Vol 2:4 The Inside Scoop on Credit

When Buying clients of mine were able to qualify for a mortgage but not for mortgage insurance, I was really taken aback and at a loss to make sense of how that could be.

I don’t like not understanding how things work because I don’t like being blindsided, so I asked a colleague of mine, mortgage broker Laurie Kotak, to help me. Specifically, I asked if she would be willing to “run my credit” and then use my report to teach me to see myself as a lender would see me.

I felt vaguely uneasy going into the meeting. I may have mentioned in previous posts that I am a Robin Hood sort, and my full disclosure is that this rebellious nature of mine has led me to make some defiantly imprudent financial decisions in the past - that vague unease was fear of what I might discover was still haunting me from those days.

So, I took a deep breath, reminded myself that ignorance is only bliss until you remember that it’s ignorance that keeps you stuck in bad places, and marched myself into the Castle Mortgage offices.

After all that, the actual reveal was anti-climactic – my credit score was fine, my financial acts of rebellion buried so deep in the past they were no longer a thing. I’m glad I braved it though, because what I learned was very engaging.

Trans Union and Equifax, the VHS and Beta of the credit world.

There are two credit bureaus and they are private businesses. Yes businesses! I was surprised at how much this surprised me, and realized that I have been operating on the naïve assumption that something as serious as a credit report would be compiled by a crown corporation which, on paper at least, has the good of the people as its bottom line. (No snickering please. It continues to surprise me when I remember that banks are businesses, too.)

Trans Union and Equifax are our two Canadian credit bureaus. They exist to perform essentially the same function, namely, to compile reports on us based on information supplied to them by our lenders and creditors, which they then provide to that same pool of lenders and creditors, who use it to determine if we should be allowed to have access to more credit. It’s a little like a giant snake swallowing its own tail.

The reason why one can’t vanquish the other - like VHS did to Beta - is that each “owns” a unique set of data that the other does not. Which means that your FICO score, as it called by Trans Union and your BEACON score, Equifax’s equivalent – are not the same number.

Neither your FICO nor your BEACON score tells your whole financial story . And here’s why – not all lenders and creditors report to both. Some do, but most report to only one or the other.

Why is that? Two things:

First, creditors have to pay to report on you. Many do not want to pay twice and are allowed to pick one bureau or the other and report only to it.

Secondly, each bureau holds onto data for different lengths of time. Your information on file at Equifax will experience a full turn-over once every 6-7 years whereas the memory of Trans Union extends to 13 or 14 years. It is not unusual, therefore, for your FICO score (Trans Union) to be lower than your BEACON score (Equifax) because it is affected by past “transgressions” longer.

(Speaking of the long arm of financial ghosts past, some banks, when considering whether or not to grant lend to you, take your combined FICO and BEACON scores and average it with another number that is based on your entire history with the bank.)

FICO or BEACON, the score is a number arrived at by bureau analysts who compile and assess the data that is reported to them by our creditors. These reports have two basic attributes related to “thickness” and “cleanliness” that are colored by “stories.”

Thick is Good. The thickness of your file refers to the overall length of time you have been reported on, in combination with how many different creditors file reports on you, or in other words, how many “tradelines” you have. The longer your history of being reported on, the more accurate a picture of your credit habits can be arrived at. So, generally speaking, thick is good.

Some of the most common “tradelines” are mortgages, major credit cards, cell phone bills, store credit cards and car loans. Diversity of tradelines is also looked favorably upon.

Clean is even better. The cleanliness of your file is about the presence or absence of red flags.

Late payments are the most common red flag and count for 35% of your score. Both bureaus distinguish between a little-bit-late and more-than-30-days-late and both reserve a special hell for anything that goes unpaid for 90 days or more.

On the flip side, however – and possibly because creditors report on you only once a month at a preset time – there is a grace period when it comes to reporting payments as late. I don’t know if this is intentional, but I do know that it exists because there isn’t a mark on my record despite the fact that I am often a couple of days late in paying my bills online.

The other red flags that mark a report as “complicated” are references to collections agencies, consumer plans (bankruptcy light), bankruptcies and repossessions

All hail the mighty mortgage! The grand pubah of red flags is a missed mortgage payment.

Which is interesting because mortgage lenders are the new kid on the block – they only started reporting on us in the last 2-3 years and yet their reports are weighted the most heavily.

So, if you find yourself having to decide which bill to pay in full and on time, it's a no-brainer - always pay the mortgage first. Alate or missed mortgage payment will hurt your credit score more than any other missed payment.

Why you might not want to cancel credit cards or lines of credit. Alarm bells start to ring if more than 35% of your total available credit is in use – the more credit you have access to that you don’t use, the better.

