Mortgage 101 – Credit Myths Busted

Dan Ahlstrand and Clinton Wilkins discuss credit scores and financial literacy, emphasizing the importance of understanding credit usage and management.

Understanding Credit Scores

Dan Ahlstrand
We’re talking about different things that impact your life. When it comes to your financial literacy, it is financial literacy month here in Nova Scotia and across the country, and if you get just a little bit of knowledge out of this, that’s kind of what the idea is about. Because we’re not only here to entertain, we’re also here to educate, right?

Clinton Wilkins
Oh, education, I think, is the number one reason that I love doing this show, right? It’s bringing these little bite-sized pieces of information to the air. And it’s things that, I’m sure, people are thinking about, they’re talking about, they’re seeing on TikTok and Instagram reels and things. But we’re bringing it to a local perspective in our local market, which I think is really cool.

Dan Ahlstrand
In the last segment, we talked about income and income sources, and some of the things that you look at when, when you’re looking at at getting somebody into the housing market, another one of the factors I would imagine that you look at is, is that infamous, and if we had the sound effects, dum, dum, dum, credit rating and and they’re the use of credit for for people, credit can be a useful tool if it’s used correctly, right?

Clinton Wilkins
It definitely can be a very, very useful tool. And there are two credit reporting agencies in Canada. There’s Equifax and TransUnion, and they’re not the ones that are deciding your score, per se. It’s all of the history that you have. It’s the lenders that you’re doing business with. It’s your cell phone company, it’s your student loans. They’re aggregating, really, really the data, and then they are spitting it out into different formats, and that’s what’s interesting. So the score that you may see online might be different from the score that I see as a mortgage broker, which might be different from the score that your bank would see, because we’re all on a different version of what we call Beacon. Here in Canada, there are FICO scores. There are a lot of different scores that are taken into consideration. And, I think credit is just so important and so kind of misunderstood. And I think during Financial Literacy Month, obviously it’s, it’s November, the theme of this month is talk money. And for this segment, we’re going to talk about credit. And, Dan, you can ask me all the questions that you want, because as much as I think that I’m a credit expert, maybe you’re gonna be able to stump me with some questions that we don’t know.

Dan Ahlstrand
Interesting, already learning something is part of this segment, Clinton. Most of us get our credit score either we going directly to one of those two credit companies that you’re talking about, or many of us use, I’ll use myself as an example. Use the banking app that I have for my bank that I use, and they’ll give you a credit score on there as well. How much does it differ between the score that I see and the score that you see?

Clinton Wilkins
It can be higher and it can be lower because, due to the different versions that are out there, it’s an algorithm, basically. And there might be more things that are important to us as a mortgage broker than what is important to a different type of lender. There are a couple of free apps out there that consumers can use that I would really advocate for. One borrowed. Well, it’s a free app you can download from the Apple App Store, the Samsung store or the Google Play Store, that’s what I should say, and that’s tied to Equifax. So, they’re going to try to sell you something, and that’s why you’re getting it for free. But it brings all your Equifax data in. There’s another app called Credit Karma, and it brings in the data from TransUnion, also really valuable between the two, between Equifax and TransUnion, people are like, Well, what’s going to be a higher score? It’s different, to be honest, Equifax only has data really from the last six years. If you’ve had a good account that’s been closed, and it will fall off after six years with TransUnion, all the good credit stays on forever. So if you’re an older person or you had really good credit in the past, typically, TransUnion will give you a higher score than then, then Equifax will, and there’s other there’s other factors. Really, credits are made up of a few main factors. One is utilization. So if you have a $10,000 credit card and you owe $10,000, that’s really going to bring your score down. If you have a $10,000 credit card and you owe $3000, that’s in a good spot, but credit cards are really meant to be used and paid off every month. They’re not meant to carry a balance. And as you and I know, the interest on a credit card is crazy, 19 or 20% yeah, there’s obviously some low fee, low cost ones that might be 10% but still, 10% is a lot of money. But money, but there are credit cards at 14%, 15%, 20%, 25% and probably 30% credit cards are not meant for a long-term borrowing vehicle. Yeah, you might owe from month to month, that’s okay, but really, you need to focus on making sure that’s paid. And I think in today’s world, no one should have. Have a late payment., I see a lot of people who have had missed payments for like, $10 credit facilities, literally a $10 monthly payment, and someone’s messing up their credit for that. A lot of lenders these days will automatic, will set up an automatic, automatic payment, which I think is awesome. The big banks will often some of the other credit card companies, and they’ll just debit your bank account with your minimum payment, or you can choose to debit your bank account with that full balance every month. Then it kind of takes that guesswork out of it. And I love anything you can do with personal finance to set it and forget it.

