Sherri and I just completed a purchase of an investment property here in Calgary as we wanted to be high-end slumlords. We put 30% down (20% is minimum requirement) out of our own resources, paid our bills on time and have no other debt than our existing mortgage and car payment.
At this point we were in good shape to make the purchase. Including good credit scores.
So, we head to the mortgage broker for our approval which happens. However, previous to making the purchase, I had paid off a credit card and closed it as I thought this would be a good thing...less open credit which won't count against our debt servicing. Makes sense BUT apparently all that history is no longer counted in my favour and my credit score was reduced.
Let me bring you back a bit. When I started my career in 1997, I started as a personal banker at Royal Bank. I was responsible for making actual credit decisions and the credit bureau was a secondary tool we used to assist in our decisions, it was not the sole determinant. At this time, we actively advised customers to close unused credit cards or to pay off balances...at this time, less debt was a good thing. I remember on many occasions doing consolidation loans and we would take the credit cards from the customer, cut them in 2 and mail the card issuers instructions to close the credit accounts. The idea was that even though the balance may be zero today, you still had the ability to max the card out tomorrow, after the loan was granted and then potentially have trouble paying our loan back. We were pretty prudent back then.
Lets circle back to 2020 where the more debt potential debt you have seems to be better, at least where your credit score is involved. So I reviewed my credit bureaus again and guess what? The have decreased again, although nothing has changed since the last credit inquiry made by the mortgage broker. Apparently the way to increase your score is to be patient and wait and pay your bills on time or open more credit and rack up debt.
The 2 bureaus also report 2 different scores, meaning, whichever bureau your lender uses, you may or may not be approved and you may end up paying more for your loan/mortgage, and that my friends is fucked.
So here is what I did. I wrote the Financial Consumer Agency of Canada and made a complaint (link below):
Good morning.
I have a general complaint regarding how the 2 major credit reporting agencies calculate and report credit scores. We had just purchased a revenue property and put 30% down. While the process of buying the property was underway, we noticed that our credit scores drastically differed between TransUnion and Equifax, although they reported the same information. Further, my credit score decreased with the inquiry from the mortgage broker.
My latest report (obtained from Borrowell and Credit Karma) shows my score downgraded from "very good" at Credit Karma to Good and my score increased 3 points at Borrowwell, showing as "good". Previous to buying the revenue property, I had paid off a credit card and closed it. I was told that doing this also negatively impacts credit scores.
What I want to know is 2 things:
1. How do these agencies calculate their scores and how they can report vastly different scores based on the same information being reported to them?
2. How can being financially responsible by paying off credit cards and closing them and purchasing assets with significant down payments from personal savings result in a lower credit scores?
As these credit reporting agencies hold significant sway over our financial lives and play a significant role in determining our ability to obtain credit and how much we pay for that credit, these agencies should be transparent and accountable for their scoring models due to the impact they have on each and every Canadian looking to borrow money.
Canadians should not be beholden to some black box scoring model that nobody understands and should be provided the appropriate information about how credit scores are calculated so we can make informed decisions about credit.
https://itools-ioutils.fcac-acfc.gc.ca/Forms-Formulaires/InqComp-PlaDemRes-eng.aspx?lang=eng
I would highly recommend review your credit bureaus regularly. It is free. The easy way is to download Credit Karma and Borrowell. Checking these will not impact your credit score and they will alert you to any inquiries made which adds a bit of peace of mind should someone try to impersonate you and apply for credit.
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