their debt, up 3.9 per cent in the second quarter, compared to the same quarter a year ago,” he said.
“A couple of things that we note are, although debt continued to go up, the rate with which it increased has started to slow for the past couple of quarters, when you compare it annually,” said Fabian.
“It might be too early to say we’re at … an inflection point but the combination of interest rates increasing and some economic uncertainty in different regions of Canada are giving people pause and maybe they may not be accumulating as much debt as they were, at the rate they were,” he said.
There is some good news coming from the Atlantic region, Fabian said of the quarterly study.
Although the economy can be volatile in the Atlantic region, he said, TransUnion sees provinces like Nova Scotia performing much better than the national average.
The average non-mortgage consumer debt in Nova Scotia is about $28,400 and only went up about 1.24 per cent on a year-over-year basis, said Fabian. New Brunswick is similar, even slightly less, at $27,300 and it went up about 2.37 per cent. Prince Edward Island had average non-mortgage consumer debt of $28,426, which is up 2.16 per cent in the second quarter, compared to the same quarter in 2017.
Newfoundland and Labrador came in under the national average in the second quarter as well, he said, with average non-mortgage consumer debt landing at $30,169, up 2.16 per cent when compared to the second quarter of 2017.
Generally, the Atlantic provinces are well below the national average non-mortgage debt, which increased by 3.87 per cent in the second quarter, said Fabian. From a delinquency perspective, however, the region scored “a little bit higher” than the second quarter national average of 5.33 per cent.
New Brunswick’s consumer delinquency rates on non-mortgage debt in the second quarter – 90 days past due – was 8.37 per cent, the highest in the region.
According to TransUnion, Newfoundland and Labrador’s consumer delinquency rate was 6.88 per cent, Nova Scotia’s delinquencies were 6.87 per cent and P.E.I. had a consumer delinquency rate in the second quarter of 5.74 per cent.
“Newfoundland (delinquency rate) trended up .32 per cent while Nova Scotia went down about 0.7 per cent,” Fabian said. “Halifax among the major cities has amongst the lowest consumer debt, about $26,000, and it was the only major city in Canada that had negative consumer debt growth (in the second quarter).”
When one takes into context growing household net worth consumer debt is not necessarily a bad thing, Fabian said. “I think the fact that delinquency rates are a little bit higher might be a little bit concerning from a risk perspective but they’re not way out of whack and delinquency rates tend to have a long tail. So, some of the Atlantic provinces for sure are coming out of a little bit of a slump economically and it takes, sometimes, 12 to 24 months to manifest itself in delinquency rates.”
Fabian said as the economy bounces back it leads to jobs and increased salaries, so it seems reasonable to be optimistic about the debt situation.
“We tell people, generally, there’s two things to keep in mind. Understand how much you can afford. So, from a delinquency perspective there’s the notion of stress testing and you should kind of stress test yourself.
“When you’re looking to take out debt or increasing your credit card payments, by putting something on your credit card or taking out a line of credit for a renovation, or whatever it might be, don’t just consider the position you’re in right now and say, ‘Yeah, I can afford that $300 monthly payment.’ But kind of consider your cash flow and maybe, take into account your circumstance to say: ‘Could I cover that payment in the event that I lose my job.’ Or, ‘Can I cover that payment for three months while I’m looking for another job.’ This is what we call … stress testing yourself to see if you can absorb that shock should there be some unforeseen event.”
By taking a realistic view of debt and one’s ability to manage it, Fabian says it will provide a little bit of comfort for an individual to realize they really are comfortable taking on some additional debt, he said.
“From a balance perspective, as long as you feel like you can take that on, I don’t know if taking on credit debt is necessarily a bad thing, it depends on what you’re doing it for. If it’s a mortgage or a line of credit to renovate your home or something like to improve the value of an asset or property for investing then that might be a good use of your debt. If it’s to buy new shoes or go on a vacation because you just want to, might not be the best use of your debt,” Fabian concluded.
Source: Cape Breton Post – Roger Taylor Published: Sep 24, 2018 at 3:34 p.m.
We’re entering the home stretch of 2018, when you can actually say, “See you next year!” to someone you’ll see in just a few weeks. It’s a time to look ahead, to make new plans, to achieve new dreams.
And if those dreams include buying your own home, you should keep an eye on the ever-changing tides of the housing market. Now, markets are like the weather: You can’t entirely predict how they will act, but you canget a sense of the forces that will push things in one direction or another.
