Common Credit Myths

Your credit score in Canada is based upon a three-digit number ranging from 300-900 that tells future lenders how risky it is to lend you money based on your history of making debt payments. Lenders will look for a minimum 2-year history on the credit report, with 2 active trade lines in order to gauge your credit repayment history.

Myth 1: Paying cash is better than credit.

Truth: You need to use credit in order to build credit, and demonstrate your ability to make payments. Using credit at least once every 30 days and making payments on time will keep you in good standing.

If you can find a happy medium between the two, will put you in a stronger financial position for future borrowing purposes. Use credit for emergencies, or occasional small purchases to keep the rating going, and then pay the balance in full when the statement arrives; win-win!

In some circumstances, alternative forms of credit can be used to qualify if there is little history on the credit report: a lease or rent letter from your landlord, a bank reference letter confirming no NSF’s in your banking history, a letter from your insurance company of good repayment history on your car or tenant’s policy, or a 1-year billing history from a local utility bill are a few examples we have used in the past.

Myth 2: Only use major credit cards to build a good score.

Truth: If you’re unable to obtain a major credit card, there are other ways to build your credit history. Making regular payments on instalment loans such as a car lease can positively affect your score, as do department-store cards and secure credit cards, which require a cash deposit in the amount of the credit limit. Look at starting with one of these for a while and then try applying for a major credit cards after 6 months or so.

The frequency or how often you seek credit can also factor into your score. It is a process, and if you force it and try to apply at too many places at once can backfire with a low credit score as a result. Lenders will view you as a ‘credit shopper’, or worse – you could be approved for all of the accounts you applied for and look like you are at risk of being over-indebted!

Myth 3: I have made some late payments or missed payments on some of my bills, I will never get back on track.

Truth: It takes time, but your credit will become positive as you build consistency with timely payments. How much time it will take depends on a number of factors, including how long the ‘late payment’ has been on your record and how long you’ve had the debt.

One tip might be to set up automatic payment options with the account. Some companies have this option that you can time to match paydays, or debit the bill from your bank account or credit card automatically – set it and forget it! Now, just don’t forget to make sure the funds are available for those bills to come out.

Also be prepared to have a good answer for the question of ‘why did it get behind’ on missed payments!

Myth 4: I will not qualify for a mortgage if I have a low credit score.

Truth: Lenders look at your entire financial picture, including your assets, available cash flow, and debt-to-income ratio. They’ll also review your housing expense-to-income ratio, which is a comparison of your expected monthly mortgage payment with your gross monthly income.

A very good credit score of 680 will afford you most lenders and products, however, some lenders have lent to clients with lower scores. Non-prime lenders will be willing to take a risk on the right client who meets all the other criteria if credit is a little weaker.

When any lender is considering to lend to a prospective borrower, the 5 C’s of credit are still considered, and this is part of the thought process when determining your application:

  1. Capacity. Review the borrower’s ability to repay.
  • Can they handle the debt? Will the new debt result in payment shock in relation to their current situation?
  1. Capital. A measure of a borrower’s net worth and demonstrates ability to manage their finances while repaying debts.
  • Do they have sufficient financial resources? Do they have their own down payment? Have they shown a history of savings or other asset-building?
  1. Collateral. The pledge of assets taken as security against borrowed monies.
  • Can their assets back their debts? Is the property value supported in relation to down payment or would a co-signor provide additional comfort?
  1. Credit. An analysis of the credit history will give an indication of the ability and desire of the borrow to repay debts.
  • Do they pay bills on time? Is there sufficient repayment history to support this amount of debt?
  1. Character. Borrower’s stability in career, residence, and willingness to provide complete and accurate information.
  • How long have they lived at their present address and worked at current job? Do any of the other 5 C’s contain inconsistencies or cause to question the ability to lend? Would you lend them your own money?

Final note: the credit score you may have obtained from online services are often times different than the scores that we obtain for credit purposes. Don’t always rely on that to be 100% accurate. For more information about your credit score, and how it may affect your mortgage application, please contact me today.