Automatic Payments and Personal Finance Habits

Dan Ahlstrand
I find that you notice it in the first month, because there’s a change in in process, right? But then once, once it’s it becomes routine. You don’t even, you don’t even miss it.

Clinton Wilkins
It’s done. And for me, there have been months where I’ve owed on credit cards, and it’s hard to kind of get ahead of that, but once you are making sure that it’s paid, it’s a lot easier to just make sure that you’re always paying it. And, I’m an advocate of putting everything on a credit card. I never use my debit card unless I’m going to the ATM I put literally everything on the credit card. But I’m trying to plan out getting the best point scheme or something like that, right? And, I really monitor it. And for me, when I wake up every morning, I check my apps, and I see, okay, how much do I owe on this card, what has gone through? And I know how much I spend at the restaurant? How much did I spend at the restaurant? How much was charged on my credit card from Amazon? But I look at it every single morning, and I think a lot of people, they just ostrich, and they put their hand their heads in the sand, and they just pretend that they don’t know. And it’s hard to stay on top of that if you’re not looking at it. And, I think some of that is fear. I owe too much. I can’t pay it off. But I think there’s a change in attitude, especially when we’re talking about things like inflation. A lot of the stuff that’s sitting on people’s credit cards, a lot of it wants, not needs, oftentimes. And I’m not saying that IPeople’s. People’s finances change. Inflation has stretched people very thin. They think a lot of the credit card debt that’s out there is kind of legacy and hanging on. A lot of it wasn’t renovations of your home. This wasn’t like groceries at the grocery store. It was probably things that were more wants versus needs.

Dan Ahlstrand
Clinton, you mentioned utilization. Is it a fallacy that if you have a credit card with a zero balance for a couple of months and you’re not using it, that will impact your credit score?

Impact of Credit Card Balances

Clinton Wilkins
It won’t hurt your score, for sure, but it just won’t provide you maybe any value. And I have a lot of customers who are paying off their cards before the statement even processes. My feedback is, stay below 30% of the limit. That’s going to give you a great score, but use that card and pay it off once the statement is generated before that due date. It’s really, really important to make, make that payment, whether it’s a minimum payment or whether it’s the full balance, make it at least a couple of business days before that statement is due to make sure that it’s posted in time. So many times, lenders have technology problems. Like I heard, one of the big banks this week they were having problems, and they weren’t able to ingest any electronic payments into their system for like two days. So it’s important to make sure that you’re paying these things a couple of days in advance. But again, I’ll advocate for that automatic payment. I think it’s a great idea. Set it and forget it, then you never have to worry about it. What about lines of credit? Lines of Credit are not as bad as a credit card. Yes, the rates can still be high, but that’s more of a longer-term credit facility. I call some of these lines of credit through the Forever plan, because some of these creditors allow you to only pay the interest, which is tough when I’m doing a qualification for a customer. If that credit facility is under $50,000, we are automatically putting 3% of what they owe in as a monthly payment, regardless of what their payment is. So let’s say you owe $20,000 on a credit card or a line of credit, I’m putting in a $600 monthly payment is in as a liability, and that’s legislated. So that’s what the government is basically making us put in for qualification purposes. I have so many people who have $40,000 – $30,000 balances. I’m not talking limits. I’m talking about balances. And that certainly can negatively in people, impact people when they’re trying, buy a home or refinance their mortgage.

