What is a credit score and how does it work?
The credit score is not a summary of the applicant’s credit as of today. It is a prediction of the applicant’s likelihood to default on a debt over the next two years. The lower the score, the more likely that client is to default in the future, and therefore, the applicant is considered a higher risk candidate for a mortgage.
What do the R#’s or I#’s mean on my credit report?
The repayment history of the trade lines are recorded as follows:
- R1 or I1: payments are being made on time and as agreed.
- R2 or I2: payment is 30 days in arrears.
- R3 or I3: payment is 60 days in arrears.
- R4 or I4: payment is 90 days in arrears.
- R5 or I5: the unpaid balance is about to be sent to a collection agency.
- R7 or I7: regular payments are being made under a consolidation order (OPD).
- I8: security for the loan has been repossessed, either voluntarily or involuntarily.
- R9 or I9: the outstanding debt has been sent to a collection agency.
Type of credit – 10%
Amounts Owed – 30%
Payment History – 35%
Length of Credit – 15%
New Credit Inquiries – 10%
How to Increase Your Credit Score?
If you have usable equity in your property, consolidate, pay off collections, close accounts all though your Hotline Mortgage broker… Once we have a mortgage approval for you, we can discuss your situation with lawyer to make sure accounts are dealt with property! (See our consolidation page)
Lower your debt-to-income ratio by paying off debts. This will increase your credit score and get you better rates and terms on loans.
- Access your credit report and score six months to a year ahead of seeking out a major loan. Most reports will indicate problem areas and suggest ways to improve.
- There are two major credit bureaus in Canada: Equifax and TransUnion. It’s only necessary to check one bureau since most creditors are registered with each.
- If your score is below 680, work hard to improve it. You will get better loan rates and terms the better your credit is.
- Pay bills on time. Even just a couple of days past due counts as late.
- Keep your debt-to-credit access ratio below 50 per cent; that is the total debt on consumer cards versus the total credit limit.
- Limit the number of so-called “hard inquiries” made about you to credit bureaus (inquiries can only be made with your permission).
- Your own “soft inquiry” into your credit has no impact on your rating and bureaus offer unlimited monitoring (for a flat fee).
- “Hard inquiries” typically count against your credit rating, with two exceptions: auto loans or mortgage inquiries made over a period of weeks are lumped into a single inquiry to allow consumers to shop for the best deal with no impact.
- If your score is good (reports will indicate how you compare with all other Canadians) take it to your lenders and ask for a better rate.
- On your highest interest rate debt, pay the minimum payment plus any additional amount you can afford. Keep paying the minimum on the others. Once the highest-interest debt is paid off, go to your next highest interest rate debt and apply the money you were paying toward the first debt toward the second debt, and so on until your debts are paid.
- Cancelling credit cards can negatively impact your credit score because it boosts your debt-to-credit access ratio and shortens your credit history. Use only the card with the lowest rate and, if necessary, lock the others in a drawer.
- Keep credit cards and accounts that have been open and established the longest open relative to newer accounts if you decided to close accounts.