 

Mark Brennan
Mortgage Broker

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

The Trouble with Debit Cards

We live in a society of instant gratification. Unlike our parents or grandparents – who saved up for larger purchases – we are often tempted to splurge on bigger-ticket items simply because we have a debit card in hand when we head out “window shopping”.

And aside from overspending thanks to the advent of debit cards, consumers are also more likely to dip into overdraft, which ends up costing more thanks to fees and interest that banks charge whenever you spend more than you have in your account.

Basically, a debit card works like a cheque. The only difference is that every time you use it, you’re immediately taking money out of your account. That’s why when you overdraw it’s like bouncing a cheque – only worse because, unlike cheques, you probably don’t keep a record of every debit card purchase you make.

You may even make a bunch of small purchases before you realize you’ve spent more than you have. So before you pay for that coffee or lunch purchase with your debit card, make sure you have enough money in your account to cover it.

Revert to using cash for daily expenses

Cash controls spending, plain and simple. Using cash to pay for everyday purchases such as coffee, transit, lunch and magazines alerts you to the idea that you’re actually spending real money. You just don’t get the same cautionary sense when you haul out plastic, be it a debit or credit card.

There’s a distinct cognitive event that happens when you handle money – it’s called awareness. Over the counter goes the five dollar bill and back comes a loonie, a dime, two nickels and four pennies.

Did you just add up the change above to determine how much money you have left? Did you think about what that purchase could have been? You see, you are much more conscious of this imaginary purchase than if you had paid with plastic.

Now, add in the awareness of the bills left in your wallet and you become attuned to your temporary wealth, or lack thereof. At the end of the day, what encourages or cautions many consumers about spending is knowing where you stand from a financial perspective. That’s why cash can help control spending. Using cash to pay for everyday purchases alerts you to the idea that you’re actually spending real money.

By allotting yourself a weekly cash allowance for entertainment and everyday expenses – such as that daily morning coffee or weekly movie – you are building a budget around what you can spend on these purchases. And once the money in your wallet has been spent, you have to ensure you fight the urge to withdraw more cash or resort back to using your debit card.

Be realistic about what you typically spend on these items in a week. If you routinely eat out for lunch or stop at Tim Hortons for coffee, count that as well. If you think you’re spending too much on these items, you can then decide to find a less expensive alternative, such as brown-bagging your lunch or making your own coffee.

Let’s say, for instance, that you start the week off with $50 in your wallet and you began to spend it on your purchases. You will see $50 turn into $40, $40 turn into $25, $25 turn into $15 and so on. Every time you look into your wallet, you will see what’s left over from your original $50 and be aware of how quickly your money is being spent. This alone can make you think twice before making a purchase.

If you have any questions concerning budgeting, let me know!

 

Mark Brennan
Mortgage Broker

Image courtesy of Digitalart at FreeDigitalPhotos.net

Advice for credit challenged clients

In today’s economic climate of tighter credit requirements and increased unemployment rates taking their toll on some Canadians, there’s no doubt that many people may not fit into the traditional banks’ financing boxes as easily as they may have just a year ago.

Your best solution is to consult your mortgage professional to determine whether your situation can be quickly repaired or if you face a longer road to credit recovery. Either way, there are solutions to every problem.

Mortgage professionals who are experts in the credit repair niche can help credit challenged clients improve their situations via a number of routes. And if the situation is beyond the expertise of a mortgage professional, they can help you get in touch with other professionals, including credit counsellors and bankruptcy trustees.

If you have some equity built up in your home and still have a manageable credit score, for instance, you can often refinance your mortgage and use that money to pay off high-interest credit card debt. By clearing up this debt, you are freeing up more cash flow each month.

In the current lending environment, with interest rates at an all-time low, now is an ideal time for you to refinance your mortgage and possibly save thousands of dollars per year, enabling you to pay more money per month towards the principal on your mortgage as opposed to the interest – which, in turn, can help build equity quicker.

Following are five steps you can use to help attain a speedy credit score boost:

1) Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so you’re only using 30% of your limits. Revolving credit like credit cards seems to have a more significant impact on credit scores than car loans, lines of credit, and so on.

