What Your Credit Score Tells A Lender
So what does a lender look for when they’re assessing the “Credit Worthiness” of a potential borrower?
Here are some things to consider when reviewing your report.
To put yourself into the mind of the lender when they are assessing your ability to repay the debt, ask yourself this simple question:
How much Money would YOU loan to a friend or co-worker if you knew they had a bad reputation for paying back borrowed debt?
… the lender is just attempting to PREDICT how likely it is that they will ever see their money again! Lenders use credit reports to assess how responsible a borrower is with their bill payments.
The 5C’s of Credit
The general methodology used my most lenders to determine the credit worthiness of a potential borrower is the 5 C’s of Credit. These 5 qualitative + quantitative factors of assessing risk include Capacity, Capital, Collateral, Credit and Character. Your credit score is an algorithmically generated number based on your payment history, how much debt you currently owe, the length of your credit history, how much new credit you have acquired recently and your ‘credit mix’.
The numbers go from 300 to 900, and generally, the higher the number the better. For example, score of 750 to 799 is shared by 27% of the Canadian population.
Specifically with respect to qualifying for mortgages, if your score is greater than 680, you are considered an A-plus client: smooth application process, should qualify for lenders best rates.
If your score is between 620 to 680, lenders will take a closer look at specific aspects of your application. You may still qualify for some of the better rates, but your application will endure a little more due diligence by the lender.
If your score is below 620, this is the range where you may be locked out of the best rates and terms. More due diligence is required, and the possibility of being turned down by lenders occurs more often.
We’ll expand on this topic in later threads. For now, be sure to take a look at your credit score, and clean up anything you believe is inaccurate or false information. You’ll be happy you did!