Never before has your credit score had such an impact on your mortgage rate.
Ever since the banking regulator (OSFI) jacked up capital requirements on default insurers, and linked its capital formula to credit scores, more and more securitizing lenders have:
a) set different rates for different credit score ranges; and/or
b) raised their minimum credit scores for given mortgage products.
At some lenders, borrowers with, say, a 640 credit score are offered rates that are 1/4 point worse than someone with a 750 score. Many retail channel lenders set their internal discounts based on credit scores as well.
On conventional mortgages, the magic number seems to be 720. On scores below that, lenders’ extra insurance costs start climbing more meaningfully, and some of them pass that through to borrowers.
It all means that we as an industry are going to have to better educate our clients about this trend—because, according to a recent TransUnion poll, many folks don’t get it.
Over half (56%) of credit card holders say they don’t even understand how their credit score is compiled.
And 4 in 10 borrowers don’t grasp the importance of making more than their minimum monthly payments.
Cardholders who pay more than the required minimum each month are less risky borrowers in general. And that shows up in their credit scores. And, while the credit bureaus don’t disclose their exact scoring algorithms, those formulas seem more sensitive than ever to debt utilization and payment timeliness.
Sidebar: 88% of Canadians regularly pay more towards their revolving debts than the minimum requirement.