by Denis Doucet
What you’ll learn
- What is a credit bureau and more importantly, what do they do?
- How does a credit bureau determine a credit rating?
- Can I hurt my credit rating by shopping for a mortgage myself?
- What factors can affect my credit rating?
- Do all financial institutions use the same lending criteria to accept or decline a mortgage application?
We are constantly responding to numerous (and very relevant) questions around credit bureaus, reports, ratings and an individual’s overall credit worthiness. So here’s a quick 101.
First, credit bureau are responsible for researching and collecting individual credit information to determine a credit rating so creditors can make a decision on granting loans. A credit rating reflects the probability that a person will pay on time, render payment late (based on their payment history) or whether they are too indebted. It measures credit behavior on a scale of 1 to 9 – 1 meaning that you pay your bills within 30 days of the due date, and 9 that you have stopped paying your bills or have submitted a repayment proposal. A letter will also appear in front of the designated number: for example, I2, O2, R2. The letter stands for the type of the credit you are using. “I” means that you were given credit on an installment basis such as a car loan; “O”, means that you have open credit such as a line of credit; And finally “R” (the most common) that you have obtained revolving credit. This means that you make regular payments in varying amounts depending on the balance of your account. Credit cards are a good example of revolving credit.
Each credit rating is a risk likelihood indicator for lenders, and reflects an individual’s ability to manage payments and debt. In other words, it allows financial institutions to assess your ability to repay a loan on time and your overall financial health.
Behaviors that affect your credit rating
Here’s a quick summary of the factors that have a negative impact on your credit rating.
- Not paying your bills on time. Delays have a negative impact on the credit rating.
- Exceeding your credit limit. Ideally, you should not use more than 70% of your available credit (credit limit). On the other hand, leveraging 25% to 70% of your credit limit has a no real effect, and leveraging your credit at less than 25% has a positive effect on your rating (of course, that’s if you make your payments on time!).
- Other factors that can have a negative impact on your credit rating is gathering too much plastic. Specifically, if you have more than two credit cards or if you are self-employed and carry more than four credit cards (Visa, MasterCard, American Express, etc.). An alternative to avoid an impact is to choose credit cards from your favorite department stores. Remember, a credit rating measures your behavior, so the length of time you’ve borrowed money, or obtained credit is important as it demonstrates stability and credit worthiness. As such, try to keep your oldest credit cards active and in good standing. Also, do not increase your debt ratio too much, as it could harm your rating as well.
- Also, try not to have more than three credit inquiries per year. For example, every time you apply for credit (for example: a mortgage, insurance, a car loan, a cellular phone or even a cable television plan) a credit inquiry is often carried out.
Shopping for a mortgage on your own can also hurt your credit rating!
In light of the information on how credit bureaus gather information, it should be no surprise that trying to shop for a mortgage on your own from multiple lenders can impact your credit rating. That said, multiple inquiries around your credit worthiness in a short period of time (less than two weeks) will have virtually no impact on your credit rating provided the multiple inquiries for new credit are viewed as a single inquiry.
A mortgage broker has access to all the relevant lending criteria of each bank, and therefore can find the best mortgage that suits your individual needs without creating the problem of multiple one-off new credit inquiries. Moreover, a mortgage broker knows better than anyone else in the market the particular thresholds of each financial institution when it comes to lending. Remember, when it comes to lenders one size doesn’t fit all… all financial institutions are not the same. Being denied a mortgage by one lender does not necessarily mean your dream of homeownership cannot become a reality with another!
Talk to your broker today.
- A credit rating is simply an estimate of an individual’s ability to fulfill their financial commitments, based on their previous financial history.
- There are several ways to positively influence your credit rating, including paying your accounts on time (within 30 days) and limiting the number of inquiries to your credit bureau.
- Looking for new credit by shopping your own mortgage to multiple lenders could equate to a higher risk candidate, hurt your credit worthiness and overall rating.
- A mortgage broker not only avoids making multiple inquiries and the potential impact to your rating, but knows the individual lending criteria of each financial institution to help make your dream of homeownership a reality.