With brutal inflation and interest rates, more Canadians are racking up debt. And when you use too much of your available credit, your credit score can do a swan dive.
That, in turn, can affect people’s chances of getting the best mortgage rate – or any mortgage at all – from cream-of-the-crop lenders.
That’s why, if you’re raring to nestle into a new home or rejigger your mortgage, it pays to peek at your credit score beforehand. That way you can take action if needed to get the score where it needs to be. And many are doing just that.
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“Between financial stress brought on by high interest rates and growing numbers of new Canadians, we’re seeing record numbers of Canadians interested in their credit scores,” says Andrew Graham, co-founder & CEO of free credit-score provider Borrowell. The company’s seen a 20-per-cent year-over-year jump in people seeking out their scores.
Free credit-score providers like Borrowell are great for keeping general tabs on your credit when applying for credit cards or small loans. Problem is, the score that mortgage lenders use is much more challenging to find.
The mortgage-score standard
Ninety per cent of top Canadian lenders and credit unions use FICO Scores. The most popular credit-score standard in the mortgage world is the FICO 8 model. But Canada’s two big bureaus, Equifax and TransUnion, typically only deliver FICO 8 scores for lender use, according to FICO spokesperson Jessica Butalla.
Very few companies are authorized to release these scores to consumers. A mortgage broker might share your credit score if you ask, but “as a general rule” mortgage brokers and lenders “are prohibited from sharing reports and scores with any third party,” says the country’s leading bureau, Equifax.
And according to FICO, the only company that distributes the FICO 8 for free is GoPeer, a peer-to-peer consumer lending company. Fellow online lender Parachute provides the FICO 10 for free, but not as many mortgage lenders use that score.
At GoPeer, you have to apply for a loan prequalification to get your FICO 8, but there’s no obligation to get the loan. You don’t need to be approved, there’s no hard hit to your credit score, and it’s free.
Once you apply, GoPeer provides your FICO 8 and a breakdown of what’s affecting your score. Only if you decide to proceed with their loan do they do a “hard check,” which typically reduces your score somewhat.
If you want to update your FICO 8 score every so often, you have to redo the application with GoPeer. That’s more hassle than free credit-score sources like Borrowell, Credit Karma and many banks, which update your score at least monthly.
Why this all matters
The problem with free credit-score sites is that none offer the most common score used in mortgage lending. The scores they offer correlate to the FICO 8, but there can often be 50-plus point differences. That can mislead mortgage shoppers in two ways.
For one, most lenders have credit-score minimums to get their best rates, like 680 or 720, for example. Some lenders even demand an 800 minimum for their “superprime” rates.
If your score from a free credit-score provider shows up as 720, but your FICO 8 score is really 670, you may not know to take action and rectify the problem that’s hurting your score.
Alternatively, you may not qualify for a mortgage at all. For example, if you’re getting an insured mortgage, the minimum allowable credit score is 600, and most lenders want to see 680 or higher.
A trick for renters to build credit, too
If you’re a renter hoping to scoop up a property while prices are down, you’ll want to be sure your credit is strong.
If your score needs a little pick-me-up, check out Borrowell. Last year, it launched Rent Advantage, a way for renters to build credit by reporting their on-time rent payments to Equifax Canada.
You simply link your bank account so they can see the rent payment, and pay $8 a month. Or you can upload a photo of the bank-account statement showing the transaction. The best part is that, unlike competing offerings, Borrowell’s Rent Advantage requires no co-operation from your landlord.
The company recently did a study of consumers with sub-600 credit scores and found that “Members who make on-time payments and don’t have other delinquencies see an average credit-score increase of 32 points within seven months,” according to Mr. Graham. Although, the impact may be less for folks with starting scores of more than 600.
There has never been so much pressure on young adults to have a good credit score
Depending on your starting score, a 30-plus-point bump could mean the difference between getting approved for prime mortgage rates instead of non-prime rates. If your score is right on the border, this borrowing cost difference could be more than one percentage point in some cases. That’s roughly $3,900 extra interest on a new $400,000 mortgage.
The takeaway is simply this. If you’re a mortgage shopper and have doubts about your creditworthiness, find a way to get your FICO 8 score. Then give yourself six weeks to six months (minimum) to fix any credit problems and improve your score.
Robert McLister is an interest-rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
Robert McLister