There is a lot of misinformation floating around about credit reports and their effect on your ability to borrow money, either on a mortgage or otherwise.  There are some things that aren’t readily obvious, even if you read all the public information.

Credit Scores (Photo credit: Casey Serin)

1. Not everything shows up on your credit report
2. Some things you wish would show up don’t, and other things that seem pretty minor can really screw up your report
3. Credit reports are not designed to be “fair”
4. Credit reports are not necessarily used by all lenders in the same ways
5. A credit report is not, by itself, sufficient to be relied upon as providing full disclosure, and just because a debt doesn’t show up on the credit report does not mean that you don’t need to disclose it in an application for a mortgage
6. You can repair your credit report but it takes time and you actually have to change your credit behaviour.

Not everything shows up on your credit report

One of the misconceptions about credit reports is that they are comprehensive in their reporting of your behaviour as a borrower or as a consumer.  Many types of debt do not generally report to the credit unless the debt relationship ends up in “collections” or in court.

Factors contributing to someone's credit score, for Credit score (United States). (Photo credit: Wikipedia)

• Governments, utility companies, and private debts from non members of the credit bureau agencies generally aren’t reported.
• So if you are behind on your property taxes it probably won’t affect your credit report.
• Similarly, an overdue power bill or light bill will not likely show up, nor will a phone bill…. unless it really gets out of hand and the creditor has to pursue you through a collections agency or by filing a writ in a court.
• Even many loans such as finance loans for time shares, or other shared property purchase agreements will only show up if there is a dispute.

Some things you wish would show up don’t, and other things that seem pretty minor can really screw up your report

Many consumers complain that they are really reliable in making their mortgage payments, which is the largest bill they pay, and yet, most of the time, a mortgage payment doesn’t show up on their credit report.  They think that because it doesn’t show on their report that it has no effect on their credit score. Not necessarily.

Logo of the Credit Institute of Canada (Photo credit: Wikipedia)

• Mortgage don’t report to the credit bureau unless they do. In recent years more and more lenders are choosing to report mortgages, even though they are NOT considered traditional consumer credit.  The gradual extension of mortgage security for Lines of Credit and other revolving loans means that there has been a gradual shift by reporting agencies.  Sometimes mortgages will report and sometimes they won’t.  It is mostly lender dependant, with credit union lenders more likely to report and monoline and bank lenders less likely to report mortgages.  But don’t count on it, as this is quite fluid at the moment and is changing.
• Minor credit problems can radically change your credit score.  Many consumers complain that disputes over tiny amounts of money can radically lower their credit score and adversely affect their ability to get loans, whether small or large.
• Unfortunately, a negative report or a collection, even for a tiny amount of money, will negatively affect your credit score, and undermine years of excellent credit management by an individual.
• What this basically means is that if you are disputing a billed amount by a credit grantor, the only way to dispute the amount owed or even whether or a debt really exists is to (a) pay the disputed amount and then (b) pursue a refund or (c) sue them for your money back.
• Even if a consumer is absolutely right and can prove that they don’t owe a creditor any amount of money, if the creditor files a collection action or reports a delinquency to an agency it will negatively affect your credit report and score. Paying it after it is reported will mitigate the amount of damage to the score but not end it.  If you can prove it is false, the agency will remove it, but the process is time-consuming and the burden of proof is on the consumer not on the reporting credit grantor.

Credit reports are not designed to be “fair”

•  Credit reporting agencies are not set up to serve the interests of consumers.  They are set up to give credit grantors access to objective information about the behaviour of credit consumers.
• Enforcement of accuracy is up to consumers, even if the agencies are required to exercise due diligence in reporting, or can be found to be liable to the consumer in the event of false reports.
• It is very difficult and expensive to fix wrong information on your credit report after the fact.
• Many people have had their lives ruined by “identity theft” where a fraudster has used their identification or information to fraudulently get credit. Credit reporting agencies will work with consumers if there is a case of identity theft, but it takes months of concerted effort by the consumer to resolve these issues.  So be vigilant, and periodically check your credit report.

