A good credit score doesn’t guarantee approval

Filed in Credit Score by on September 12, 2013 1 Comment

If you watch any TV at all, you are sure to have seen the ads promoting you to check your credit score. Most of these ads are American base, which means the advice is not necessarily great for Canadians.

Any time you apply for a loan or mortgage, the financial institution you are using will want to check your credit rating. The same rules apply when trying to get a new phone line or an account with a utilities company.

The question then becomes whether or not a good score guarantees a loan. The average Canadian Credit Score hovers around 700 and it is considered a good credit score. Credit scores in Canada can range from a low of 300 to a high of 900. To lenders, Canadians with bad credit will have a score of 600 or less. This is especially true when lenders are reviewing your application for a mortgage or a car loan. A good credit is above 600 and an excellent credit score is 700 or more.

However, a high credit score doesn’t necessarily translate to a guaranteed loan approval. Actually, the answer is that it doesn’t, and that is because there are more parts to a credit report than just the score. You can have an average 700 rating and a good steady income, yet still be turned down. That is because most lenders look at repayment history rather than anything else.

Let’s imagine that you have a credit score of 700, but only a single credit account. To make matters worse, that loan account is a credit card that you have only had for a short period of time. Before that, you had no other credit or bad credit, with the latter likely to have been something from a few year’s previous, assuming you have that 700 score.

This is a scenario where the 700 score might not be good enough.

Lenders generally look at your repayment history from the past couple of years, with at least two trade lines (loans, revolving credit). Examples of a trade line are a credit card with a $1,000+ limit, an installment loan such as a car, and a revolving credit line.

If you are thinking about applying for a mortgage in the future, but have no credit to speak of, it’s time to start building. The easiest way to do that is to apply for a credit card or small installment loan. Make sure to always pay on time, as lenders like to see a clean repayment history for a 1-2 year period. Even if you have a past bankruptcy or have been on credit counselling the general consensus is that a person will need at least 2 years of history showing regular payments in order to increase the likelihood of getting approved for a loan.

What’s the right score?
The best score you can achieve is 900, but the average score for Canadians sits at around 700, which is considered good. Dropping below 620 can really hurt your chances of getting a loan. In fact, the Canadian Housing and Mortgage Corporation (CMHC) will consider approving insurance for Canadians with credit scores as low as 580. Generally though a score of 680 is recommended. One of the first steps to improving your credit score is to get your finances under control. “A little organization can go a long way” according to FinanceFox.

Having a lower score doesn’t necessarily mean being unable to get a loan, although it will likely mean having to accept a higher interest rate. If you are finding you are having difficulty obtaining a loan at a bank, consider visiting a financial broker who will have the means to find a lender that is willing to provide you loan.

There are steps you can take to improve your score, but it’s not something that happens quickly. It could take months or even years to get your score to a level that is deemed acceptable. Try to keep your balances below 50% of the total credit available and always pay bills on time.

Time is the only option that some people have, especially if they have a bankruptcy on their credit report. That is something that can stay there for 7 years, with delinquent payments staying on a credit report for about 6 years.

A set algorithm is used to calculate the credit score, but financial institutions may use that information however they choose. Each of those institutions uses a scoring model of their own, which is something most people aren’t aware of. A low score may not eliminate you from getting a loan, but it’s impossible to know which parts of the report on lender values over another.

You shouldn’t need a TV ad to tell you to take action regarding your credit score. Be aware of what your score is and do what you can to get it to an acceptable level. Know what your score is before you decide to apply for credit of any kind.

About the Author ()

Pat Drummond is the author of Credit Reports Canada and considered by many to be one of the leading experts on productivity and simplicity in relation to financial planning. He started this online credit score & reporting site to chronicle and share what he’s learned in over 20 years of counseling families and individuals on debt management, obtaining loans and improving credit scores.

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