2) Limit the use of credit cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. If there is a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you may have paid the balance off the next month.

3) Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders may view your file. Ensure everything’s up to date as old bills that have been paid can come back to haunt you.

Some financial institutions don’t even report your maximum limits. As such, the credit bureau is left to only use the balance that’s on hand. The problem is, if you consistently charge the same amount each month – say $1,000 to $1,500 – it may appear to the credit-scoring agencies that you’re regularly maxing out your cards.

The best bet is to pay your balances down or off before your statement periods close.

4) Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. As such, the cards can lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the cards for a long time. You should use these cards periodically and then pay them off.

5) Don’t let mistakes build up. You should always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.

If, however, you have repeatedly missed payments on your credit cards, you may not be in a situation where refinancing or quickly boosting your credit score will be possible. Depending on the severity of your situation – and the reasons behind the delinquencies, including job loss, divorce, illness, and so on – your Mortgage Broker can help you address the concerns through a variety of means and even refer you to other professionals to help get your credit situation in check.

 

Mark Brennan
Mortgage Broker

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Facts About the Social Insurance Number

Your Social Insurance Number, or SIN, was first started in 1964 to be used as an account number for pension and employment insurance programs. It wasn’t until 1967 that it was used for tax reporting purposes with Canada Revenue Agency (CRA).

On March 31, 2014, Service Canada began issuing SIN’s in a paper format (confirmation of SIN letter). Production of the plastic SIN cards has stopped. Your SIN is NOT a piece of identification. It can be asked for but should not be a requirement to provide the number. If you are not satisfied with the explanation or purpose it is being requested for, you can refuse to provide it.

Equifax Canada indicates the following about the use of your SIN#: If you provide your Social Insurance Number, we will cross-reference it with our records to ensure that we disclose the correct information to and about you. Knowing your SIN# helps us avoid delays and confusion in case another individual’s identifying information (such as name and address) is similar to your own.

A credit report may be sometimes be able to be obtained without your SIN#, however the information may not be complete, current, or items could be missing on your report as compared to using the SIN#. An example would be if a father and son both had the same name and lived at the same address. Regardless of having separate dates of birth, occasionally the files of these two people can become cross-linked – a term that means that some of the credit details of one is included on the report of the other; a father’s credit card may appear on the son’s report or vice versa.

Incidents like this one above can add delays to obtaining credit approval, especially if the debts reporting throw your debt ratios out of whack and possible late payments reporting now affect your credit score improperly! You can find out how to obtain your own personal credit report here and be sure to verify your information is accurate.

You can have a new SIN number issued if you can prove you have been a victim of fraud. Keep in mind that you will need to notify every creditor, financial agency, employers (past and present for benefits and pension), etc. to inform them of this change.
sin by province

There is also a built-in algorithm to the SIN# that aids in preventing fraudulent creation of numbers for nefarious purposes.

TO VALIDATE A SIN, PROCEED AS FOLLOWS:
  • WRITE the SIN on a sheet of paper, e.g. 044-096-857;
  • INPUT a check mark over the 2nd, 4th, 6th and 8th digits, as indicated above;
  • WRITE the SIN again, but this time doubling the digits that were check-marked, i.e. 084-0912-8107.
WHERE THE DOUBLING OF A SINGLE DIGIT RESULTS IN A TWO-DIGIT NUMBER, THEN:
  • ADD these two digits to form a single digit,
  • AND add all of these numbers, i.e. 0+8+4+0+9+1+2+8+1+0+7 = 40.
IF THE SIN IS VALID, THE RESULTING TOTAL WILL BE A MULTIPLE OF TEN.

OR, you can use this website that checks the number for you: http://www.metca.com/payroll/sinbin.html

The information compiled in this article was completed as a courtesy and the various noted sources are shown with links to their respective sites for additional information. I do not warrant the accuracy of this information beyond the publishing date of this article, and in the event the links are no longer accurate, updated, or misdirected.

 

Mark Brennan
Mortgage Broker

SIN card image courtesy of wikipedia.com