The realtor.com® economic research team analyzed a wealth of housing data to come up with a forecast of what 2019 might hold for home buyers and sellers—and it looks like both groups are going to be facing some challenges.
1. We’ll have more homes for sale, especially luxury ones
We’ve been chronicling the super-tight inventory of homes for sale for several years now. Yes, homes have been hitting the market, but not enough to keep up with the demand. Nationwide, inventory actually hit its lowest level in recorded history last winter, but this year it finally started to recover. We’re expecting to see that inventory growth continue into next year, but not at a blockbuster rate—less than 7%.
While this is welcome news for buyers who’ve been sidelined, sellers must confront a new reality.
“More inventory for sellers means it’s not going to be as easy as it has been in past years—it means they will have to think about the competition,” says Danielle Hale, realtor.com‘s chief economist.
“It’s still going to be a very good market for sellers,” she adds, “but if they’ve had their expectations set by listening to stories of how quickly their neighbor’s home sold in 2017 or in 2018, they may have to adjust their expectations.”
Although next year’s inventory growth is expected to be modest nationwide, pricier markets will tell a different story. In these markets—which typically have strong economies (read: high-paying jobs)—most of the expected inventory growth will come from listings of luxury homes.
It’s no secret that home sellers have been sitting pretty for the past several years. But is the tide about to change in buyers’ favor?
“In some ways, life is going to be easier for home buyers; they’ll have more options,” Hale says. “But life is also going to be more difficult for home buyers, because we expect mortgage rates to continue to increase, we expect home prices to continue to increase, so the pinch that they’re feeling from affordability is going to continue to be a pain point moving into 2019.”
Hale predicts that mortgage rates, now hovering around 5%, will reach around 5.5% by the end of 2019. That means the monthly mortgage payment on a typical home listing will be about 8% higher next year, she notes. Meanwhile, incomes are only growing about 3% on average. That double whammy is toughest on first-time home buyers, who tend to borrow the most heavily and who don’t have any equity in a current home to draw on.
3. Millennials will still dominate home buying
Just a few years ago, millennials were the new kids on the block, just barely old enough to buy their own homes. Now they’re the biggest generational group of home buyers, accounting for 45% of mortgages (compared with 17% for baby boomers and 37% for Gen Xers). Some of them are even moving on up from their starter homes.
As we mentioned above, things will be tough for those first-time buyers. But the slightly older move-up buyers will reap the benefits of both their home equity and the increased choices in the market.
And regardless of whether they’re part of that younger set starting a career or the older set that’s starting a family, “they’re going to be more price-conscious than any other generation,” says Ali Wolf, director of economic research at Meyers Research.
That’s because they typically are still carrying student debt and want to be able to spend on experiences, like travel. That takes away from the funds they can put aside for a down payment, or a monthly mortgage payment.
“They want to maintain a certain lifestyle, but they still see the value in owning a home,” Wolf says.
So they might compromise on distance from an urban center, or certain amenities, or space—70% of millennial homeowners own a residence that’s less than 2,000 square feet, Wolf notes.
There’s plenty of time to expand those portfolios, though, as millennials’ housing reign is just beginning: This group is likely to make up the largest share of home buyers for the next decade. The year 2020 is projected to be the peak for millennial home buying—the bulk of them will be age 30.
4. The new tax law is still a wild card
At the time of last year’s forecast, the GOP’s proposed revision of the tax code was still being batted around Congress. While there was talk that it might discourage people from buying a home, no one really knew how it might affect the real-estate market.
This year … well, we still don’t really know. That’s because most taxpayers won’t be filing taxes under the new law until April 2019. And while some people might have a savvy tax adviser giving them a better idea of what’s in store, for many, the reality check will come in the form of a bigger tax bill—or a bigger refund.
Renters are likely to have lower tax bills, but might not be tempted to buy while affordability remains a challenge, and with the new, increased standard deduction reducing the appeal of the homeowner’s mortgage-interest deduction.
“I think the new tax plan will affect mostly homeowners and home buyers in the upper parts of the distribution,” says Andrew Hanson, associate professor of economics at Marquette University in Milwaukee, WI. “Those who either own or are buying higher-priced homes are going to pay a lot more.”
Sellers of those pricier homes will also take a hit, as buyers anticipating bigger tax bills won’t be as willing to pony up for a high list price.
The biggest change resulting from the new tax law, Hanson predicts, will be in mortgages, since people will be less inclined to take out large mortgages.
“If anyone is going to be upset about the tax plan, it’ll be mortgage bankers,” he says.
