Your Credit Score Just Got An Upgrade

(July 15, 2016 )

Eva Neufeld, a Mortgage Broker with Mortgage Tailors has just shared some information with me that I think brings some light on how your credit score works.How It Impacts You....Equifax, one of the two credit reporting agencies in Canada, creates the formulas that calculate your credit score.  They create new formulas to adjust to changing consumer behaviour.  The Mortgage Broker industry previously used a formula called Beacon 4.0.  As of June 1st, we are now using Beacon 9.0.  This formula recognizes that a lot has changed in the last 20 years in how much credit consumers have and the popularrity of certain types of credit (eg: credit cards, lines of credit).  By looking at more recent consumer data and incorporating it into the formula, the resulting credit scores are a better predictor of future consumer defaults.The new Beacon 9.0 formula may help or hurt you depending on your credit report.  Here's what has changed with this new credit score calculation:Mortgages Are Now IncludedPreviosly, mortgages were not included on credit reports.  They were recently added, but payment did not factor into your score.  Now mortgages not only report, but are also included in your score calculation.  This is great if you have very little credit but pay your mortgage on time. This is not great if you have missed payments, It will hurt your score, and any  future mortgage holder will see it.Cell Phone Payments Report AND CountCell phone data used to report, but unless it went to collections, did not get factored into your score.  That has changed.  That payment data now counts and is considered to have predictive power on your future behaviour.  This is great for young people who are just starting out and may only have a cell phone and one credit card, BUT it is only a good thing if you pay on time.  If you have been spotty with your payments, it will now negatively impact your score.Line of Credits Treated Differently Than Credit CardsThe old formula treated all revolving credit the same, with high utilization (using an amount close to your limit) hurting your score.  The new formula recognizes that lines of credit are often at low interest rates and used to finance cars and homes and treats high usage on them differently than on credit cards.  High credit utilization is still treated as high risk behaviour.
Hard Credit Pulls Treated More ReasonablyFor mortgage and auto loan inquiries, any number of inquiries or credit pulls done within a 45 day period are now counted as 1 credit pull.  The formula now recognizes that people who are shopping for auto or home financing will likely have their credit pulled by more than one lender throughout the process and likely only purchase one auto or home.  Inquiries in general only impact your score for a 12 - month period.  This is great for New Canadians or someone who moves to a new city.  They often have a large number of inquiries when they first move as they get set up with rental, vehicles, utilities and cell phone.  A year later their scores will have recovered from all those frequent credit pulls.
Your Pattern of Behaviour MattersConsumers tend to have more trade lines than 20 years ago (ex: Cell phone, line of credit, credit cards and loans) so the formula was adjusted to look for patterns of payment on credit products.  This means if you have one trade line with a negative history but the rest are all good, that one trade line has less weight.  But, if you have spotty history on many trade lines, it carries more weight.
Tips to Keep Your Score Up!*  Do not miss a mortgage payment!  Always call your lender well before a payment date if you think you may be unable to  pay.    Not only will a late payment impact your credit score, it will also impact your ability to get a mortgage for the 7 years it appears on your credit bureau!* Set your cell phone payment up with auto-pay so you never miss a payment.  You can even have the auto- pay set up with your credit card for points!* Keep credit card balances below 50% of your limit (even lower if you are rebuilding credit).  Even if they are paid off in full each month, the balance on your statement is what gets reported to your credit report as your current balance.* If you are trying to improve your credit score and have high balances on a line of credit AND credit cards, bring down the credit cards balances FIRST.Eva works with her clients to help them understand their credit and take the steps needed to build it for mortgage qualification.  If you have questions about how the Beacon 9.0 impacts you specifically, do not hesitate to reach out to her at www.TailoredSolutions.com.