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Whenever you apply for credit of any kind – a car loan, a credit card or, if you are in the market for a Waterloo Region home mortgage, – the lender wants to know just what kind of risk you present to them and the way they do that, for the most part, is to look at your FICO credit scores.
Most Canadian adult consumers actually have not one but two FICO scores – one with each of the two major credit bureaus, Equifax Canada and TransUnion Canada. Each score is calculated using the information contained in the credit report each of these bureaus keeps on file for you and as that information changes so does your credit score.
What is a FICO Credit Score?
Most of the credit scores used in Canada are called FICO scores because they are calculated using an algorithm developed by Fair Issac and Company. Fair Issac is an analytics company based in Minneapolis, Minnesota. Founded in 1956 by an engineer, Bill Fair and a mathematician, Earl Issac the company released the first credit scoring system in 1958.
How the algorithm actually works is very much a closely guarded secret and anything known about the way the calculations work is a best guess at the most. Add to that the fact that each of the credit bureaus uses the FICO scoring method in a slightly different way and you really do have something of a mystery.
One thing that is known is that not everyone has a FICO credit score because there needs to be a certain minimum amount of information on their credit report in order for one to be accurately calculated.
For a score to be calculated there must be at least one account that is a minimum of six months old and there must also be one account – in good or bad standing – that has been updated within the last six months. if this is not the case the person is considered to have insufficient credit and very few lenders will consider an application from them any further.
The FICO score is considered by most lenders to provide the best guide to any future risk based solely on date from an individuals credit report. In examining that score the higher it is the lower the perceived risk to the lender should they extend credit to the individual. However, no single score actually says whether a specific person will really be a “good” or “bad” customer.
Therefore while the majority of lenders do use FICO credit scores to help them make lending decisions they are not the only criteria they use. every lender has their own unique strategy when it comes to deciding whether or not a person is worthy of their trust. There really cannot be said to be a number that can be considered a “cutoff” for successfully applying for credit as every lender has this differing set of standards (which again are a closely guarded secret)
The FICO Score By Other Names
A FICO score is called something different by each of the major credit bureaus. At Equifax, it is called a BEACON score while at TransUnion it is referred to as an EMPIRICA score.
So Which Credit Score Will My Mortgage Lender Use?
Like so many of the questions that people have about FICO credit scores, this is one that it is impossible to answer definitively. Simply put though no one credit score is ever going to be used to make a decision about extending a line of credit for a mortgage to you.
Why? Consider these facts:
Credit Bureau Scores are Rarely the Only Scores Used
Most lenders have a scoring system of their own of which the credit score is only a part.
Your Credit Score is Probably Slightly Different at the Two Major Bureaus
In addition to the basic FICO score the different credit bureaus have their own take on credit scoring and do things slightly different from one another.
The FICO Credit Scoring System is Not the Only One Out There
FICO may offer the most used credit scoring algorithm but it is not the only one out there and some lenders may choose to look at an alternate scoring method altogether instead.
Your Credit Score is Changing All the Time
Every time a new piece of information is recorded on your credit report your credit score will change at least a little. that means that the credit score you had when you checked a month ago may be different to the one that your potential lender will see when they pull it now.
How does this all affect a potential homebuyer? The fact is that it is very important that you understand what your credit score is. If you have good credit a once yearly look at your credit reports should suffice, just to make sure there are no mistakes and your FICO scores will come along with that. Everyone is entitled to one free credit report from each major credit bureau every year so that won’t even cost you anything.
The people who need to monitor their credit scores more closely are not just those have poor credit that they are trying to rebuild before planning to try for a mortgage.
While your credit score is used to qualify you for a mortgage it is also used to determine what your interest rate will be. Knowing what your credit score is when you apply for a mortgage can help you figure out how big of a mortgage you will really be able to afford as well as your ‘chances’ of being approved.
Need mortgage advice and help? Contact Angelica Pinto, who serves our community as a licensed mortgage agent as well as a skilled real estate agent.