Joe Sammut, Mortgage Agent at Mortgage Architects talks about the importance of maintaining a good credit score.
How important is the credit report?
What are some of the things you could be doing in your 20’s to make sure you have a good credit rating?
Why is it important to make the minimum payments, if you cannot afford to pay the full amount on your credit card?
What is a credit score out of?
Why is it important to pay of your credit card balance sooner than waiting for the statement?
Davelle: Here we go. Hi, Joe. Thanks for joining the show today. Joe Sammut is a … Is it mortgage broker or agent? I always forget.
Joe Sammut: I am a mortgage agent with Mortgage Architects.
Davelle: Okay. Joe Sammut is a mortgage agent with Mortgage Architects. He is going to be joining us today to talk about the stimulating topic of credit reports. Thanks, Joe, for joining us.
Joe Sammut: You’re very welcome. Thank you. Thanks [inaudible 00:00:24].
Davelle: One of the reasons I decided to talk about credit reports is a couple of weeks ago we were doing one of our first time buyer seminars and it was just a topic that just came up. I’m noticing it’s a topic that comes up continually with people who are looking to make a big purchase, like buying a house or a condo, because they don’t understand the importance of having a good credit report, what goes into it, and how they go and make sure that they have a good credit report.
Joe, do you want to tell us a little bit more about how important the credit reports really are?
Joe Sammut: Certainly. What I will tell you, or what I would like to start with, is credit is unfortunately not one of the things that any of us have ever been taught in school. Even our school curriculums today are not at all discussing credit perhaps the way they should. Perhaps educating young people, most importantly young people, on how maintaining a good credit score and a good Beacon score is going to help them throughout their adult years simply because without a good credit score it’s going to be virtually impossible to get financing going forward if they’re not conscious of exactly what their credit looks like.
What we find is that unfortunately by the time we get to … By the time an individual gets to us when they’re in their late 20s, early 30s, a lot of the damage has been done already and then we need to spend a number of years with that client or with that prospect to help them repair their credit and give them some guidance as to what perhaps they should’ve done when they were in their late teens, early 20s.
Credit is something that carries through life with you. It’s your signature. It is your credit worthiness. It’s your ability to obtain credit. It’s what lenders look at to decide whether or not they’re going to give you that car loan, that student loan, your first mortgage.
Again, credit is a very, very important part of peoples’ lives. Unfortunately, as I said, it’s not taught young enough on how to maintain good credit and how much in fact credit costs you if you don’t maintain it properly.
Davelle: Sure. If you’re in your 20s what are some of the things that you could be doing to make sure that you have a good credit rating?
Joe Sammut: One of the things that I encourage young people to do is to, first of all, get a credit card of any sort. A $500 Visa, a $500 MasterCard. Get something in their name that they then can utilize on a monthly basis and pay it off the minute they use it. Now, by doing this you’re definitely not going to be the bank’s best friend because they’re not making any interest off of you because you spend the money on their credit. You’re then in turn paying it back so that way you have a zero balance, so therefore they can’t accrue any interest to your bill.
As I said, you’re not the most popular of individuals amongst the banks because they’re not making money off of you, but it doesn’t matter. They will make money off you in the future and they realize that that’s helping you to maintain or to establish some good credit. Get a small credit card, utilize it, use it, buy something, pay it off, use it again, pay it off. Pay it off as soon as you spend it. Don’t necessarily wait until you get the bill at the end of the month to then pay the bill.
You’re best off to pay the bill or pay it online the day after you spend the money, so then that way you’re much more conscious of not spending the money unless you had it available to you to pay the bill off.
Davelle: Got it. What about what’s some advice that someone in their 30s should know about their credit?
Joe Sammut: Same type of thing, but one of the biggest misconceptions is if I have a small balance on my credit card and I don’t make the payment this month that’s okay. I’ll just make double payments next month. Doesn’t work that way. If you cannot afford to pay the credit card off in its entirety at least try to make the minimum payment at all times on time or before the due date always. Simply because if you don’t your credit bureau gets flagged with a delinquency on that credit card or on that loan or what have you. That is what impacts your Beacon score most negatively, if you have delinquent payments.
Davelle: Got it.
Joe Sammut: At all times try to make at least the minimum payment until such time that you can afford to make more than just the minimum.
Davelle: Actually maybe we should step back for a second and say so what is a credit score out of?
Joe Sammut: Credit score is out of 1,000. In Canada we call it a Beacon score. There are two credit bureau reporting agencies in Canada. There’s Equifax and then there is TransUnion. They both have their own scoring system, but essentially what happens is there are over 200 components on somebody’s credit bureau that goes into calculating the scoring system.
