I frequently meet people who tell me they have good credit. However, what they refer to most of the time is their credit score and not their credit in general.
Having good credit isn’t just about your credit score. It’s much more complex than that. Before deciding whether or not to grant you a loan, the banker looks at several aspects. This is called the 5Cs of credit. Do you know? We will list them later.
Several myths circulate. One of the most common myths is that when we order our profile from credit agencies, our rating is affected.
Two types of requests
It should be understood that there are two categories of requests. Offensive requests and harmless requests. Offensive requests are those that affect your credit rating downwards while so-called harmless requests do not affect it.
Here is a non-exhaustive list of situations where your credit rating will be affected downwards. When you :
- Apply for credit cards;
- Change cellular provider;
- Use a mortgage pre-qualification;
- Rent a unit as a tenant and the landlord requires a pre-rental survey;
- Apply for loans or mortgage margins;
- Increase the limit of a card or line of credit (in some cases);
- Buy a financed vehicle;
- Apply for a personal loan.
In short, each time a creditor requests you to grant you credit.
Note that in Canada, creditors wishing to grant you new credit must obtain your authorization in writing or by voice recording. Check for credit applications that you have not authorized and, if necessary, have them removed from your credit file.
Here are some examples of so-called harmless requests:
- When you consult your credit report yourself;
- When a creditor who has already granted you credit consults your file again;
- When the RCMP, Revenu Québec, or Canada Revenue Agency checks something about you;
- In most cases, when an insurer gives you a quote
What influences your credit score?
Here are the five factors in order of importance that influence your score:
1. Your payment habits: ie your ability to pay on time. This element is the most important in the calculation of the rating. It counts for 35% of the calculation. The watchword when it comes to maintaining a good credit rating? Always pay on time! This is what matters most to your creditors. Make sure they will get back the money they lent you.
2. Your usage ratio, which is the total of all your credit card balances and lines of credit divided by the total of the total limit of your cards and lines. This aspect accounts for 30% of the calculation. Be careful not to exceed 50% utilization.
Let’s take an example to understand.
You have three credit cards and a line of credit for a total limit of $50,000. Now, you have a cumulative balance of $10,000. You therefore use your credit at 20%, or ($10,000 / $50,000) X 100.
Your credit rating should hold up if the other four factors are doing well since, at 20% utilization, you are not at too much risk of defaulting on payment.
Would you like to maintain a good credit score? Always pay on time and don’t overuse your credit. You will have 65% of the work done.
3. Your history, ie how long have you had access to credit. This aspect accounts for 15% of the calculation. The older your credit, the better your score. Be careful of credit cards that you close at the request of a banker! This could greatly reduce the age of your credit and lower your score.
4. The number of credit types you have counts for 10% of your score calculation. A credit card is one type, a line of credit is another type of credit, a personal loan, etc. In the best of all worlds, have three different types of credit.
5. The number of credit applications you have made in the last twelve calendar months. This aspect also counts for 10% of the calculation. Avoid unnecessary requests so as not to affect your score. You will understand that the very active real estate investor sees his credit score melt as he buys buildings.
Now, what about the 5Cs of credit?
Here are the factors the banker relies on to say:
Accepted or refused!
First, the capital you have.
Imagine for a moment that you meet your banker and tell him that you don’t have a penny to invest! It’s a safe bet that he won’t want to give you a loan. Usually, bankers are not very supportive of creative financing.
Second, your character.
The approach, your presentation, and the attitude you have towards your banker will influence the trust he will have in you. If you present yourself well, with good, well-prepared files, you will put the odds in your favor of obtaining a Yes.
Imagine for a moment that your banker tries to reach you after a late payment and you neglect to call them back. Is he hesitant to give you new loans when you ask for them?
Third, is your ability to reinject money following the purchase of your building.
For five homes or less, two factors will be taken into account as to your ability to reinject money. Your income and the money available once the building is notarized.
Will you have $1,000 or $50,000 left when you buy the building in question? Do you generate a personal income of $20,000 per year or $400,000? In the second case, there is more chance that you will be able to reinject sums in the event of a glitch. But beware! It’s not automatic. Look at the lifestyle of certain professionals to convince yourself of this. They earn several hundred thousand dollars a year but have no savings.
Fourth, collateral guarantees.
Another important point for the banker’s decision-making concerns the collateral guarantees you have. If your real estate adventure goes wrong, are you able to provide certain guarantees to reassure the banker? Most of the time, the guarantee will be taken on the building you are about to buy, but sometimes the banker is more greedy and requires other guarantees. Everything will depend on your credit profile and the building you are looking for.
Fifth, your credit rating
The last of the 5Cs, but not the least. Your credit score is between 300 and 900 when it comes to the FICO score, i.e. Fair Isaac Corporation, the company behind the best-known score system used by banks. The higher the score, the less risk you represent for the creditor of defaulting on payments.
To find out your credit rating, visit the following websites:
www.transunion.ca and www.equifax.ca
It’s up to you!
Finally, since your credit profiles are constantly changing, remember that you will have to consult your two credit files regularly, that is to say, twice a year per credit agency. You may find certain errors there which could harm your credit and this is why you must have the erroneous information corrected to develop a credit that represents your real financial situation.