How long does it take to improve your credit score? If you’re hoping to buy a home, having a good credit score is key, since it helps you qualify for a mortgage. So if your credit score is low, knowing how long it takes to raise it to home-buying range can help you plan.
While raising a credit score can’t happen overnight, it is possible to raise your credit score within one to two months. However, it could take longer, depending on what’s dragging down your score—and how you handle it. Here’s what you need to know.
How long does it take to raise a credit score?
First off, what’s considered a good score versus a poor one? Here are some general parameters:
If you’re looking to boost your credit score fast, here are some actions you can take.
Correct errors on your credit report
Correcting errors on your credit report is a relatively quick way to improve your credit score. If it’s a simple identity error—like a credit card that’s not yours showing up—you can get that corrected within one to two months.
If it’s an error on one of your accounts, though, it could take longer, because you need to involve your creditor as well as the credit bureau. The entire process typically takes 30 to 90 days. If there’s a lot of back-and-forth between you, the credit bureau, and your creditor, it could take longer.
The first step to correcting errors is to get a copy of your credit reports from TransUnion, Equifax, and Experian (the three major credit bureaus), which you can do at no cost once a year at annualcreditreport.com. Next, review them for errors. If it’s an error on one of your accounts, you must refute that error with the bureau by providing documentation arguing otherwise. For example, if you paid a credit card on time and the card issuer is reporting a late payment, find a bank statement showing that you paid on time.
Credit bureaus typically have 30 days to investigate the error. If they agree that it’s an error, they will remove the item. The credit bureau may also ask for additional information or ask you to discuss the information with the creditor involved. If that’s the case, stay on top of communications with your creditor so you can get things resolved as quickly as possible.
Deal with delinquent accounts
Bringing delinquent accounts current and settling accounts that are in collections can also boost your score fairly quickly. Once the creditor or collection agency reports your account update, you should see a positive bump in your score. Keep in mind, though, that your late payment history will remain on your credit report for seven years.
If you have bad accounts that have been on your report for six years or more, you may not want to worry about settling them or bringing them up to date. This can re-age the account, and if you fall behind again, it will stay on your credit report for another seven years.
“Make sure you don’t re-age these accounts, because they’re going to drop off soon,” says Nathan Danus, CDMP and Director of Housing and Community Development at DebtHelper in West Palm Beach, FL. Negative information typically “falls off” your credit report after seven years, so if you’re close, it’s best to just wait it out.
Lower your credit utilization
Credit utilization refers to how much you owe compared with the amount of credit you have available. For example, if you have a $10,000 credit limit across all your credit cards and you have balances totaling $9,000, you’ve utilized 90% of your credit. This drags down your credit score.
“What these consumers often need to do is pay down the balances on their existing credit accounts, which can be a challenge if they’ve allowed the balances to creep up over time,” says Martin H. Lynch, compliance manager and director of education at Cambridge Credit Counseling of Agawam, MA. “The ratio of what’s owed to the amount of credit available represents 30% of the consumer’s score, so rapid improvement is possible if there’s a large amount of money available to pay down balances.”
Linda L. Jacob, a financial counselor at Consumer Credit of Des Moines, IA, recommends paying down balances to below one-third of your credit line. Any payments you make will be reflected on your credit report as soon as your creditors report your payment to the credit bureaus. Credit scores are updated on an ongoing basis, and creditors typically report once per month, so if you make a payment that lowers your credit utilization, that should be reflected on your credit score within two months.
If you’re regularly using your credit card but you want to keep your utilization low so you can apply for a mortgage, you may want to pay down your credit-card balance on a weekly or biweekly basis. This ensures that your balance is as low as possible whenever your creditor reports your payment history to the credit bureaus.
You can also decrease your card utilization by getting more credit, but this approach can backfire. Consumers sometimes assume that by getting more credit, their credit score will improve. If you have a $3,000 balance on a card with a $4,000 credit limit and you’re approved for a new credit card with a $1,000 limit, you now have $5,000 in total credit lines. Instead of using 75% of your available credit, you’re now using 60%. That’s better, right?
Not necessarily. “Just applying for credit lowers your credit score, and that effect lasts for months,” warns Mike Sullivan, personal finance consultant at Take Charge America in Phoenix, AZ. “For the first few months after you apply for credit, your credit score may actually go down.”
You can try getting around this by asking a credit limit increase on a card you already have. Be sure to ask whether they do a “soft” credit pull rather than a “hard” credit pull, though, since hard credit inquiries are the ones that impact your credit. A creditor may be willing to give you a credit line increase with a “soft” pull, which will not hurt your credit score.