What it is is really a scoring system that [inaudible 00:05:01] lenders and the credit bureau agency designed many, many years ago. They continuously tweak it and perfect it. It’s a system that was designed many, many years ago to almost take the guesswork out of lending. Meaning that if somebody goes to a bank to get a car loan and they have a good Beacon score, a Beacon score of let’s say 750, 800, the lender automatically looks at that person a little bit differently than they would look at somebody that has a 580 or a 590 Beacon score.
Joe Sammut: That Beacon score is so low there’s a history there. It tells you automatically that that individual has had problems paying their bills over time. Whereas if somebody has 750, 800, 850 as a Beacon score that automatically tells us without really looking too much further that that individual pays their bills on time and is a very good credit reference.
The 200 elements, or the plus 200 elements that are used from a credit bureau to develop that score, I believe those are trade secrets. I don’t know what exactly the credit bureau agencies use or pull from a score. One of the things that they look at is who in fact you’ve gone to for credit.
Joe Sammut: For example, if you go to a [chartered 00:06:15] bank to apply for a MasterCard, you’re not looked at as poorly as if you went to a [inaudible 00:06:22] lender to get a payday loan. There you’re looked at a little bit differently because you’re going to a less desirable source of credit and therefore the credit bureau looks at who you’ve gone to for credit. Therefore they give you a lower score because of it.
Another thing that they would look at is how often you’ve gone and looked for credit. For example, people don’t realize that every single time they fill out a credit application, whether it be for a credit card, a mortgage, a car loan, a rental application, they are having what’s called an inquiry made on their credit bureau. Those inquiries impact your Beacon score.
If you have too many inquiries you get known as a credit seeker or a credit monger. Basically somebody who’s looking for too much credit. That concerns the bank. Therefore, your Beacon score is negatively affected with the number, or a large number, of credit inquiries that you have done on you.
Joe Sammut: These are all little things, so how often you pay. Are you late 30 days? Are you late 60 days? Are you late 90 days? Have you ever been assigned to third party collections? Have you ever had a car repossessed? Is your mortgage up to date in good standings?
Joe Sammut: [crosstalk 00:07:37] keep in mind that for somebody that is not necessarily a first time home buyer but a perhaps repeat buyer, they have their mortgage rating on their credit bureau. If a mortgage company sees that they were delinquent two or three times in their mortgage payments they’re going to then think twice about lending them another mortgage.
Davelle: Now, if someone let’s say gets a credit card bill at the first of the month and it says it’s due on the let’s say 25th of the month, does it matter when it comes to the credit report whether they pay that bill on the 5th of the month or they pay it the day before it’s due?
Joe Sammut: Not necessarily because quite often the credit card companies are not in sync with the reporting agencies, such as Equifax or TransUnion. The credit card companies report to the credit bureau agencies on a particular date or day of the month. That day of the month could be completely different from when that credit bureau agency or that credit card shows as though it was paid off.[crosstalk 00:08:33] if somebody let’s say had $1,000 limit on their credit card and a $500 balance, they could have just gone and paid that $500 balance. I could do a credit check a week from now and I would still see that $500 still outstanding.
Joe Sammut: The credit bureau agency had not caught up yet with, or the credit card company had not caught up yet with, the credit bureau agency. Really as long as you prove that it’s been paid it doesn’t quite frankly matter what day of the month you pay it. It’s always better to pay it sooner rather than later because some credit card companies actually start accumulating interest from the day you spend the money.
Joe Sammut: They don’t wait for the statement. They start charging it from the day you spent it, so you might want to pay that sooner rather than later.
Davelle: Now, does it matter how high your credit limit is from card to card?
Joe Sammut: Not necessarily, no. That is again another myth, but that could very well change with some of the recent steps in both the mortgage market and the credit market as a whole. There are new regulations coming down the pipe. One of the regulations that could change, and the rumblings are that it might change, is that if you have too much unsecured credit in your name, whether you spend it or not, it could very well work against you if you have too much credit available to you.
Now, that’s not the case today, but it could very well be down the road. You don’t want to have too much credit available to you while still trying to buy yourself a home or, again, buy yourself a car. You want to make sure that you are living within your means and you don’t have … I guess the fear is that you have all this unsecured credit available to you. You go out and buy yourself a car and then you go spend all that unsecured credit, and now you can’t afford either, the car or the unsecured credit.
Again, you have to be very, very careful with not trying to get yourself too much credit.
Davelle: Right. Of course. Now, in the eyes of this Beacon score, what would look better, someone who paid cash for their car, got a loan for the car and regularly paid it off, or someone who leased the car? Which one of those three things looks better in the eyes of the credit scores?
