Paying the Bills

A recent headline in the Toronto Star read "Credit Card Defaults at Record Level".  It indicated a record level of accounts being written off as uncollectable for 3 straight quarters.

So what does this have to do with real estate?  Most real estate buyers will need a mortgage.  As part of the approval process, the lenders will turn to a credit reporting agency to determine the credit worthiness of the potential buyer.  The most common credit reporting agency in Canada is Equifax and they look at a number of factors to establish a Beacon Score.  The factors they use and the proportion of importance they assign to each are:  payment history 35%, amounts owed 30%, lenght of credit history 15%, new credit 10% and type of credit used 10%.  So potential buyers may be declined based on their unacceptably low Beacon Score.  Further, they may be approved but at a higher interest rate to offset perceived higher risk to the lender.  This, in turn, will affect the amount they can borrow.

A poor Beacon Score can even adversely affect current homeowners.  Some lenders are checking Beacon Scores prior to renewing an existing mortgage.  In other words, the homeowner can pay the mortgage on time and still be denied at renewal.  Their view is the credit card delinquency is a precursor to mortgage payment delinquency and possibly an unwanted Power of Sale.  Many insurance companies are also checking credit prior to sending out house insurance renewals.  House insurance premiums can increase dramatically if credit is judged unsatisfactory.  It appears their belief is that if homeowners are behind on their payments, they'll be a higher risk for deferred maintenance and potential claims.

In summary, it is crucial to protect your good credit.  Always pay at least the minimum by the due date.  If you're having problems, contact the company involved as soon as possible and explain the situation.  You may be pleasantly surprised at their willingness to work it out.

My next post will look at September 2009 Sales as reported by the Kitchener-Waterloo Real Estate Board.        

Jeff Gingerich

Jeff Gingerich

Sales Representative
CENTURY 21 Heritage House Ltd., Brokerage*
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