Beacon scores are a single number that summarizes your credit situation as a borrowing risk for lenders.
Beacon scores can range from 300 to 900. The average Canadian has a beacon near 700.
Only 11 per cent of Canadians rank above 800 and it’s virtually unheard of to see a beacon near 900. You want to be in the 650 to 700 range to qualify for a good mortgage rate.
Even a 600 score will get you a decent enough deal if you can prove income and haven’t had any credit delinquencies for at least a year. This is the average minimum credit score to qualify for good rates on mortgages with less than a 20 per cent down payment.
If your score falls below 600, you are what lenders call a “B” client, meaning there are issues with your credit that banks won’t like.
While one out of five Canadians are in the below 600 score boat, don’t despair if that includes you as your credit can be fixed and there are still lenders willing to grant mortgages to the credit challenged.
Also, keep in mind the exact score needed depends on the type of mortgage you require. For example, mortgages for the self-employed or for rental properties often require scores on the higher end.
Assuming you want to improve your credit, this is how the Beacon formula is calculated.
The main criteria are as follows.
Payment history (35 per cent) —this also factors in the recent and number of payments over 30 days late, collections, judgments and bankruptcies. A single 30-day late payment can drop your score 15 to 20 points.
Current debt (30 per cent) —considers how much you currently owe compared to your credit limits. How many creditors you owe money to and how much you could owe if you maxed all your available credit.
Age of accounts (15 per cent)—the longer your accounts have been opened the better. Generally you need at least two accounts over one year old.
Type of credit (10 per cent)—bank loans, credit cards and revolving credit all impact you differently.
Credit enquiries (10 per cent)—numerous credit applications in the past 12 months is a no no. Huge benefit of a mortgage broker is they pull your credit only once for multiple lenders.
Besides bankruptcy, the top Beacon score killers are payments over 30 days late, maxing out credit cards. (i.e. using over 70 per cent of your limit) and
seeking too much credit in a short period of time (i.e. applying for four credit cards in one month).
If you have a lot of maxed out cards, bring them at least below 70 per cent of their limit—below 50 per cent is better and below 30 per cent is best).
Your credit score can jump considerably in as little as a month.
The moral lesson behind Beacon scores is to know your credit score and manage it carefully. More than 70 to 80 per cent of Canadians have errors on their credit report so don’t be afraid to check your score at www.equifax.com.