Equifax, one of two credit reporting agencies in Canada, creates the formulas that calculate your credit score. They create new formulas to adjust to changing consumer behaviour. The mortgage broker industry previously used a formula called Beacon 4.0. As of June 1st, 2016, we are now using Beacon 9.0. This new formula recognizes that a lot has changed in the last 20 years in how much debt consumers have and the popularity of certain types of credit (eg. lines of credit). By looking at more recent consumer data and incorporating it into the formula, the resulting credit scores are a better predictor of future consumer defaults.
The new Beacon 9.0 formula may help or hurt you depending on your credit report. Here’s what has changed with this new credit score calculation:
Mortgages Are Now Included
Previously, mortgages were not included on credit reports. They were recently added, but payment did not factor into your score. Now mortgages not only report, but are also included in your score calculation. This is great if you have very little or only newer credit but pay your mortgage on time. Alternatively, this is not great if you have missed payments. It will now hurt your score, and any future mortgage holder will see it.
Cell Phone Payments Report AND Count
Cell phone data used to report but unless it went to collections, did not get factored into your score. That has changed. That payment data now counts and is considered to have predictive power on your future behavior. This is great for young people who are just starting out and may only have a cell phone and one credit card. BUT it is only a good thing if you pay on time. If you have been spotty with your payments, it will now negatively impact your score.
Line of Credits Treated Differently Than Credit Cards
The old formula treated all revolving credit the same, with high utilization (using an amount close to your limit) hurting your score. The new formula recognizes that lines of credit are often at low interest rates and used to finance cars and homes and treats high usage on them differently than on credit cards. High credit card utilization is still treated as high risk behavior.
Hard Credit Pulls Treated More Reasonably
For mortgage and auto loan inquiries, any number of inquiries or credit pulls done within a 45-day period for a particular type of loan are counted as 1 credit pull. The formula now recognizes that people who are shopping for auto or home financing will likely have their credit pulled by more than one lender throughout the process. And inquiries in general only impact your score for a 12-month period. This is great for New Canadians or someone who moves to a new city. They often have a large number of inquiries when they first move as they get set up with a rental, vehicles, utilities and cell phones. A year later their scores will have recovered from all those frequent pulls.
Your Pattern of Behavior Matters
Consumers tend to have more trade lines than 20 years ago (ex. Cell phone, line of credit, credit card, loans, etc.) so the formula was adjusted to look for patterns of payment on credit products. This means if you have one trade line with a negative history but the rest are all good, that one trade line has less weight. Alternatively, if you have spotty history on many trade lines, a history of good payments on one or two accounts may carry less weight.
Tips To Keep Your Score Up!
- Do not miss a mortgage payment! Always call your lender well before your payment date if you think you may be unable to pay. Not only will a late payment impact your credit score, it will also impact your ability to get a mortgage for the 7 years it appears on your credit bureau.
- Set your cell phone payment up with auto-pay so you never miss a payment.
- Keep credit card balances below 50% of your limit (even lower if you are rebuilding credit). Even if they are paid off in full each month, the balance on your statement is what gets reported to your credit report as your current balance.
- If you are trying to improve your credit score and have high balances on a line of credit AND credit cards, bring down the credit card balances first.
I work with my clients to help them understand their credit and take the steps needed to build it for mortgage qualification. If you have questions about how the Beacon 9.0 impacts you specifically, please do not hesitate to reach out.