FICO scores

Surprise! There's not just one credit score. Although the most widely used score is the FICO score, another credit score could show up on your disclosure. The new rules don't require lenders to identify the brand of credit score.

"I think you'll have a slice of lenders who will proactively tell the consumer what brand the score is," says John Ulzheimer, president of consumer education at SmartCredit.com.
For everyone else, there are ways to decipher the score's origin. If the range is between 300 and 850, it's a FICO score. Still, it could be a specific FICO score, such as one designed for credit card issuers, and not the one available on myFICO.com. If the range is 501 to 990, it's a VantageScore, which was developed by the three credit reporting agencies, Equifax, Experian and TransUnion. If the range is anything else, it's an obscure model not used by many lenders, says Ulzheimer.

"Call the lender and find out what score it is," Ulzheimer says. "I think that's a reasonable request."

credit limits

For some spenders, a credit limit is like a speed limit: the highest they can go without getting into trouble.

Credit scores place a big emphasis on how much of your credit you use every month. Called a credit utilization ratio, your score dips when that quotient climbs.

And your credit score doesn't distinguish between the balances you're paying off every month and those you don't. It only looks at the totals you're charging.

The bottom line for consumers is that if you want to keep your scores high, you need to keep those balances low.

How low can you go?

Want to calculate your utilization rate? Add up last month's card balances. Divide that by the total of all your credit limits on open credit card accounts. The two-digit number after the decimal point is your utilization rate.
Go back and do the same thing for each individual card, too. That's because the FICO score looks at how much of your total limit you're using with all your cards together, along with each card individually, says Barry Paperno, consumer operations manager for FICO, the Minneapolis company that produces the FICO score. Utilization rates count for almost 30 percent of your score, he says.

So just how low do those rates need to be? "It varies from consumer to consumer, depending on their overall profile," says Paperno.

"The lower that percentage, the better for your score," he says. The goal is not zero, but as close to that as you can manage.

"The people in this country that have the highest scores -- 760 and above -- have an average utilization of 7 percent," says John Ulzheimer, president of consumer education for Credit.com in San Francisco. He recommends keeping those balances to 10 percent or less of the credit limit.

And that's "reasonable," says Paperno. "If you're in that range, you're not going to get yourself in a lot of trouble, score-wise," he says.

One irony for consumers is that a zero balance can hurt your score. That's because the score rewards the individual who can use credit cards but keep the balances low, says Paperno. "But zero indicates that you are not using your cards," he says.

Some cards don't report credit limits to the bureaus. In that case, the entity calculating the score will often substitute the consumer's highest balance, which can make your utilization rate look higher than it truly is.

The best way to find out which cards report credit limits is to check your credit report, says Paperno.

The good news is that the practice of not reporting limits is becoming much less common. "Almost all -- at least with the major lenders -- report the limit," says Rod Griffin, director of public education for Experian, in Costa Mesa, Calif.

If you like living on plastic, you don't necessarily have to choose between a low utilization rate and the convenience of credit cards.

Charge cards that require you to pay the balance in full every month aren't included in your utilization rate in the most recent versions of the FICO score, says Paperno.

How to tell which is which: either call the issuer, or pull out that credit report again. If the notation for a card says "revolving," it's a credit card, says Paperno. If it states "open," it's a charge card.

But several credit experts say it doesn't pay to stress over utilization rates. "If you're keeping a low balance and your scores are fine, I wouldn't worry about that," says Griffin.

When it can pay to really look more closely at the equation:

• You're a year or less from a major purchase, like a home or car. That's a good time to make sure the balances are paid down, and there's enough activity on the cards to give you the most advantageous score and terms.
• You have unexplained card problems, like lower credit limits, declining scores and/or increasing APRs.
• You've recently gotten a new card and want to see how it's impacting your score.

Your utilization rate isn't the only factor you want to consider if you're setting your personal card limits with an eye toward maintaining strong credit.

