Evaluating your credit score has just become more complicated. Today, more than ever, lenders are placing huge importance on your credit score when deciding to lend you money.
Old system = Beacon 4, New system = Beacon 9.
With Beacon 9, every 10 points = higher probability of default. For example, a score of 660 is 20% more likely to be delinquent than a score of 670.
Some key Differences between Beacon 9 and Beacon 4 include:
- Beacon 9 uses much more recent (2009-2011) data.
- Beacon 9 includes mortgage data, including mortgage repayment history.
- Beacon 9 includes telecommunications data.
- Beacon 9 treats the utilization of lines of credit (LOC) different from credit cards. If you have a large secured LOC, that should not negatively affect your credit.
- Multiple mortgage inquiries for mortgages = one hit during a 45 day period.
- Inquiries can only affect the score for 12 months.
- Trade level analysis vs. consumer level—consumers who are delinquent on isolated accounts are treated less severely than consumers delinquent on multiple accounts.
Beacon 9 is more predictive of mortgage default. Under Beacon 9, mortgage repayment is weighted much more heavily than the occasional R2 or R3* on low limit/low utilization cards.
Beacon 9 really focuses on high utilization of credit cards and finance trades. Previously, under Beacon 4, even if you had lots of trades and they were repaid on time, you would have a good score. Beacon 9 will no longer reward that. If you have a lot of utilization on credit cards, your score will drop.
Sporadic R2s on low limit cards are not given much weight. Furthermore, paying the total balance due vs. the minimum payment is not taken into account.
*”R” means you have “revolving” credit, where you make regular payments in varying amounts depending on the balance of your account, and can then borrow more money up to your credit limit. Credit cards are a good example of “revolving” credit. If you always pay on time, it will be coded an R1. If an amount was written off because you never paid it back, it is coded R9 and shows a balance owing. The R ratings are a coding system that translates “on time”, “one month late”, “two months late”, etc., into two-digit codes. See https://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02179.html for more information.
Only 30% of consumers have credit scores over 820, and 25% of consumers have scores between 720 – 819.
This new system will inevitably have benefits and drawbacks, and will impact your ability to secure a mortgage at a good rate. A mortgage broker will be able to walk you through your mortgage application, including presenting your credit score and income to lenders.
Building and improving your credit history takes time, so it’s important that you call a mortgage broker as soon as you are considering buying your home. By preparing a pre-approval, a mortgage broker can not only analyze your credit and financial situation, but also provide you with valuable information on what you can do to improve your credit score, so that you don’t miss out on your dream home.
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