Dan Ahlstrand
How does the liability work if you have three credit cards and a line of credit, and for it, maybe, you’re fortunate enough to have them all at a zero balance, do you still have to put that liability in at 30% or how does that work? It’s on balance.

Clinton Wilkins
Some lenders do it based on the limit. For us, we do it based on the balance. So this is where mortgage brokers really sometimes are. A step above the rest. Different lenders, some at the retail level, require you to put it in based on the limit, and that can obviously skew the numbers a lot. There are lots of borrowers out there who have $100,000 credit facilities, depending on what your financial situation is, that can be really bad. If you’re walking into a branch and say, Hey, I want to get some credit, and you have all this credit available, but you don’t but you don’t owe anything, but it might look like, Hey, you’re just fully indebted. And, the way that these branch lenders sometimes think about it is, well, you might not owe today, but you could literally go tomorrow and spend that $100,000, and it can change your financial position tomorrow.

Dan Ahlstrand
Is there a magic number when it comes to credit score that you look for when you’re when you’re when you’re getting somebody into the market?

Clinton Wilkins
Well, the magic number, if you want to be a unicorn, is a perfect score. It’s out of 900; there are a few unicorns out there, really, not many. Not many. Sometimes we see a double unicorn when it’s like a husband and wife. A double 900 is very rare. Typically, they’ve had some installment debt, they’ve had some revolving debt, but it’s a magic mix. You don’t want to have all credit cards, you don’t want to have all installment loans. You want to have a mix of it, and you want to make sure you’re making your payments. And we talked about utilization, but the payment history really is something that’s going to stick around for six years. If you owe more on a credit card one month, that’s not really going to bring down your score overall in the long run, because you can always pay that down. That’s really a snapshot in time. But missed payments, they stay on for like six years. So it’s important to make the payments automatic and make sure you’re making those payments on time. So I would say the payments are probably number one, most important utilization, probably number two, most important, and really the credit mix is number three. So when I talk about credit mix, I just don’t mean credit cards versus lines of credit versus loans. I mean, what creditors are these coming from? So we know there are prime lenders like the Big Five, like Scotiabank, TD Bank of Montreal, for example. And then there may be other lenders, like credit unions, so we consider that all prime lending. But then there are alternative lenders, like, think about the old school, like Wells Fargo, City Financial, I’m thinking in today’s world, like Easy Financial, there are these places that will give pretty much anybody a loan. That’s what we consider an A B lender, and that, as much as you may pay it perfectly, it will hurt that credit mix, because that’s not a prime lender, and it basically looks to the credit bureau to be like they went to these subprime lenders because they couldn’t get credit with a prime lender.

Minimum Credit Scores for Mortgages

Dan Ahlstrand
So, is there a minimum credit score that that you from getting a mortgage immediately disqualifies you?

Clinton Wilkins
We will give a mortgage to anyone with any score, and any Canadian can get a mortgage, even if they have the worst possible credit ever. Dan, you could just be, have not paid anything, and have a 300 score, which I think would be at the very bottom, but if you have a score that low, hopefully there’s a good story. Hopefully, you are in the rebuilding stage, and hopefully, you have a lot of money to put as a down payment, or have a lot of equity in the home. Typically, the lower the credit score, the higher the rate, and the more skin you need to have in the game. So these super low scores, typically, we’re only financing these folks at like 50% of the property, , what we consider a prime borrower is people that have a score above 600 but between the 600 and the 700 score, there better be a good story about why your score is lower, because we really think a lower score is anything below 680 so there better be a good reason and rationale why the score is on the lower side, higher, the better higher the better, baby. If you’ve liked what you’ve heard and you want to learn more, feel free to visit us online at TeamClinton.ca.