How you are weighed and measured. Bureau analysts are not the only ones who “read” your file and piece together a financial picture of you the way an FBI profiler comes up with a description of a perpetrator based on the evidence at the scene of the crime. Anyone who lends money or extends credit profiles you in a way unique to their field, weighing and measuring the data in your file according to their particular agenda.

Of these, mortgage brokers are tasked with being the most stringent, and car dealerships, apparently, the least (Hinting that the long arm of the fossil fuel lobby extends deep into the world of credit. I’m a little shocked, actually – this is the last place I expected to run into those guys. Eye-opening to say the least!)

My faith in humankind is rekindled by the fact that your story matters. At the heart of the task of profiling is the ability to piece together the story that emerges from the data. This story can play a definitive role in determining whether we get the credit we are asking for or not. In fact, the redemptive power of a “good” story to mitigate red flags is one of the most refreshing things I discovered in this foray into the world of credit - my inner Robin Hood loves that lenders are open to overlooking red flags if the circumstances surrounding them makes sense.

So, what constitutes a “good” story, the kind of story a lender might be opening to hearing?

Two powerful examples are “Someone close to me died and in my grief I didn’t pay attention to paying my bills…” and “I experienced a sudden illness that put me in the hospital and there was no one to look after paying my bills for me.”

The Canadian Mortgage and Housing Corporation requires your credit score to be above 600 in order to insure your high-ratio mortgage. But what do they do if your BEACON score is above 600 but your FICO score is below? Which number is the number that leads? Depends on the story.

Will too many hits on my credit report lower my score? Again, it depends on the story. If the hits all come in from car dealerships in a tight timeframe, a “good” story is inferred – you’re doing your due diligence in shopping around for a good deal on a new car.

If, however, the pings are all coming in from credit cards, you might be in trouble and sliding debt around from card to card in your own version of an interest relief program. That’s a not-so-good story, that could, potentially, result in a lowered credit score.

Your story is one of two main reasons you should monitor your own credit file on an annual basis. If you can provide a “good story” context for any data in your report that might be viewed in a negative light, you should definitely share that story with the credit bureau.

A second reason to periodically check in is to verify that all of the information attached to your identity is accurate. Apparently, mistakes get made quite often.

Mistakes in my report? S.I.N to the Rescue! Simple really. Both credit bureaus make it easy for errors to occur by having no standard way to read birth dates. 1/4/65, for example, could be either January 4th or April 1, 1965.

This is where S.I.N. numbers come to the rescue. Because it's a unique identifier, A S.I.N. number would clear this up easily, except that neither Equifax nor Trans Union require a S.I.N. number in order to provide the report.

(Is it just me that thinks this is a little lackadaisical?)

I used to be leery about giving my SIN number out, but I’m going to smarten up in that deprtament.

The only other time it is a recommended that you check in with the credit bureau is if your ID and/or banking cards have been stolen, leaving you vulnerable to having your identity “stolen.”

Consumer Credit Monitoring Services After the meeting, I contacted both Credit Karma and Equifax to get my credit scores and compare them to the number my mortgage broker had come up with. All of the mortgage brokers I talked to said that they regarded these reports as “credit light”, so I was right ready to mount my high horse of indignation, expecting my “credit light” numbers to be higher, giving me an inflated sense of what my credit report could do for me.

Both, however, were lower - no soldier-of-justice ride for me.

Credit Karma is a “free” service that gets its information from Trans Union, and by “free” I mean that it costs no money. However, they must share your information because after I signed up with them (and before I signed up with Equifax) I was on the receiving end of an email from someone who wanted to help me improve my score.

Equifax, on the other hand, provides a credit monitoring service for a fee - $4.99 for the first month, $19.99 for every month after that. I signed up for the trial month but see no reason to keep the plan when all I really need is an annual check-up with the occasional spot check in the event of thievery.

Late Breaking News! FICO has killed BEACON! I’m not kidding! Just as I was about to publish this, Laurie called to say that Castle Mortgage had been informed that Trans Union’s FICO had somehow become the king of the hill.

The actual announcement reads like this:

The household name "Beacon” is being replaced with "FICO.” As you know this is the score used by lenders to assess a mortgage applicants credit worthiness.

Very little has changed, except for the name. The scoring model is the same for the "new” FICO Score 8 based on Equifax data as it was for the Beacon 9.0 score.

The change in name is as a result of a partnership extension between Equifax Canada and FICO that has been in existence for almost 30 years. Credit scores which have been previously distributed under the brand name BEACON®, will now be delivered under the FICO brand name as FICO® Scores based on Equifax Data.

So, they are still different numbers, but now they have the same name?

Hmm...I don't get it.

If you have any questions or a response to this article that you would like to share, I can be reached at wendy@wendyrealtor.ca

I love what I do. If you or anyone you know is looking for help with any stage in the buying or selling process, I would love to hear from you.

Laurie Kotak, Mortgage Specialist at Castle Mortgage, can be reached at lkotak@castleteam.ca.