Tag Archives: equifax

3 things you probably didn’t know about your credit score

A photo illustration shows charts for credit scores on a computer in North Vancouver, B.C., Wednesday, June, 15, 2016.

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.

WATCH BELOW: Huge price to pay for payday loans

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.

WATCH BELOW: Dollars and sense: Credit score basics

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.

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Bankruptcy scores: Why lenders may turn you down despite a good credit score

Few borrowers know about bankruptcy scores, but lenders have been using them for years.

Few borrowers know about bankruptcy scores, but lenders have been using them for years.

Few have heard of them, but they’ve been around for a few years: Bankruptcy scores.

Most Canadians know about credit scores, and some are acutely aware of their three-digit number. Where you fall on a scale from 300 to 900 can affect whether or not you qualify for a mortgage for your dream house, a car loan or a credit card and how much you’ll pay for the privilege of borrowing that money.

 

But there’s often another set of numbers that could cause lenders to deny you a loan or hike your interest rate — even if your credit score doesn’t look so bad. Financial institutions often rely on bankruptcy scores to gauge the probability that you’ll go financially belly up in the next 12 to 24 months.

Credit reporting bureau Equifax has a Bankruptcy Navigator Index that it says allows lenders to “uncover the financial red flags not so obvious at first glance.” And competitor TransUnion has its own CreditVision Bankruptcy Score.

 

The latter “is an empirically-derived model designed specifically for the Canadian market,” TransUnion Canada told Global News via an emailed statement. “The score ranges from 100 to 950, with lower scores indicating a higher risk of filing for bankruptcy or [a consumer] proposal,” the company added, noting that financial institutions, telecom companies and lenders in the auto-loan industry, among others, use it.

TransUnion has had bankruptcy scores for a number of years but introduced its CreditVision score in 2015, it said.

Equifax did not respond to two requests to provide additional information on its Bankruptcy Navigator.

 

How bankruptcy scores work

Bankruptcy scores are aimed at detecting risky borrowers that sometimes go under the radar with traditional credit scores, licensed insolvency trustee Doug Hoyes told Global News.

“It turns out that there is a significant difference in behaviour between the person with bad credit who will not file bankruptcy and the person with a similar bad credit score who will declare bankruptcy and this is what your bankruptcy score measures,” Hoyes, co-founder of Ontario-based debt-relief firm Hoyes Michalos, wrote in a blog post.

 

Sometimes, there’s a lag between when an overstretched borrower reaches the point of no return and when that reality will be reflected in his or her credit score. It’s possible for people with scores in the 600-700 range to be on the verge of defaulting on their debt repayments, said David Gowling, senior vice-president at debt consultancy MNP.

“Some people come in telling me how great their credit score is, but then you find out they’re using one type of credit to pay another type of credit,” Gowling told Global News. And because they’re still able to make minimum payments, “the credit score hasn’t caught up,” he added.

According to Hoyes, compared to someone with a bad credit score who will stay afloat, someone who is at high risk of going bankrupt tends to:

  • Use credit more often;
  • Apply for credit more often and have more recently acquired debts or credit accounts;
  • Have fewer accounts in collection. (This is because people who rely on debt to pay more debt are often careful about not missing payments in the belief that this will grant them access to more credit);
  • Have a higher credit utilization rate, i.e. carrying a credit balance that takes up a large percentage of your borrowing limit.

 

While credit scores are a look at your borrowing history in the rear-view mirror, bankruptcy scores likely pick up on these telltale signs of might happen in the near future, Hoyes told Global News.

In general, the credit file of someone at high risk of bankruptcy tends to show much more recent activity, which is why applying for new credit in an attempt to improve your credit score can backfire, according to Hoyes.

WATCH: Lenders behave like car insurance companies: If you don’t have a driving record, you’re automatically a very risky driver.

What bankruptcy scores mean for you

Bankruptcy scores affect borrowers in three main ways, Hoyes said. Like credit scores, they can influence both how much you’ll be able to borrow and at what rate. But they could also result in lenders deciding to sell your debt to so-called debt buyers.

 

Debt-buyers are companies – sometimes collection agencies – that buy delinquent debt at a deep discount and then try to collect some of that debt.

If a lender has, say, 100 borrowers who are late making debt repayments, it can use a bankruptcy score to decide which ones to offload to a debt-buyer. Selling the riskiest accounts for a fraction of the face-value of the credit balance means writing off some debt, but the loss for the lender might ultimately be less than if the borrowers filed for bankruptcy.

The thing is, though, that there’s no way to know what your bankruptcy score is. While consumers can review their credit reports and purchase their credit scores, bankruptcy scores are typically only available to lenders.

The key takeaway, though, is that if you’ve reached the point where you’re using new debt to pay old debt, your decent-looking credit score is probably meaningless.

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Forgiven debt lingers on credit report for months

Wesley Harkness was evicted from a prior apartment he rented at 90 Jameson. The previous landlord, MetCap Living, claims he did not give them proper notice after they evicted him.

Evicted tenant was charged 2 months rent for not giving notice. The gov’t ruled this illegal, but the debt remained on his credit report for almost 3 months.

Almost three months after Wesley Harkness’ former landlord agreed to forgive his debt, the money was still outstanding on his credit report, downgrading his credit rating and harming his ability to take out a loan or get a credit card.

Only once the Star asked Equifax why his debt hadn’t been erased was the problem finally resolved.

 

Harkness’ five-year saga stands as a warning to how difficult it can be to get anything removed from your credit report – even when the debt is imposed illegally and when the lender agrees to drop the claim.

Harkness was evicted from his Jamieson Ave. apartment in 2010 and shortly afterward received a letter from his landlord demanding two months rent because he did not give proper notice.

 

MetCap, one of Toronto’s biggest corporate landlords with more than 10,000 units in the city, claimed that tenants still had to give 60 days notice to vacate an apartment,even when they were being evicted. After the Star exposed the practice in June, housing minister Ted McMeekin publically stated that it was illegal and MetCap agreed to stop pursuing evicted tenants.

 

Craig McDonald, collections manager at MetCap’s in-house collections agency, Suite Collections, sent a fax to the credit bureau Equifax on June 25th, asking that Harkness’ debt be marked as “settled.” But Equifax claims to have never received the fax.

Harkness only found out that his debt was still considered “outstanding” when he went to the Equifax office near Finch Ave. and Yonge St. to get his credit report this month, more than 11 weeks after Equifax received the request to mark it as settled.

But one debt expert says even if the debt is considered settled, “that’s not good enough.”

“There’s a distinction here between a debt being settled and if a debt should never have been put there in the first place,” said Mark Silverthorn, a former collections lawyer who quit the industry to share his insider knowledge with the public.

When a debt has been settled, it remains on your credit report for seven years, Silverthorn said. But if a debt was imposed illegally, the lender should have the debt removed from your credit report entirely.

 

“If the Ontario government has said that this practice is illegal, then there are no settlements. (The debt) shouldn’t be there,” Silverthorn said.

When the Star contacted Equifax and MetCap to inquire into the lingering debt, a second fax was sent to entirely remove the debt.

 

Equifax Vice President John Russo said a letter was sent to Harkness confirming that it had been removed entirely from his credit report last week.

Source: thestar.com –  Staff Reporter, Published on Thu Oct 01 2015

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