Joe Sammut: Leasing and buying, or financing, look very, very similar. Again, it’s going to show as a large outstanding debt with monthly installments on it. If you [inaudible 00:10:53] a car loan and pay [inaudible 00:10:57] for six months on monthly payments and then you just decide to pay it off in full it shows that you’ve got a track record by paying your bills off in more than enough time.
If you go out and you buy everything cash, contrary to what one would believe whereby cash is king, if you buy cash and you do not establish debt or a credit rating, no credit is worse than bad credit.
Joe Sammut: The reasons being is the banks aren’t keen on lending somebody a mortgage when they’ve paid everything cash because it is so much against the grain today in today’s world of finance and today’s world of technology where the banks are assuming that everybody needs money to buy something or to finance something. Therefore they get a little bit skeptical of those people that are paying everything cash.
Joe Sammut: Like I said, by paying cash you don’t establish a record or a track record for yourself. No credit, no track record, is worse in some cases than bad credit.
Davelle: Wow. Now, one of the things you had mentioned earlier was with the payday loans. Using those payday loans negatively impacts your credit rating?
Joe Sammut: It could. If they do a credit check on you and you see … Keep in mind … Remember I mentioned earlier about the inquiries that are done in your name?
Joe Sammut: Every time you have an inquiry done it shows up as to who was it did the inquiry, what their phone number is, and what date they did the inquiry.
Davelle: Got it.
Joe Sammut: If a payday loan company is doing an inquiry on you to establish an account, and let’s say you go to ABC payday loan company and then next month you go to XYZ payday loan company, in the eyes of a lender you’re going to a payday loan company because you can’t cash your checks through traditional means.
Davelle: Got it.
Joe Sammut: Therefore they automatically start questioning why you’re doing what you’re doing.
Davelle: Wow. I mean, it’s funny. For our listeners, if you’re wondering why does your credit history matter to you, whether you are a renter or an owner, credit history matters because even if you’re a renter, most landlords want to look at your credit history to make sure that you do have good credit to make sure that they should be renting to you and that you will continually pay their rent because you’ve continually been paying your bills.
I mean, I’ve seen cases where there’s people with credit scores below 650 that basically people won’t rent to them because they just don’t feel comfortable renting out to people who have a lower score. I always tell people credit is important. Not just when you’re buying, but even when you’re renting, too.
Joe Sammut: Yep, absolutely. That’s absolutely the case. Your credit, like I said, I really can’t stress this enough, your credit is something that you should be maintaining, or, first of all, establishing at a very young age. Young age being anything over 18. I think you should start trying to establish credit, but maintaining it throughout your 20s and 30s, and showing a track record whereby you’re borrowing and paying back. Your credit is your signature.
With good credit you’d be amazed at how many doors will open for you. With bad credit or questionable credit, or questionable trends on your credit bureau as to where you’ve gone for credit, you have no idea how many doors could be slammed in your face with no reason given.
Davelle: Right. Of course.
Joe Sammut: A lender does not need to give you a reason as to why they’re turning you down for a certain credit [inaudible 00:14:12]. They can just tell you you don’t qualify. Meanwhile in the background they know where you’ve been, how you paid, who you owe money to that are reporting. Again, there could be people you owe money to that aren’t reporting, but those aren’t going to help or hurt your credit rating because they don’t show up.
They’re going to be able to see everything about you in a very quick glance. For those of us that know how to read a credit bureau, we can see everything about you for the last three years. We know where you’ve been, how often you pay, and we can see trends.
If you’ve missed payments because you moved and the credit card bills went to the wrong address and didn’t catch up to you in enough time with a good explanation it can be explained away, but nine times out of ten it’s truly the individual’s fault who just chose not to pay their bills or just chose to do something a little bit more creative which unfortunately backfired on them.
Davelle: Right. Now, how often would you recommend that people check their own credit rating to make sure that everything’s okay, no one has stolen their identity or anything like that?
Joe Sammut: That’s a great question. At least once a year. You can get in touch with Equifax and TransUnion and you can request a personal inquiry. What that will do is give you the ability to see your credit, see who’s on your credit bureau, see whether or not it coincides with who you think you own money to. If you have a very common name, for example Smith, Morrison, [crosstalk 00:15:40] a frequent name.
Joe Sammut: You want to make sure that your name is not being cross-referenced with somebody else’s. In some cases if the credit bureau cross references your two bureaus, that other person could very well [inaudible 00:15:57] by making it look better than it is, but most often you are … The other person being cross-referenced to your bureau is a detraction from your bureau, most certainly not a compliment.
