What Affects Credit Score? Beacon, FICO, & Credit Reports

Credit reports and corresponding credit scores are used by lenders to help determine whether an individual is worthy of receiving additional credit. Canadian credit bureaus such as Equifax and Transunion keep tabs on North American consumers credit history and spending habits to assist lenders in making decisions regarding who they grant credit to and under what conditions.

What is a Beacon and FICO Score? What is the Difference?

All credit bureaus in Canada and the U.S. use a model developed by the Fair Isaac Credit Organization (FICO). While all bureaus use the same FICO model, each bureau has their own name for your credit score. Equifax calls their credit score a beacon score, while a Transunion score is called a FICO score. In the United States, credit scores range from 300 (extremely high risk) to 850 (extremely low risk), while in Canada, scores range from 300 (extremely high risk) to 900 (extremely low risk).

Information Included on a Credit Report

Personal information included on a credit report:

• current and previous addresses
• current and previous employers

Financial information in the report can include information on:

• your bank accounts, including any “bad” cheques or non-sufficient funds (NSF) payments
• credit you already have, such as credit cards, lines of credit, and loans
• a bankruptcy or a court decision against you that relates to credit
• debts that you did not pay and were referred to collection
• a list of all people and companies who have made inquiries about your credit, including lenders, yourself and other authorized organizations (for example, a landlord or employer if you have given your consent)

Does Everyone Have a Credit Score?

Only those who have established credit at some point in their life will have a beacon score and information, called “tradelines” on their credit report. Establishing credit involves borrowing money from a lender and following the terms and conditions of the credit product. Credit cards, car loans, school loans, personal lines of credit and mortgages are all examples of credit products which would act as trade lines on your credit report. The most common way that an individual would establish credit for the first time would be to apply for a credit card with a low credit limit.

How to Build Credit With a Credit Card

With household debt levels constantly on the rise in Canada and the United States, many consumers consider credit cards to be a poor choice financially and do not apply for a card or do not use them consistently. While there are ways to build credit without using a credit card, the use of a credit card on a regular basis will be the easiest way to create your first tradelines and begin building a credit score.

Some would think that using credit cards should suggest that a consumer is financially irresponsible due to the absurdly high interest rates, but the exact opposite is true. By holding one or more credit cards and using them responsibly, you are demonstrating your ability to handle credit. The longer you use your credit cards responsibly and on a consistent basis, the more your credit will build. Ideally, using your credit card on a regular basis and paying off the entire balance each month would be the optimal approach.

Minimum Beacon Score Required for a Mortgage

High Ratio Mortgages (Less than 20% Down Payment) must be insured by CMHC or another private mortgage insurer such as Genworth or Canada Guaranty.

• Most mortgage insurers require a minimum beacon score of 600
• Most lenders, however, require a minimum beacon score of 620
• Credit scores above 700 typically receive the best interest rates

Low Ratio or Conventional Mortgages (20% or more Down Payment) do not require mortgage insurance and each individual lender will have their own minimum requirements.

In most cases, the larger the down payment, the lower the beacon credit score required to be approved.

How Beacon & FICO Credit Scores Are Calculated

There are many different factors which affect credit scores. While the Fair Isaac Credit Organization (FICO) and Canadian credit bureaus Equifax and Transunion have never released the exact credit score algorithm, it is believed to be very close to the following:

Source: YourMortgageCentre.com
 

All Credit Report Trade Lines Have a Rating

Each of your credit products have one of the following ratings:

• 1 – Pays within 30 days
• 2 – Pays 30-60 days late
• 3 – Pays 60-90 days late
• 4 – Pays 90-120 days late
• 5 – Pays 120 days late, but not yet written off
• 6 – No rating exists
• 7 – Paid through a consolidation order, consumer proposal, or credit counselling debt management program
• 8 – Repossession
• 9 – Written off

Infront of the rating, will be the type of credit product; either R for Revolving, I for Instalment, or O for Too new to rate. For example, a credit card which was 30-60 days late, would have a “R2” rating.

How to Improve Your Credit Score – It’s Easier Than You Think!

• Order a copy of your personal credit report periodically. You can request a copy for free through mail or pay approximately $20 to view it instantly online through Equifax or Transunion.
• Always make at least your minimum payments on-time.
• Keep your revolving credit limits below 60% of the maximum.
• Keep accounts open for as long as possible. Your average account age is important. Opening new accounts and cancelling will keep your average account age low.
• Have at least a couple credit cards with limits over $5,000 to show you can be financially responsible with available credit.
• Pay off entire balance of revolving accounts each month, if possible.
• Use one mortgage broker to shop for a mortgage. Going from bank to bank, or broker to broker will cause your credit to be pulled multiple times and will affect your credit score negatively.

As you can tell from the length of this post, there are a lot of important things to know about your credit report and corresponding beacon or FICO score. While this post is intended to help you feel more comfortable with what a credit report is and how to improve your score, please reach out and ask any other questions which may still remain! With a firm understanding of credit reports and scores, you will be able to ensure your next mortgage is obtained at the lowest rates with the best terms for you and your family!

If you’d like to pull your credit report, here is a direct link to the Equifax product page to obtain both your credit report and score for just over $20. When you think of all the money you could save in interest by simply taking steps to improve your score, it is well worth it!