Published: October 24, 2018 • Last updated: April 10, 2021 at 8:59 am
Saturday, April 11, 2020 COVID-19 Update
One month into the COVID-19 crisis, many Canadians have already been adversely affected in ways that could affect them for many years to come.
Sudden job loss or reduction of income has forced people to prioritize their spending – not enough money to pay the mortgage or rent payment, property taxes and strata fees, utilities and other life necessities. Credit cards, loans, and other consumer debt all expect to be paid each month too.
Missed payments could show up on your credit report, and stay there for six years!
It is always best to communicate with any party you owe money to if you have any designs on missing or skipping a payment. Rather than wallow in anxiety, get in front of these problems and ask key creditors for their consent or permission to defer payments.
If you simply stop paying, eventually some of that is going to end up reporting negatively in your personal credit history. Late payments can really drag down your score.
Our strong advice is to keep a permanent record of all late and deferred decisions you make. Record the date the payment was due and the date you contacted the creditor. Who you spoke to, what was discussed and agreed. And take note of exactly when you made subsequent payments. Save any email or written correspondence.
This matters because there is a very good chance that where there is mutual agreement about deferring a payment, the credit bureaus will not be in a rush to report such payments as late or delinquent.
If you check your credit at a later date and find a smattering of new late payments being reported, having a written record to refer to gives you a chance to request the credit bureaus to remove such entries.
- COVID-19’s Impact On Canadians Well Being
- Nine Strategies to Manage Credit Hygiene and Stay Financial Healthy
How Can I Increase My Credit Score Quickly?
Sometimes you need to increase your credit score in a hurry. For example, maybe you are buying a house and your mortgage broker has told you your score is too low. Here are four quick tips that will give practically everyone’s score a boost.
- Access all your credit card and line of credit statements and make note of each statement date and due date. Get in the habit of paying off the balance on all revolving facilities 3 to 5 business days BEFORE the statement date. In other words, do not wait for your monthly statement to make a payment.
- Keep making frequent payments to any cards that you are actively using.
- If you cannot cover all outstanding balances, spread around the utilization of your credit, maintaining average utilization as low as possible. Do not have, for example, one credit card with a balance of $9,900 and a limit of $10,000 while concurrently having three other credit cards with zero balances.
- If you have not used some credit facilities in a few months or even years, make a small transaction on the card immediately, wait a few days, then pay it in full.
- If you see there are reporting errors in your credit report, write to Equifax and state your case and provide supporting documentation. They will investigate and amend errors.
- Do not use payday loans, no matter how enticing they seem. I never saw anything good come to someone who did. And if a mortgage lender sees them on your credit report, she will downgrade her opinion of you.
Here is an article published at Credit Cards Canada’s website on the topic of prepping your credit for a mortgage application. These tips can easily make the difference between qualifying or not when it’s close. Of course, it goes without saying you do not under any circumstances let anyone access your credit history in the meantime. An inquiry may lower your score.
CASE STUDY: Rebuilt Credit Quickly & Qualified for Mortgage
About a year ago a reader in Alberta sent me a message lamenting his poor credit score and asking what he and his fiancée would have to do to qualify for a mortgage. Their desire was to own a home within a year. He wrote as follows:
“Hello Ross, I need your help on credit building, I think everyone’s situation is unique, in my case I have paid all collections but one with $2,000 left, built up some $8,000 in savings, have 16 up to date payments with my Capital One MasterCard, and my Equifax score is 609. But TransUnion (TUC) just went down from 576 to 549. I only have one credit card I am using to build credit, is that enough? We are planning on buying a house early next year.”
I wrote back with some advice…
Thank you for writing to me. Here is some feedback to your situation:
1) Check to make sure the important stuff on TUC is the same as on Equifax – i.e. only one o/s collection, the status of Capital One accurate, your personal info etc. If it is, don’t worry about the scores being different – scores are often different between both bureaus and also between the one you get and the one I access when I pull your credit (with your consent only) for a mortgage application.
