Why is a Beacon Score Important?

You’ve decided to get a new home or refinance your existing mortgage, have approached your mortgage agent for the mortgage and he asks you about your credit score. The term “Beacon Score” comes up and right away you picture a light house sending caution light beams to ships in the night. You aren’t that far off. A “Beacon Score” is precisely that. It is an alert to lenders of the risks of lending you cash. It tells lenders, how much to charge you for your mortgage, in direct relation to that risk you pose to them in getting that money back.

No one knows for certain how the scores are arrived at, other than the inventors, Bill Fair and Earl Isaac. Back in 1956 with Bill Fair’s engineering and Earl Isaacs mathematician abilities, they started their company, the “Fair Isaac Corporation” (FICO). The concept of the company was that info used cleverly can be exploited to enhance business choices. In 1957 Conrad Hilton hired FICO to design and build the billing system for one of the first credit cards, Carte Blanche.

It was not until 1989 the first general purpose FICO scores appeared as the Beacon Score, at Equifax, and the Emprica Score, at Trans Union.   The most typical, Beacon scores, range in number from 300 to 900. The average Canadian has scores close to 700. Many people think that you must have a score in the 800s to get the finest rates. In actual fact, if your score is between 680 and 700 you’re likely going to get terribly competitive rates, partly due to the extremely competitive nature of the market today.   You can still qualify for a reasonable rate with scores of 600 and above if you have solid earnings and no delinquencies.

However you will need to have a minimum score of 600 for an insured mortgage or CMHC, (down payments of less than 20%). If your score is under 600 you slip in to the “B” client standing. Do not feel bad though, 1 in 5 Canadians are in that classification, but it is actually possible to improve your scores.  Credit history regualtions differ dependent on the sort of mortgage you require. Self-employed individuals (BFS “business for self) will require higher scores and more paperwork to qualify.

Investment properties or rental properties also require more solid scores and a higher down payment, than the average purchase or refinance.   Though it is not empirical info, the following is an estimation of how your scores relate to the mortgage rates you might expect;  Scores  Interest Rate  700+  Best Market Rate  680-699    0-.2% above  650-679  +.30  620-649  +.40%  600-619  +.50%  580-599  + 1.5%  540-579  +2.0%  500-539  +3.0%

There are differing factors that affect your score and are weighted in other ways.

These are ,

 Payment history

35% –  Recency and number of delinquent payments over 30 days. One delinquent payment can influence your score by 15-20 points.

Current Debts

30% – How much do you owe and to how many creditors.

 Age of Debts  

15% The older your accounts the better. You ought to have at least 3 accounts over 1 year.  

Kinds of Debt

 10% – Bank loans, credit cards, car financing, all affect your score differently

Number of Inquiries

10%- Several investigations in 12 months will have an adverse effect on your score.  Credit History Killers  There are definite credit score killers which should be avoided at any cost. The biggest ones are bankruptcies, judgements and collections. If you are currently handling these negative issues, it is better to get them all cleared up before you even think about making an application for a mortgage.   Bankruptcies don’t imply you will not ever qualify. If you have officially discharged the insolvency, 3 months previously and have a minimum 20% down payment, you may have an opportunity. You’ll need a provable deposit of 5 -10% down if your insolvency has been discharged 2 years ago. The longer the period between discharge and making an application for credit the better it is. Careful. Application of credit information over a period will almost erase the low points of insolvency.  How to enhance your Scores.  Avoid late payments    “years of great credit can fly out through the window if you are late on paying your debts. Keep your debts current.  Pay off all debt as swiftly as possible  – anything on official record. Student loans, automobiles, credit lines and so on.  Keep credit balances low  . Or better yet , pay off balances every month. Over 70% of your credit limit on your cards? This can have a detrimental effect on your score.  Get your balance to less than 30%. This tip alone has the biggest effect on you scores. Reduce your credit cards to one  . The oldest account in good standing. Close every other accounts and confirm their closure .If you don’t have a credit card apply for  a secured card, not a pre paid card. Pre-paid credit cards do nothing for credit ratings.  Avoid retail cards  .   They tempt debt spending and come with huge interest charges.  It is in your own interest to understand your credit report info before you consider applying for credit or a mortgage. This is to permit you to clear up any inaccuracies on you report. Over 70% of Canadians have mistakes on their credit reports. It’s simple to do and ought to be monitored at least twice yearly.  The Equifax site is easy to work with and will produce instant results. .Steve Clark is a mortgage agent with Northwood Mortgages.

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