12 Feb

7 Things That Won’t Hurt Your Credit Scores

General

Posted by: Alan J. Nicholas

You may already know that certain behaviors – such as paying your bills on time, every time – can reflect positively on your credit scores. But it’s also important to know that not every action will directly impact your credit scores at all, either positively or negatively.

The following items may influence your finances, but they generally won’t have any effect on credit scores:

1. Paying with a debit card

Using a debit card, rather than a credit card, to pay for items typically won’t impact your credit history or credit scores. When you pay with a credit card, you’re essentially borrowing the funds to pay back later. With a debit card, you’re using money you already have in an account. No borrowing is involved.

The same is true for prepaid debit cards, which you can buy with a dollar amount already loaded onto the card. Prepaid debit card activity generally does not appear on credit reports from the three nationwide credit bureaus.

2. A drop in salary

A salary cut may affect your personal and financial life, but won’t directly affect your credit scores. While your income generally isn’t a factor used to calculate credit scores, it’s important to note that some lenders and creditors may consider your income when evaluating a request for credit. They may also check your debt-to-income ratio, or your amount of debt compared to your income.

Also, a drop in income can hurt your credit scores if it results in late or missed payments on your credit accounts. Payment history is typically used to calculate credit scores.

3. Getting married

Your marital status is not a factor used in calculating credit scores. If you get married, you’ll still have your own credit reports, and so will your spouse.

That said, if you and your spouse open joint credit accounts, they will appear on both of your credit reports. And late or missed payments on those accounts can negatively impact credit scores.

4. Getting divorced

Actually filing for divorce doesn’t directly impact credit scores, but if you have late or missed payments on accounts as a result, it may negatively impact credit scores. In community property states, property – and debts – acquired during the marriage are generally owned equally by both spouses. That means you and your spouse may both be responsible for any debt you incurred while you were married.

While a divorce decree may give your former spouse responsibility for a joint account, that doesn’t let you off the hook with lenders and creditors. If your name remains on an account, late or missed payments reported to credit bureaus may negatively impact credit scores.

5. Having a credit application denied

A denial of a credit application won’t affect credit scores. But the application itself may result in a hard inquiry, which may negatively impact credit scores. If you get rejected by several lenders, there may be common factors in your credit history that drives those decisions.

6. Having high account interest rates

Interest rates and annual percentage rates (APRs) on your credit accounts aren’t a factor used to calculate credit scores. But late or missed payments on those accounts can hurt your credit scores.

7. Getting help from a credit counselor

There are many credit scoring models, and they generally don’t consider whether you are participating in a credit counseling service. But actions you take as a result of the counseling can impact credit scores – for better or for worse.

For more information on your credit, determining your buying power or consolidating your debt, contact me today!

5 Feb

CANADIAN QUALIFYING MORTGAGE RATE LOWERED TO 4.99%

General

Posted by: Alan J. Nicholas

Market interest rates have fallen sharply since the coronavirus-led investor flight to the safety of government bonds. The 5-year government bond yield–a harbinger of conventional mortgage rates–now stands at 1.34%, down sharply from the 1.60+% range it was trading in before the virus became global news (see chart below).

This morning, one of the Big-Six banks finally reacted. TD cut its posted 5-year fixed rate to 4.99%. TD’s posted rate had previously been at 5.34%, making this a 36 basis point cut. Other banks had lowered their qualifying rate to 5.19% last July, leading the Bank of Canada to cut its 5-year conventional mortgage rate to 5.19%. This is the qualifying rate under the B-20 rule introduced on January 1, 2018.

Even the regulators have been questioning the efficacy and fairness of using the big-bank posted rate as a qualifying rate for mortgage stress testing.

On January 24, the Assistant Superintendent of OSFI’s Regulation Sector, Ben Gully, gave a speech at the C.D. Howe Institute suggesting that the B-20 qualifying mortgage rate historically would be no more than 200 basis points above contract rates. He said that OSFI chose the “best available rate at the time.”

He went on to say that for many years, the difference between the benchmark rate and the average contract rate was 200 bps. However, this gap “has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed. We are reviewing this aspect of our qualifying rate, as the posted rate is not playing the role that we intended. As always, we will share our results with our federal partners. This will help to inform the advice OSFI might provide to the Minister, as requested in the mandate letter to him.”

By keeping posted rates too high, the Big-Six banks have inflated the qualifying rate, making it more difficult than necessary to pass the stress test to get a mortgage.

While TD’s rate cut is welcome news, its posted rate is still too high by historical standards. Given today’s average contract rates, the posted rate should be at least 20 bps lower still.

Banks have a strong incentive to inflate their posted mortgage rate. For one thing, they are the basis for the calculation of big-bank mortgage penalties. Also, they are the minimum qualifying rate.

The posted rate does not appropriately reflect the state of the mortgage market as few borrowers would pay this rate. Interestingly, banks often move this rate in lock-step, or close to it, reflecting their dominant oligopolistic position in the marketplace.

If a couple of the other big banks follow TD’s lead, the Bank of Canada benchmark rate will be below 5% for the first time since January 2018 when the new B-20 rules were adopted. Lowering the stress test rate by 20 bps from 5.19% to 4.99% would require roughly 1.8% less income to qualify for a mortgage on the average Canadian home price (assuming a 20% downpayment), increasing buying power by 2%. This doesn’t sound like much, but it can have a meaningful psychological impact on already improving housing markets. The latest CREA data shows that the national average home price surged 9.6% year-over-year in December. A lower stress test rate would make a busy spring housing market even more active.