At least once a week a client calls us inquiring for a mortgage, proudly reporting they have a high credit score. When we ask for the source of this information they report they have utilized the services of one of the trendy free sites such as Credit Karma, Borrowell or Mogo. Unfortunately, many of these clients also refuse to allow us to pull their credit in fear of negatively impacting their score. Since mortgage brokers require the consent of clients to pull their credit we are forced to place false hope in the validity of these free reporting sites while we continue with their mortgage application.
Sadly, what often happens is the client then finds their dream home within the price range we have predicted based on their “apparent credit score”. They FINALLY allow us to pull their credit from a credit report provider that ALL Canadian lenders rely upon when making their lending decisions such as Equifax or Transunion. Their credit score is released to us and often it is much lower than that of the free sites and thus their mortgage application falls apart and their dream home is lost.
The credit scores produced by these trendy free sites are completely irrelevant when applying for a mortgage. Potential homeowners should seek out the advice of mortgage professionals who can provide them with accurate credit scores that will be considered for mortgage applications.
WHAT IS A CREDIT SCORE?
A credit score is a number that represents your likelihood of being able to timely pay back a loan otherwise referred to as your “creditworthiness”. Credit scores are determined based on your credit reports which are produced by credit reporting agencies. These agencies collect financial information about you, including the length of your credit history, debt, credit utilization, payment history and credit inquiries. A credit score is a three digit number that ranges from 300 to 900. For mortgages, typically a credit score over 600 is acceptable to qualify for a mortgage and under 600 is usually unacceptable. In other words, the higher your score the more financially reliable you are considered.
ARE FREE CREDIT SCORES VALID FOR MY MORTGAGE APPLICATION?
Now for the clincher, there are many different scoring models used to create credit reports. With constant technological innovation in the financial space, multiple free credit score apps have emerged and have become popular amongst potential homeowners. These apps also rely on Equifax and Transunion and allow prospective mortgagors to obtain their scores and monitor their credit health. Some of the more popular free apps include Credit Karma (TransUnion), Borrowell (Equifax) and Mogo (Equifax). The scoring models or algorithms used by the free apps and credit reporting sites differ from those used by actual lenders. So while there may be a small perk of tracking your credit health on the cute free apps, the actual score they produce is irrelevant when it comes time to apply for a mortgage. Lenders do not look at the score from the free sites. If buying a house is on your radar, you should pay for a full report from Equifax or Transunion or obtain your score from a banker/broker, who will pay on your behalf.
CREDIT SCORE MYTHS
1) Free credit scores can be used in my mortgage application.
FALSE – free credit scores are based on different scoring methods compared to those utilized by mortgage lenders. Credit Karma is completely transparent in their Terms of Service, “The credit scores that lenders and others use may be different than the one you see here. That’s because there are hundreds of scoring models out there, and they all weigh things a little differently.” For credit scores that are valid for mortgage applications use Equifax or Transunion
2) When a mortgage broker pulls your credit it will hurt your credit score
FALSE – the harm is done when a mortgage broker pulls your credit INFREQUENTLY (1-2/year) is negligible in comparison to beginning a house search without an accurate qualifying price range. Credit scores are impacted by pulling credit repeatedly which gives lenders the impression that you are constantly seeking and needing loans.
3) Free credit scores are risk free
FALSE – while there may be no financial loss the likelihood of being inundated with offers from the 50+ ‘partners’ that fund the free sites is high. This combined with the fact that they will now have complete access to your financial history (and weaknesses and vulnerabilities) and fully utilize those in their marketing tactics is frankly terrifying.
TIPS TO IMPROVE YOUR CREDIT
So perhaps you have already signed up for one of these free sites and are compulsively monitoring your credit “health”. One of the few benefits these sites present is that they are enhancing awareness of credit health. Their aesthetically pleasing design and usability are attracting individuals that may otherwise be uninterested in their financial health. And finally, there are some helpful tips in easily digestible language, however, we will not speak to the accuracy of this advice.
See below for 3 of our own tips that can help you to improve your credit score.
1) LESS IS MORE
Avoid seeking out more credit than you actually need. Make use of the resources you have but avoid taking car loans, credit card debt or any other loans that are not essential. Trash the credit card offers that arrive in the mail and walk by the tempting offers at the Costco check out!
2) PAY YOUR BILLS
Demonstrate your capacity to repay a loan. If lenders see you aren’t paying your hydro bills why would they trust you to pay a mortgage? Pay all of your bills on time, every month.
3) STAY UNDER 2/3 of YOUR CREDIT LIMIT
Credit reporting agencies do not look fondly upon individuals who utilize loans or credit limits to their maximum. You will be more attractive if you demonstrate self-restraint by having access to funds and not fully utilizing them.
Finally, credit score innovations in the tech space will continue to appear and likely create even more confusion. The most efficient way to navigate the barrage of heavily marketed information is to seek out the services of a reputable mortgage professional you have faith in. Entrust them to pull your actual credit score and provide you with an accurate presentation of your financial possibilities before that dream home is lost.