Credit reports are not necessarily used by all lenders in the same ways

My Mortgage Docs to be Reviewed by an Expert (Photo credit: Casey Serin)

While most mortgage lenders use credit reports in their review of an application it is only one of the measurements used.  Credit reports speak to the “credibility” of a borrower in terms of their “reliability” in meeting their obligations on time. Different lenders use credit reports in different ways – some rely on them, almost completely, and a bad credit report eliminates the possibility of obtaining a mortgage loan.

• This is almost universally true of all high ratio mortgages in Canada granted by institutional lenders and guaranteed by mortgage insurers such as CMHC, GENWORTH and Canada Guarantee.  Because all insurance guaranteeing repayment of the principle of a mortgage loan is backed by federal government guarantees, the Government of Canada has spelled out the lowest credit scores required.
  

  CMHC logo (Photo credit: Wikipedia)

• It is not necessarily true of non-insured lenders such as private mortgage lenders, Mortgage Investment Corporations, and finance companies.  Most they will look at credit reports but not limit their evaluation to a credit score.  Some don’t look at the credit report at all, and rely heavily on the value of the security for the loan for their loan security.  Typically these types of lenders will loan a lower amount against the value of a property – usually less than 65% of the value of the asset.

A credit report is not enough as “full” disclosure

A credit report is not, by itself, enough to be relied upon as providing full disclosure, and just because a debt doesn’t show up on the credit report does not mean that you don’t need to show it in an application for a mortgage.

• As stated earlier in this article, many types of debt do not show up or report to a credit agency, such as mortgage loans, leases of some types, personal guarantees or covenants under business loans, it is critical to realize that full disclosure for the purpose of obtaining credit requires the disclosure of all liabilities, whether they show up on the credit report or not.
• The legal obligation to report all relevant debt, whether it reports or not, is often violated by borrowers who mistakenly believe that they are not obliged to report anything that cannot be “discovered” by a lender.  While it is true that a lender may not “discover” the hidden liability during the course of underwriting a mortgage, if a mortgage is obtained without full disclosure it is considered to be a form of mortgage fraud, and is a criminal offense with severe potential consequences including a criminal record if discovered later.  This discovery most often happens in the event of a default on the mortgage by the consumer adding a major unexpected result of a foreclosure action by the lender.

Credit repair myths

You can repair your credit report but it takes time and you actually have to change your credit behaviour.

• There are many companies that make a business out of helping to “fix” your credit report.
• Some other businesses specialize in helping consumers recover from a major credit breakdown or serious financial collapse.
• None of them can “correct” the credit reports if they are actually true.
• In addition, every form of credit repair, counselling, or consumer repayment program has consequences in terms of its effect on your credit report, and will not restore your “good name” quickly or even certainly.

The only certain way to improve your credit report and score is to become someone who actually pays bills on time, limits use of borrowed funds to that which can be given in a responsible way, and reviews and protects your credit reputation by ALWAYS thinking through the consequences of various credit related actions.

If you are in deep financial trouble seek professional assistance, but realize that while they may protect you from the collection of debts you really can’t afford, this will come with a price that makes it very difficult to borrow for a long time, sometimes more than seven years from the time of the problem.

stressed and worried (Photo credit: Wikipedia)

In summary, when it comes to your reputation as a borrower, be very very very careful and make sure that you know the consequences of your agreements with credit grantors.  They certainly are, and so should you be.

Donald Wilson, President of DominionGrand Financial Corporation.

There is a lot of information available about your credit score and how it is calculated. If you want to find out look up credit score or credit report on Google, Bing or other search engine.

Understanding Your Credit Report and Credit Score

The government of Canada offers a free publication called Understanding Your Credit Report and Credit Score. This publication provides sample credit report and credit score documents with explanations of the notations and codes that are used. It also contains general information on how to build or improve credit history, and how to check for signs that identity theft has occurred. The publication is available online through http://www.fcac.gc.ca, the site of the Financial Consumer Agency of Canada. Paper copies can also be ordered at no charge for residents of Canada.

From Wikipedia, the free encyclopedia