Indeed for many, savings of thousands of dollars per year could be had easily by reducing interest rates on loan and mortgage payments. For others, the dream of attaining an affordable mortgage and a home becomes attainable. In knowing how the credit scoring system works and how your credit score can be raised, the money saved on interest can be used to pay off your mortgage faster, or in any other way besides making your lender richer.
The credit scoring system:
Your Equifax Beacon Score informs lenders about how much of a lending risk you are, and ranges between 500-850. The following chart tells us how these scores generally affect mortgage rates:
|
Beacon Score |
Interest Rate |
|
719-850 |
The best rate |
|
700-719 |
+0.20% |
|
675-699 |
+0.65% |
|
620-674 |
+1.70% |
|
560-619 |
+2.50% |
|
500-559 |
+3.50% |
So given that the average Canadian credit score is about 690, most people have some room left to save thousands of dollars on interest payments.
How to raise your score then? The following criteria lay out how the Beacon Score is calculated. For each criteria, we look at how to increase your score. Remember, the following speaks of a perfect situation. Although perhaps not immediately attainable for many, the closer you can get to these ideal situations, the better your credit score will be.
1. Payment History – 35% of Score Calculation: Factors in the number of debt payments over 30 days late, collections and any other matters resulting from late payments. A single payment over 30 days late removes 20 credit points instantly. Credit will begin to repair after only two months of on time payments, so use this rather short repair period for motivation to pay consistently.
2. Current Debts - 30% of Calculation: Looks at how much debt you have relative to your credit and debt limits. For example, a total credit limit of $10,000 which has $8,000 outstanding totals 80% of credit used. Any number above 30% of credit used will begin to diminish a credit score. If 30% can not be attained, a good goal is 50%. Attempting to increase your credit or a debt consolidation loan are possible ways to help lower your percentage of outstanding credit limit. Your variety of debt will also affect your credit. Try to keep two credit cards and hold one consolidated bank loan to maximize your score in this area.
3. Account Age – 15% of Calculation: How long you have held a bank account with your financial institution affects your score slightly. The optimal number of accounts held is three and the longer they have been open the better.
4. Types of Credit – 10% of Calculation: Similar to two. Focuses on the mix of debt you have (credit cards, bank loans, lines of credit). The optimal mix is one store credit card (ex. the bay, Best Buy…), one or maximum two bank credit cards, and one installment bank loan. Again, this is an optimal position and any reasonably similar situation will not lower your credit much.
5. Number of Credit Inquiries – 10% of Calculation: Over the past 12 months, how many times has your credit score been looked at? Having too many credit or loan applications could deem you a ‘credit seeker’, so try to keep the number less than 5 per year.
Finally, have your credit bureau checked for mistakes. I have seen many individuals with mistakes on their credit score that resulted in higher interest payments. Check with Equifax regularly to ensure your credit score is accurate.
Reasonable variation from this perfect situation will still give you a great credit score and obviously, the closer to it, the better it will be. Contact a credit professional or myself for further information on increasing your credit rating and save thousands of dollars on interest as a result.
Brent Richardson
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