You definitely want to make sure that nobody else’s information is on your bureau and that, as you said, nobody has compromised your credit [crosstalk 00:16:15] your identity.
Joe Sammut: It is quite prevalent and you have to be very, very proactive at making sure that you can catch it before it happens.
Davelle: Yeah, that makes sense. I mean, it’s funny. I always tell people, “Check your credit rating once a year.” It’s sort of my annual thing to do around sort of Christmas, New Year’s time. I make sure I go to equifax.ca and pull my credit report just to make sure that everything on there is accurate.
Joe Sammut: Very much. It’s like changing the batteries in your smoke detectors.
Joe Sammut: You [crosstalk 00:16:41] should do it once a year and at a time of year where you do your housecleaning, where you do your getting your house in order, or making sure that everything is the way that you need it to be. If it’s not, it gives you the opportunity to take steps to clean it, as opposed to going out and then trying to buy a house and then at the 11th hour finding out that, oh my goodness, there’s something on your credit bureau that’s now going to take you two months to clean out.
Davelle: Right. Absolutely. Are there things that you would say people in their 40s need to be careful about or watch out for or make certain they do when it comes to their credit report?
Joe Sammut: No more so or no less so than everything that we’ve just talked about.
Joe Sammut: It doesn’t matter your age. I mean, credit fraud, identity theft, it’s impacting people in their 20s and people right up to their 90s. The criminals out there or the criminal element out there that is destroying peoples’ credit, they’re not prejudiced as to who they do it to. Everybody should be very, very conscious and diligent to make sure that their credit is exactly as they see it to be. If it’s not you question it right away and don’t let it linger.
Joe Sammut: Don’t [inaudible 00:17:52] without you getting answers.
Davelle: Got it. Now, can you speak to us a little bit? When I’m looking at credit scores I noticed … Well, outside of the credit score, there’s the R1, R2, the R3, which I believe it’s sort of when people pay their bills 30 days, 60 days. Can you talk about that a little bit?
Joe Sammut: Yeah, certainly. You have what are called revolving debts. For example, an R1 rating on a car loan says that that individual has paid their car loan, their revolving debt, with an R1 status. Meaning that they’re currently R1, meaning that they’re up to date and in good standings. We then are [inaudible 00:18:31]. It will tell us how many times they’ve been 30 days late, 60 days late, 90 days late over the last seven years. I can see all of that. Ideally we want to see somebody who’s currently R1 and has always been R1.
Joe Sammut: We don’t want to see any delinquent payments in the past. If we do, we just need to have a good understanding as to why. [inaudible 00:18:52] is an installment. Pardon me. I said a car loan a revolving, that’s not true. My apologies. An R1 would be things like a line of credit or a credit card. That’s revolving debt.
Joe Sammut: Meaning that it’s readvanceable. You can borrow it again after you’ve paid it off. An installment loan would be an [inaudible 00:19:09], an [inaudible 00:19:10], an [inaudible 00:19:10] three. That is an installment loan, meaning a car loan, a student loan, something that has a pre-prescribed payment over a period of time and that payment does not change. As you pay it down you cannot utilize that equity again or that capital again. That’s called an installment loan.
Then there are other ratings. An O rating, which to be quite honest with you I don’t know exactly what that is off the top of my head, but you see that very, very rarely. Again, your credit bureau tells me your complete history. I can see what all of your credit cards, lines of credit, loans are today, how they’re performing and how they have performed over the last seven years.
Davelle: Wow. That’s amazing.
Joe Sammut: Another thing to keep in mind is every time you go to inquire about credit those mortgage inquiries I referred to earlier, they actually stay on your credit bureau for three years.
Joe Sammut: There’s a running tally of everybody you’ve gone to for credit over the last three years. I can see what type of places you’ve gone to for credit. How much have you shopped around? Where have you gone? What have you done? As I said, I can see all of that.
Davelle: How does filing for bankruptcy or getting a under consumer protection, how does that affect your credit rating?
Joe Sammut: Bankruptcy, well, essentially what has to happen is after your visit with a bankruptcy trustee they will be able to tell you whether or not you in fact are even eligible to go bankrupt. There’s a certain criteria or a certain litmus test that they have to follow to let you know or to determine whether or not you can go bankrupt on your creditors.
You then have to have what’s called a creditors meeting. Your creditors actually have to approve your decision and your trustees’ decision to go bankrupt or to allow you to go bankrupt. If it’s all granted and you’re approved you go bankrupt and then you are discharged from bankruptcy after I believe it’s now 24 months. Then you can start reestablishing credit after you’ve been discharged for two years after [inaudible 00:21:11] conditional discharged from the trustee.