2) The outstanding $2,000 collection is dragging your score down and hurting your prospects – I would settle that sooner, rather than later. You can pay it in full or you can try to negotiate if you feel you can give the creditor good reason to do so.
3) You don’t say the limit of your C1 card – if it is less than $2,500, it’s probably not enough unless the rest of your application is very strong (employment, income etc.) I would recommend you arrange a second card – a Canadian Tire MasterCard would help, or possibly a card from your current bank (assuming you have no negative history with them)
I would not apply for a second card until you have settled your collection, and the fact it has settled is reflected in your Equifax report. (Otherwise, you will probably be summarily declined)
4) You don’t give me any historical background – i.e. are you a former bankrupt or consumer proposal, what your report actually looks like etc., so until I see your report and know some more info, I cannot say how strong your chances of a mortgage will be in the New Year – it becomes case-specific.
Please understand it is not just the numerical score of your credit report that determines your mortgage worthiness, but what is actually in the report and why it is there that also matters. So if you would like to send me a copy of your two reports, I will give you more feedback.”
We stayed in touch over the next several months. Chris sent me their credit reports and I reviewed them and gave specific advice tailored to their circumstances. It turned out his fiancée Darlene also had problems with her credit history, and we addressed those too.
I wrote as follows:
“Your fiancée is coming up for two years’ credit history – which is very good. Two things are hurting her score and your collective ability to get a mortgage.
1) There is an unpaid collection of $260 – this should be settled and the report updated to reflect that (This is the number one reason why her score is not 750+)
2) She does not have enough credit – She should ask the bank where she deposits her pay for a credit card – normally they would say yes right away – they may balk because of the unpaid collection – if I were her I would take a copy of this report into the branch, apply at branch level, and show/tell the adviser that the collection has been paid so they can attach a note to the application they submit for her. Which means, settle the collection first.”
During the summer, Chris wrote back to me and gave me an update:
“Hello Ross, I took your advice, got a second card with CIBC and was approved for $500, I paid off the collections and trying to stay on top of things now. I have $20,000 saved between me and my fiancée. I hope something can pan out.”
And finally today Chris wrote to tell me they have bought a new home and their mortgage was readily approved. The job is done!
So you see, all it takes is a commitment to improve, and to follow the necessary steps.
A year ago, Chris and Darlene had no chance of a mortgage because of their credit histories and because they had not dedicated enough effort to saving for a down payment and closing costs.
One year later, they are happy homeowners!
CASE STUDY #2: Huge credit score increase results in mortgage miracle
Justin came to us last month looking to refinance his home in order to pay for a major renovation project as well as his daughter’s post-secondary education. Not an uncommon (double whammy) situation to find yourself in.
Less than one year ago, Justin had asked us to help pay off his consumer proposal a few years ahead of schedule. We arranged a private second mortgage and cleaned everything up. We also suggested two credit cards he would be approved for, which he dutifully applied for, following our advice to the letter.
But when we checked his Equifax credit score while building the current application, we were all disheartened to see his score was only 497.
(Scores range from 300 to 900–with most people falling in the range of 600 to 750)
A score of 497 was going to kill the application. Assuming we found a lender who would work with Justin, we could be sure of three things:
- The maximum loan amount would only be 65% of the current appraised value of his home.
- The interest rate would be very high, as his score is so low — likely in the range of 5.19% to 5.99%
- Lender, brokerage and legal fees would be quite high.
The prospect of a low loan amount would render this dead in the water, and most certainly not help Justin foot the bill for his reno or the tuition. It was time to get busy!
I looked over his credit report and noticed a number of errors; things that were just plain wrong and not consistent with the facts. I offered to clean this up by assembling a package for Equifax and presenting it to them in such a way they would readily agree with our analysis, and update his report accordingly.
The types of errors in Justin’s report were:
- The fact that he had completed his consumer proposal in late 2016 was not being reported. (kind of huge!)
- Several of the credit facilities included in his proposal were still reporting balances owing.
