Over the past few months, your credit score may have changed – for better or for worse – without you even knowing. Canada's credit reporting agencies are moving away from the Beacon score 4 that has been the standard for 30 years, and are now using Beacon score 9. As a consumer, what does the change mean? More important, how will it affect you?
What is a Beacon Score?
Canadian Beacon scores are created by an algorithm using data from a consumer's individual report; that is to say, a combination of all the credit habits on file for you. This algorithm generates a score between 300 and 900. A higher score indicates a better credit history and less risk to a lender.
Generally, to obtain a high-ratio mortgage (less than 20% down payment), your score would need to be a minimum of 620 and preferably higher. In some cases, we have had success with lower scores for younger people or people who do not use much credit. If you're worried about poor credit, you can still contact us for a free consultation.
The Beacon 4 scoring model used development data obtained from Canadian spending, debt and default habits during the years 1997 through 1999. Beacon 9 uses Canadian development data from the years 2009-2011 to create the new risk model. Given how much the economy has changed since 1997, and since 2008 in particular, the new Beacon 9 scoring system will give more accurate predictors for future consumer behaviour.
What's New in the Beacon 9 Model?
The significant changes that may be noticed on an individual report depend on what kind of credit habits you have; while much of the data is similar to the previous system, there are some notable differences.
Two additional trade lines showing: mortgage payment history and cell phone payment history. Previously, someone who used very little credit may have been at a disadvantage for not having enough trade lines. This important change can give you additional credit history, and your cell phone and mortgage payments will be used to either improve or lower your Beacon score based on how you manage those debts.
Different ratings for different types of credit. The old algorithm treated all types of credit – revolving credit, credit cards and lines of credit – equally. Now, lines of credit are evaluated differently because they are more widely used for large items like car loans or are often used in place of high limit/high interest credit cards. This change will help you if you use your lines of credit wisely.
A better window for inquiries. When your credit is pulled from a bureau, that inquiry can affect your score. Previously, if you had your credit checked multiple times in a 14-day time period (for example, if you were vehicle or mortgage shopping) you could see several inquiries but only 1 "hit" on your report. That penalty-free window could be quite tight for the details to be worked out. With Beacon 9 reporting, you have a 45-day time frame during which to have multiple inquiries considered as a single "hit". Additionally, the effects of a "hit" will now only stay on your report for up to 12 months rather than the previous 3 years!
These changes are significant in that they are much more reflective of how we use credit. Beacon 9 also gives lenders a much better predictor of what leads a borrower to default on their loan. It's just as important as ever for you to know your credit habits; the calculation of credit scores is now slightly more complicated, so the more you understand, the better.
If you knew your Beacon score prior to July 2016, you might notice a change in your score today – even if you haven't changed any of your habits – due to the different evaluation of risk factors for the different types of credit. At the end of the day, behaviours that would have hurt your credit with Beacon 4 could still have that impact with Beacon 9. The things you can do to keep your credit healthy will still work.
If you're wondering how your credit score will impact your home ownership goals, contact Auxilium Mortgage today to speak with one of our planners: call Toll-Free 1-855-590-6520 or visit us at 307 Goldstream Avenue during regular business hours, Monday through Friday 8:30 a.m. – 5:00 p.m. Our team can also arrange an appointment evenings or weekends to work with you.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.