You are in a period of bankruptcy for two years. You then can start reestablishing credit two years after that. After you’ve reestablished credit, the banks will then lend you money. They will lend you a mortgage, a credit card, car loans, and this like that.
Joe Sammut: If you go to consumer proposal, it’s significantly different. You go into the consumer proposal whereby you are agreeing to pay your creditors 20 or 30 cents on the dollar for everything that you owe. You then have two to five years to pay that off.
Joe Sammut: Once you pay that off, you then can start reestablishing credit. Then once you have paid that off and you have reestablished credit for two years the banks will start to lend you money again. Both of them impact you quite negatively. Ironically enough, the consumer proposal might very well impact you for a, negatively impact you, for a longer period of time than the bankruptcy will.
Davelle: Well, that’s what it’s sounding like. I’m thinking, “Wait a minute. The consumer proposal, you’re actually trying to pay things off. Why is that person being dinged even more?”
Joe Sammut: I’ve never understood why that is because, like you say, that individual is doing their very best to make good on what they owe or [crosstalk 00:22:30] afford to make good.
Joe Sammut: They are having to drag it along a lot longer than the person who went, entered into bankruptcy. I don’t have an answer as to why that is [inaudible 00:22:44].
Joe Sammut: Not that I would rather see somebody go bankrupt than consumer proposal, or vice versa, because both of them are going to negatively impact you for a great length of time, but if that is the only way to get out a jam that you’re in then speaking with a trustee is going to be the best advice that you can possibly get.
Davelle: Got it. What if you’re a couple and one person has stellar credit, let’s say an 800 score, and the other person has a 550, what should you do then if both of you are trying to get a mortgage to buy a house?
Joe Sammut: There was a day when we used to be able to average the two scores. We can’t do that now. If you have a great score and a not so great score, the not so great score negatively impacts what the great score individual’s able to do. In a case like that, if it’s a very bad score and for good reason, we might very well consider leaving that person off the application and do everything in the name of the person that has the good score.
Joe Sammut: Assuming they qualify on their own. If they don’t qualify on their own and we need both of them then we need to spend some time to repair the not so good credit or the not so good applicant’s credit. Hopefully get them both to the point where they can attain financing.
Davelle: Wow. Geez, tough strokes.
Joe Sammut: [crosstalk 00:24:02].
Davelle: Doesn’t sound like it’s easy.
Joe Sammut: It’s not tough if you maintain good credit.
Joe Sammut: That’s key. It’s very important. I can’t stress this enough. I’ve spoken to schools many, many times where I’m sitting with kids, young adults, and I’m telling them the importance of maintaining good credit. It is so vitally important to not only your credit future but also your peace of mind, your ability to sleep at night. You have no idea how negatively it impacts you when you have bad or questionable credit and you’re running from your creditors.
Joe Sammut: If you can’t afford to buy it, if you don’t have the cash to buy it, don’t buy it. If you can’t afford to pay your credit card off at the end of the month, don’t use your credit card.
Joe Sammut: Credit card companies are not your friend. Credit card companies are there to make money off of you. If you look at your credit card bill, which is thankfully … Was finally instituted a few years ago whereby they have to show you now on a credit card bill how long it will take you to pay off that balance if all you do is make minimum payments.
Joe Sammut: You’re talking 20 or 30 years. If you don’t have the money to buy the product, don’t use your credit card. If you have the money and you intend on paying it off at the end of the month, using credit is nothing more than a temporary tool and it’s a beautiful thing.
Davelle: Got it. Wow. Sounds like great advice indeed. Anything else you want to add in terms of credit reports? Anything that you think people should know?
Joe Sammut: Just don’t apply for credit willy-nilly. If you’re going to apply for credit, make sure that you’re doing it for the right reasons. You need that credit at that time. Don’t apply for these gimmicky things when you go to the hockey game or the basketball game where you get a towel or a basketball if you apply for a credit card because that’s going to negatively impact your credit.
If you go to a department store, you walk into a Saks Fifth Avenue and you apply for a credit card, that’s going to to impact, negatively impact, your credit score. Only apply for the credit that you need and you want you know you can afford to pay.
Davelle: Got it. Great advice indeed. Thank you so much for speaking with us today, Joe. Joe, how can people reach you?
Joe Sammut: You can reach me at 1-888-575-4403, extension 21, or by email at Joe Sammut, J-O-E S-A-M-M-U-T, @mortgagegate.ca.
Davelle: Awesome. Thanks so much, Joe. Talk to you later.
Joe Sammut: I appreciate it very much. Thank you.
Joe Sammut: Bye bye.