Canadian Credit Information

Understanding credit, credit cards, credit scores, beacon/FICO scores, etc. can be very confusing, and its no wonder, because it is. 

The first thing to remember is that you're not alone in not understanding credit and how it works.  There are misconceptions everywhere. 

Many bank and credit bureau employees don't understand the credit system themselves. 

This is not meant to be a conclusive guide to credit, only an eye opener for credit in Canada. The sooner you take control of your credit, and understand how it affects you, the sooner you can get approved for the mortgage on that dream house or that new car loan. 

The credit section is divided into categories:

Information on credit is available if you look for it.  The key is to check your credit report once per year.  You can order a report from both credit bureaus for free by mail or for about $25 on the internet.

The two Credit Bureaus in Canada are:   Equifax     TransUnion

The debts shown on this report are combined with your income and used to calculate your debt ratio and how much of a mortgage payment you can afford. There can be mistakes and probably are.  You can get mistakes fixed but you have to know they are there first.

The main reasons to check your report are:

If you have found mistakes get in touch with the financial institution and confirm the details, get the paperwork to prove the error and send it to the credit bureaus. If you pay off collections, or late payments, keep your receipts.

Nobody has made the error to punish you or try to deny you the loan.  Remember that lenders and banks want to lend you money.  Errors are simply from data entry mistakes or from neglect. 

The credit bureau does not care if you have good credit or bad and the person answering the phone does not have it in for you!  Don't get mad, don't yell, and don't try to blame anyone, it won't help.  You can fix the errors but it will take time.  That is why getting your own report every year will keep you in control.

If you can prove that there is a mistake, by law it must be corrected.  It will take some time but contact the credit bureaus directly and send them the information. 

If somebody is offering a 'quick fix' that sounds too good to be true, it is!

 

Now What is Credit?

Lenders are in business to make (not lose) money. Consequently when a bank lends money it wants to ensure that it will get paid back. To maximize the possibility of being paid back, the bank wants to make sure that there is sufficient assurance that a person can and will pay back a loan.

The lender must consider the 5 "C's" of Credit each time it makes a loan.

Character

Character is the impression a borrower makes on a potential lender. Based on certain criteria, the lender will form an opinion as to whether or not a borrower is considered trustworthy to repay the loan, which may include:

The more stability demonstrated in either of these factors will greatly enhance your situation.

Collateral

Collateral is any additional security that can be provided. When dealing with Mortgage Loans, the collateral would be the property and house, or for a car loan, the car would be the collateral or security.

Then, in the event that the borrower cannot repay the debt, the bank or lender can take possession of the asset for “non payment“. This gives the lender ownership to the item or asset put up as security, and allows them to sell it to recover the money owed on the loan. With mortgages this is known as “Power of Sale”.

Capital

Capital is the money a borrower personally has invested in the transaction. When dealing with mortgages, this is referred to as the “Down payment”. The more a borrower is willing to invest as a down payment, the more likely they will do all they can to honor the payment obligations.

 Capital is also reflected by the ability and willingness to save money towards the transaction. The more initial equity provided by the buyer, the more they have to lose in the event of “troubled times”. Also, a potential borrower with a higher net worth, has resources to call upon in the event of a financial set-back.

Credit

Credit is the evaluation of a borrowers credit habits. The information obtained in a "credit bureau” indicates a borrowers repayment habits and credit availability. All major credit cards, auto loans, leases etc. are reported to the credit bureau (Equifax and Trans Union are the 2 Credit Bureaus in Canada).

A lender will analyze the credit bureau to determine a borrowers ability to maintain credit obligations and determine how one utilizes their credit. Some individuals make the mistake of not making their minimum monthly payments on loans and credit cards especially small payments that are deemed “insignificant“.

But, in truth, these missed payments appear on their credit bureau, and can cause major headaches down the road.

Capacity

Capacity is the ability to repay debt extended. Lenders will want to know how a borrower can repay the loan, by assessing a calculation of a debt to income ratio, as it relates to the loan that you are applying for.

This as known as a “Debt Service Ratio”. Many lending institutions have different thresholds to assess this calculation, with some allowing as high as 50%. If you fall within the lenders guidelines, it is determined that repaying the loan is highly likely.

Prospective lenders will also want to know about any other sources of income you may have to repay the loan, in the event your steady income stream is interrupted.

So please, next time you are turned down by your bank, or considering applying for a large purchase, review these facts and check your current situation against them.

This is another benefit of consulting a mortgage professional, as they are well versed in the systems of credit, and most times are available to dispense advise to help “repair” damaged credit through the use of a Secured Credit Card and to increase the odds of an “approval” the next time you need to borrow money.