- Some of the credit facilities were reporting late payments on dates AFTER he filed his consumer proposal. This is simply not possible. Once you file a consumer proposal, you gain immediate protection from your creditors and they may not continue collection and payment processes.
- Some facilities said “bad debt, collection account, or unable to locate”. Again – not true — he was never hard to locate and the debt was included in a consumer proposal.
- He had three credit cards from one bank which read “assigned to the third party for collection”. This was an error on the bank’s part — they had assigned the debts to a collection agency AFTER the proposal was filed — a no-no!
We have direct and instant access to the folks at Equifax who were extremely good and efficient at correcting everything we pointed out. Within three days of sending the package, we were able to pull Justin’s credit report and his score had jumped to 686 from 497!!!
That’s an increase of 189 points 😊
Please realize it is unlikely Equifax themselves have made the errors — they rely on their clients — the card issuers, to report the facts to them, and they accept this info at face value until or unless it is challenged by the consumer.
Anyway, back to Justin’s situation. This simple but crucial step in the mortgage application process meant that we were going to be able to do exactly what he needed.
- We got approval from B-to-B Bank for a two-year mortgage at only 4.14% with a 30-year amortization
- The loan amount was 80% of the current appraised value
- There was not even a one-time lender fee
The moral of the story is once again… the importance of managing your personal credit history with some vigilance. I cannot stress this enough. If things seem wrong to you, they can be corrected.
And I can tell you from helping hundreds of borrowers who previously filed a consumer proposal or personal bankruptcy; chances are there ARE errors in your credit history right now.
A simple peek under the hood could mean a pretty huge bump for your credit score, just like Justin, and the next mortgage miracle might be yours.
How to Protect Your Credit Score Once it’s All Good
It wouldn’t make much sense to rebuild your credit just to have it drop again in a few months after you get that dream house or lease that car you really need. Here are some tips to keep your credit score in top shape.
Be proactive; Nip errors and problems in the bud before they happen. Create an online profile at www.equifax.ca and monitor your credit score and history once or twice a year.
Keep your balances as low as possible relative to their limits. In a perfect world, you would always report zero balances even though you are using your cards regularly.
Use your credit cards like debit cards with benefits. Only use them if you can afford to pay off the balance each month. Enjoy their rewards programs, travel benefits, etc.
Exercise your cards regularly. You may have one or two preferred use cards (which is fine) but also try to use every available credit facility every few months, no matter how minor the usage. And get in the habit of making multiple payments each month.
Reconsider Co-signing. When you co-sign on a financial product, even a cell phone contract, it is essentially like handing control of your credit history over to another person. Are you sure that is what you want to do?
Try to keep new inquiries to a minimum. Do not allow any third parties to perform ‘hard’ inquiries unless it is absolutely necessary.
TIP: If you wish to dispute a charge on your credit card, pay it first, then dispute – you will always get a refund you deserve.
Avoid the temptation of easy new credit cards. Department stores and major chains are the biggest culprit of these and often come with obscene interest rates.
Make sure you have the “right” kind of credit in your portfolio. If you only have one $500 secured credit card, you are not going to be able to qualify for a mortgage when you need one. If you are not sure about what you have or what could help your portfolio, please Ask Ross.
Make a note of all the credit facilities you have that may have annual fees or balance protection coverage – especially if you don’t use them, you might incur late payment charges and go into late-payment status. Try keeping a finance/budget calendar with all of the important dates tracked.
Don’t believe the doomsayers who proclaim credit is evil. In today’s society, you must do everything in your power to build and maintain a healthy credit history. Far more doors of opportunity will open for you than if you take a lackadaisical approach to such important matters.
One of Toronto/GTA's Most Trusted and Knowledgable Mortgage Agents
Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
With unique dual certification as a licensed credit counselor and mortgage agent, Ross's insights are valued by mortgage professionals and homebuyers alike.
If you have questions about anything financial or mortgage-related, please contact [email protected]. Ross answers everyone personally.
For more information, visit About Ross Taylor.