Understanding your credit score

If you are in the market for a mortgage loan, you might have heard your mortgage broker refer to your Beacon Score and you may have wondered what they were talking about. If so, what they were referring to is your credit score which is a number that tells lenders how much of a lending risk you are. Your interest rate and fees are determined by your Beacon Score, so it is very important that you understand what it is and what things can raise and lower it.

Beacon Scores range from 300-900 with the average Canadian having one around the 720 range. Borrowers at the higher end of the scale get better rates, and those at the lower end get the less desirable rates due to their higher lending risk. It is interesting to note that only about 11% of Canadians have a Beacon Score above 800 and nearly no one has a perfect score of 900.

If your Beacon Score is below the magic number of 600, lenders will consider you a “B” client and will view you as someone with serious credit issues. If you find yourself in the lower portion, approximately 300-580, you will find that lenders place you in the sub-prime category for lending. This means you will get horrible interest rates and high fees on any loans you take out.

If you have bad credit, don’t despair. You can fix your credit over time by understanding how the Beacon Score formula works and making sure to improve those areas of your personal financial situation which will also increase your Beacon Score. Here are some areas for you to consider:

Payment History – 35% of your Beacon Score – This is based on your payment history over the last few years. With on-time payments it will rise, and with late payments of even 30 days, it will fall. Any bankruptcy, judgments, or collection accounts are in this area of your Beacon Score.

Current Debt Load – 30% of your Beacon Score - Your current debt load is how much money you currently own and how many different creditors you owe money to. It also takes into consideration how much debt you would have if you maxed out all of your available credit.

Age of Accounts – 15% of your Beacon Score – This is a rating based on how long your credit accounts have been open with longer being better. You want to ensure that you have at least 3 credit accounts which have been open for longer than one year for the best score.

Type of Credit – 10% of your Beacon Score – Bank loans, credit cards, and revolving debt accounts each impact your Beacon Score in a different way.

Credit Enquiries – 10% of your Beacon Score – Each time someone pulls your credit report your Beacon Score will temporarily drop. For this reason you do not want to make a ton of credit applications all at one time or prior to trying to obtain a mortgage.

There are overall three things which can kill your Beacon scores like no other. They are: bankruptcy or judgments, payments over 30 days late, and maxing out your credit cards. For the best Beacon Score possible your credit card balances should always be below 50% of your credit line, or 75% at the absolute maximum.

Another thing that can negatively affect your credit scores are erroneous entries on your credit report. Make sure you get a copy of your report on a regular basis and contest any entries which are incorrect.

By understanding how your Beacon Score is tabulated, you can help your score to improve prior to attempting to obtain a mortgage loan. By doing so, you can ensure that you get the best mortgage loan rate possible.