Soft inquiries are for background purposes only. For example, a credit card company may do a soft pull to see if you’re eligible for certain credit card offers, or an employer may do a soft pull before offering you a job. Soft pulls can be done without your permission and do not impact your credit score. Hard pulls require your permission, and are done when lenders or credit card companies are assessing whether to grant you a loan or line of credit.
How to raise your credit score for the long haul
Once you’ve corrected errors, settled your delinquent accounts, and brought your credit utilization under control, the only other things that will improve your score are time and developing good payment habits. For example, if you tend to forget to make payments, you can set up automatic payments so you don’t forget.
And here’s some good news for people with bad credit: Generally, people with the lowest scores will see the biggest gains the fastest.
“It’s a lot like dieting,” says Sullivan.
For instance, if your score is 550, “you could probably get it up 30 points in a matter of a couple months, if you’re really dedicated and really careful,” he explains.
On the other hand: “If your credit score is already a 750 and you’re trying to get it to 780, that can take double or more the time.”
Still, it’s worth doing whatever you can to get the best interest rate possible.
For more smart financial news and advice, head over to MarketWatch.
Here’s what most Canadians likely know about their credit score: It’s a number somewhere on a scale from 300 to 900 — and the higher that number, the easier and cheaper it generally is to get credit.
If you want to take out a mortgage or auto loan, a good credit score improves your chances of being approved and getting a lower interest rate. A high score may also give you access to instant-approval credit cards and loans.
But here’s something you probably didn’t know:
No one really knows exactly how credit scores work
For obvious reasons, Canada’s two credit-reporting agencies, Equifax and TransUnion, do not reveal the exact formula through which they come up with credit scores. If they did, it would become easy for anyone to game the system.
The implication here is that most advice you get about how to improve, build or repair your credit score is really an educated guess. Based on anecdotal evidence and what they see dealing with clients, financial advisers have a pretty good idea of how different types of behaviour affect credit scores. But they can’t tell exactly how much of a difference each one really makes.
That’s why Douglas Hoyes, a licensed insolvency trustee at Kitchener, Ont.-based Hoyes, Michalos and Associates, is skeptical of strategies that entail taking out costly loans just so you can supposedly build or repair your credit score faster.
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Borrowing at, say, 30 per cent interest is guaranteed to cost you a pretty penny. The gain, on the other hand, it quite uncertain. Taking out a loan will definitely improve you score if you make your payments on time, but how much of a difference will it really make? No one can say for sure.
Given the uncertainty, Hoyes advises borrowing through the lowest-cost debt you can access and trust that your credit score will gradually improve if you keep on top of your finances.
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For those with no credit history or a poor credit score, a good first step is getting a secured credit card such as the Home Trust Visa, according to Hoyes. “Secured” credit means the lender will ask you to put down, say, a $1,000 security deposit for a $1,000 credit card limit. The point of such a credit card isn’t to borrow money to finance expenses for which you don’t have cash at hand but to show that you can make disciplined debt repayments.
Secured credit cards normally come with steep interest rates. The no-fee version of the Home Trust Visa charges interest of 19.99 per cent, but borrowers need not worry about it if they pay off their balance in full and on time, Hoyes noted.
Credit scores are designed with banks, not you, in mind
You might think that diligently paying off your credit card bills as soon as they come would get you the best possible score. You might be wrong.
Some financial advisers and debt management experts believe carrying a small balance of up to 30 per cent of your available credit on your card might actually boost your score more than having a balance of zero.
That’s because “credit scores are meant for the benefit of the banks, not you,” said Hoyes.
Banks are happy with customers who reliably repay their debt. But they also make money off charging interest. So they may be happiest with customers who will eventually repay their debt but keep carrying a balance, on which they’ll have to pay interest, explained Hoyes.
He advises doing what’s best for your pocketbook and skipping on financial behaviour that will ultimately cost you more — even if it means your credit score will be a bit lower.
Credit scores don’t matter as much as you think
A third thing to keep in mind about credit scores is that they aren’t necessarily the only metric a bank will use to assess your creditworthiness. “Banks may have their own formulas, too, which are different from whatever Equifax and TransUnion are using,” noted Hoyes.
Finally, he added, a bad credit score won’t shut you out of borrowing forever. Even bankruptcy is something you can recover from relatively quickly, if you have a good, stable job and show financial discipline, said Hoyes.
“I have plenty of clients who bought houses two years after being discharged from bankruptcy,” he told Global News.