When you apply for a home or auto loan, those lenders will look at your debt load. But the amount of debt they'll accept will vary widely, says Chris Kukla, senior counsel for government affairs with the Center for Responsible Lending, in Durham, N.C.

Among other factors, lenders will look at your back-end ratio, which is the total of your payments for one month (car payment, college loans, credit cards, mortgage) divided by your gross income, says Kukla. When it comes to the credit cards, lenders will use the minimum payments based on the current balances, he says.

A few years ago, some lenders were satisfied with figures that went to 55 percent or 60 percent, Kukla says. These days, 40 percent to 50 percent is "on the high end," he says. Lenders want to know "that you're not spending more than half your income on debt."

How is my credit report used

Credit information is gathered by credit reporting agencies, sometimes called credit bureaus. There are two major credit reporting agencies in Canada: Equifax Canada Inc., and TransUnion of Canada. Governed by provincial and federal laws, credit reporting agencies store and maintain credit information about individual Canadian consumers for use by members of the credit reporting agency. Members include banks, finance companies, auto leasing companies, credit card companies and retailers.

Credit grantors update individual credit reports regularly by providing information to credit reporting agencies about their customers' credit and payment activities. This ensures that credit reports remain up-to-date and as complete as possible. Other sources of the information contained in your credit report can include public records from courthouses across the country and collection agencies.

How does the credit card issuer calculate exchange rates for purchases outside of Canada?

VISA International converts all foreign transactions to Canadian funds at a preferred rate. This rate also includes a conversion fee, presently at 2.5%, which offsets the costs incurred by VISA International and CIBC in offering a comprehensive worldwide VISA service, as international transactions are more expensive to process than domestic transactions. The exchange rate is set at the time of purchase, and it will vary according to the date and time of the transaction.

Below is an example of the conversion calculation:

Amount of purchase is $50.00 USD

The rate of exchange is @ 1.54
Canadian amount = $77.00 CAD
+2.5% conversion fee = $1.93
-----------
$78.93 CAD

The total amount recorded on your statement would be $78.93 CAD

Beacon score

Your Canadian Credit Bureau report provides crucial information in your quest for the lowest mortgage rate in Canada. The primary source of information that the bank has on you is from this report. You need to know how to find the potential problems before the bank so you can be prepared for their questions.

Beacon Score
The first thing most bankers look at in your Canadian Credit Bureau is your Beacon Score. This is a summary of your credit worthiness as determined by an automated system at the credit bureau. Many bankers rely heavily on this score for loan/mortgage approvals and the interest rate you qualify for.

If you want the best mortgage rate in Canada, you should plan on having a beacon score above 600. If you have a score over 750 on your credit bureau report and have investments in addition to your home, you will be able to choose from the best rates, products and terms. A beacon score over 750 is considered excellent.

If the beacon score on your credit bureau report is below 600, you will face an uphill battle to get a mortgage. This considered a poor score. The rate is likely to be a little higher than normal, depending on your circumstances.

Credit scores can change daily. Depending on the situation, it may be fairly easy to increase your score and get approved at a good rate for your mortgage. An online monitoring service will keep you updated on where you stand whenever something changes on your credit bureau report.

There are some lenders who will look beyond just the beacon score in your Canadian Credit Bureau. Some banks will give the more experienced loans officers the authority to approve mortgages if a person has bad marks on their Canadian credit bureau report. A mortgage broker mortgage broker can help find a lender willing to offer a good interest rate if you have issues on your credit bureau report.

Collection Notices
Your Canadian Credit Bureau Report shows all collection, bankruptcy and Orderly Payment of Debt (OPD) activity for a full six years. It is important to pay attention to this section because disputed bills, old, forgotten bills and current collection activity shows up here. Banks will not give you a loan if there are unpaid bills in this section. Many banks will not even lend you money to pay off those bills. These must be cleared off your credit bureau report ASAP. The beacon score really takes a beating if you have an unpaid entry in this section of your Canadian credit bureau report.

