July 7, 2020

Why your credit score is not your credit score

Posted By: MortgageOutlet.ca

I work with clients on a daily basis to help with their mortgage needs.  Obviously, a big part of the discussion relates to credit scores.  

It is amazing how many misconceptions Canadians have about credit – and sometimes these misconceptions can cost them severely!  The intent of this article isn’t to discuss what a credit score is – it is to highlight misconceptions.  As a quick background, a credit score is a statistical predictor, usually out of 900, based on your past credit behaviour, of your credit ‘reputation’ and how reliable or risky you are as a debtor.  There are two main credit bureau reporting agencies in Canada, Equifax and Transunion.

Here are the top 10 myths I would like to straighten out – plus a NEW bonus myth…


MYTH #1: “My credit score is amazing.  No, it is outstanding.  No, it is unbelievable!”

REALITY: Good credit is important, but generally, all you need is “good”, established credit.  It doesn’t need to be amazing, or perfect or outstanding – simply, good credit.  It is kind of like being pregnant – you either are or you’re not – and either you have good established credit, or you don’t.  An 860 credit score will generally not get you anything better than a 730 credit score – other than some bragging rights!


MYTH #2: “I already checked my credit score for free”

REALITY: Many websites and credit card companies give consumers free access to their credit scores  – and this is great to provide some basic information.  But ultimately, these ‘free’ credit reports are different than a formal credit request from a lender.  You get what you pay for!  Here is an interesting story by the CBC at https://www.cbc.ca/news/business/marketplace-credit-score-1.5314868 about larger differences in credit scores from these ‘free’ sources.  If you are planning to buy real estate, it is important to formally check your credit upfront to save you time and energy.


MYTH #3: “My credit score is low so I can’t get a mortgage”

REALITY: Lenders consider a variety of factors before granting a mortgage.  Is this a purchase or refinance? Why is the credit score low?  How much down payment is available? Many lenders also use their own statistical model to create their own ‘internal’ credit scores, and a borrower might qualify based on those scores!


MYTH #4: “A credit score is a credit score is a credit score”

REALITY: A credit score is not a credit score is not a credit score

This is my favourite misconception.  Let’s look at 3 scenarios – where each client had a credit score of 630:

  1. Client was hospitalized 3 years ago, didn’t pay his debts, and his credit score plummeted.  But he recovered, and has been paying on time ever since
  2. Client recently got divorced, and he has relied on his wife’s credit cards for the past 20 years.  Now, he got his first credit card in his own name for the first time ever
  3. Client has frequently been paying his bills late over the past 3-5 years 
  4. Client only has a $300 credit card

Lenders would look at 2 and 4 as new-to-credit and 3 as delinquent – and they wouldn’t be keen to lend a half a million bucks to these borrowers, compared to borrower #1 who had a one-time life event that has been resolved.  Fortunately, there are also solutions for 2,3 and 4!


MYTH 5: “I owe $10K, and it doesn’t matter ‘how’ I owe it”

REALITY: HOW you owe your debt actually matters a lot

Again, let’s look at 3 scenarios:

  1. Client owes $10K on a credit card with a $50K credit limit
  2. Client owes $10K on a credit card with a $10K credit limit
  3. Client owes $2K on 5 credit cards and each card has a $10K credit limit

In scenario 2, the statistical model for the credit bureaus identifies a credit risk, because this consumer is ‘maxing out’ his credit card – and maybe his finances are in jeopardy.

TIP- Try to keep your balances lower than 50%-75% of the credit limit


MYTH #6: “I’m going to be smart and close some credit cards to strengthen my credit score”

REALITY: NEVER close credit cards without guidance from an expert

A critical factor of your credit score is your credit history.  If you close an old credit card from university – and your only other credit card is fairly new, your credit score could plummet as you have basically deleted your experience with credit.


MYTH #7: “My credit score will drop if you pull my credit”

REALITY: “If you have good credit, pulling credit generally doesn’t impact your score”

Again, let’s imagine two scenarios:

  1. Tony gets laid off, and stops paying his credit cards because he doesn’t have money.  He also applies for an Esso credit card, then a Home Depot card, then another credit card
  2. Stacey has a great job and is excited to buy a new house.  She applies to her bank and also to a mortgage broker to hear about different rates and options

Clearly, Tony is actively seeking credit and the credit bureau statistical models will see this change in his behaviour as risky.  Similarly, they understand that Stacey is gathering information, and her score will not really change much and “generally” a request within 30-45 days will count as one credit request.


MYTH #8: “I am about to refinance and “I don’t have money”, so I will pay next month”

REALITY: ALWAYS try to make the minimum payment if you can.  Missing your minimum payment (and going over limit) can have a large negative impact on your credit score.

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MYTH: #9 “I don’t need to pay that old parking or speeding ticket”

REALITY: I once had a client with a $300 speeding ticket from Italy, which was reported on his credit bureau.  He needed to pay or wasn’t eligible for a $700K mortgage.  Speak with this guy!

https://biv.com/article/2019/02/175-parking-ticket-led-nearly-2m-lost-profits-mortgage-specialist-claims

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MYTH #10: “My car lease or additional mortgage is not being reported, so I can ‘hide’ this info from my new mortgage provider”

REALITY: There are two credit reporting agencies and other sources – don’t hide info! 

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MYTH #11:  My bankruptcy will ‘disappear’ off my credit report

REALITY: This may be true, but if you are a 50-year old Canadian who has lived here since birth – and you only have one new credit card with a $300 limit, the lenders can ‘read between the lines’.  They can also check Google and public records!


NEW MYTH #12: “My mortgage and credit card deferrals are not on my credit report”

REALITY: The jury is still out on this one.  Some lenders may or may not report a deferral, but a new lender might ask to see payments made during the March-June 2020 timeframe and they can see if the payments were made or deferred…  It is possible that some lenders will not be excited to lend you money if you had a deferral.


All information provided is generic and is not customized to your specific situation.  You should speak with your local credit expert before making any assumptions or decisions about credit.

Elan Weintraub is a co-founder and director at Mortgage Outlet.ca, an award-winning mortgage brokerage in Canada, with lenders including banks, credit unions, commercial, construction and private lenders and more.  He can be reached by email at elan@mortgageoutlet.ca .