Late Payment History
Late payments on your Canadian credit bureau report show up as an "R", "I" or "O" rating. The importance of the late payment shows up as a number from 1 to 9. A 1 is the best rating. It shows that you have paid your bill within 30 days of the due date.

An R2/I2/O2 shows an uncaring attitude toward debts. If you have one or two, no one cares. However, if you have several of them, bankers start to get nervous. The general rule is that a "2" rating is not serious, however, loans and mortgages have been turned down with as few as three "2's" if the rest of the mortgage application is not strong. The best source of evaluating the importance of "2" ratings is to have a conversation with a mortgage broker You may still qualify for the lowest mortgage rate in Canada.

A "3" rating on your Canadian credit bureau report indicates some financial problems. If it is current, you need to have a good explanation to get the best mortgage rate. If the "3" is one or more years old, you still need an explanation, but many lenders will try to overlook it on an otherwise strong application. If you have more than one "3" at any time within six years it may be a challenge to get the best mortgage rate, but you will still qualify for a mortgage somewhere. Contact your mortgage broker to discuss your situation.

A "4" or higher rating on your Canadian credit bureau report means serious trouble. If you have even one of these on your credit bureau report, many banks will not even entertain giving you a loan or a mortgage. Your best bet is to contact a mortgage broker and work out a strategy to qualify for a mortgage. It is highly unlikely that you would qualify for the best mortgage rate in Canada, but you may still qualify for a mortgage. If you have more than one "4" in the past year, the only way to qualify is to have a good explanation for it or have a cosigner. However, if the "4" is two or more years in the past and the rest of the application is strong, you may still qualify for the best mortgage rate in Canada.

A rating of "9" on your Canadian credit bureau report is as bad as it gets, other than a bankruptcy. Most lenders will not provide a mortgage with someone that has a current "9" rating. However, there is still hope. A good explanation combined with the mortgage broker's recommendation to the right lender may do the trick. He/she may still be able to get you a good mortgage rate. If the "9" rating is two or more years old, most lenders will shy away from the deal, but your mortgage broker may know of a lender or two who would be willing to provide a mortgage for you.

Bankruptcy
A bankruptcy showing on your Canadian credit bureau report is a serious thing regardless of how long ago it happened. If you have only had one bankruptcy, the listing on the Canadian credit bureau report will disappear at the end of the sixth year. However if you have had more than one bankruptcy, all of them will be on your Canadian credit bureau report forever.

If you have had one bankruptcy, you may still qualify for a mortgage soon after the bankruptcy. The trick is to get establish a good credit rating right away. You can get a secured credit card, a car loan, a furniture or appliance loan etc. at high interest rates. If you are fortunate enough to be reading this before you decalare bankruptcy, try to continue payments to a couple of creditors (like your home and car) through the bankruptcy. If you can do this, you will be able to get new credit soon after the bankruptcy. It won't be easy, but your mortgage broker may be able to help you. Even if you haven't been able to keep some lines of credit open through the bankruptcy but have re-established some credit, you may still qualify for a mortgage. The mortgage interest rate may be a little high, but at least you would be able to own a house.

If you have too many debts showing on your Canadian credit bureau report you may still have a chance of qualifying for a mortgage. One way to handle it is to somehow consolidate your loans. Another way would be to get a cosigner to add income to your application. You may also have some income that normally doesn't show up on your income tax return that can be used by some lenders. A more complete discussion of income can be found on the Mortgage Calculator page.

Your mortgage broker would definitely be a good resource if you have a strong Canadian credit bureau report but the debt load is a little high. Even if your own bank has turned you down, if there is a way to make the numbers work, your mortgage broker will find it.

Many times when the debt load is starting to build up, you may go over the limit on your credit cards. The credit company is happy to let you do this once in a while, but your beacon score really takes a hit. Whenever possible, stay at least 30% below the limit on your your credit lines/cards. If you can do this with all your credit, the Canadian credit bureau report will reward you with a very good beacon score and the bankers will be chasing you to give you more and more credit at the best terms they can offer.