For the past few weeks, we’ve become accustomed to Prime Minister Trudeau’s daily update from Rideau Cottage in Ottawa. To help ease the economic impact of the COVID-19 pandemic, the government has put forward several measures intended to support those who have lost their jobs due to the outbreak.
With tens of thousands of Canadians suddenly and unexpectedly facing unemployment, the country’s banks also stepped up to provide short-term relief for those now unable to make their upcoming mortgage payments. This relief comes in the form of a mortgage payment deferral plan to help unemployed workers get through the next few months.
Mortgage Deferral Program Highlights
The Canadian Bankers Association recently provided updated information regarding the program on the CBA website. The plan allows for mortgage holders impacted by the COVID-19 crisis, and who are not currently in arrears, to apply for a deferment of their mortgage payments. Some financial institutions are also offering a similar arrangement for other loan payments, including credit card debt.
If you qualify for this program and are considering your options, the first thing you must understand is that deferring payment is not the same thing as forgiving a payment. Any payments that are deferred will be tacked on to the end of the term of the mortgage, with interest due on the deferred payments.
Potential Impact on Credit Ratings
Under normal conditions, skipping a mortgage payment would have an immediate and negative impact on your credit score. However, these are not normal times and, initially, there was considerable confusion on how seeking a mortgage deferral might impact your credit rating.
This confusion has been cleared up somewhat since then. The latest information indicates that financial institutions will work directly with the credit bureaus to ensure that customers that have arranged for deferral will not suffer a hit to their credit score.
In Canada, the two main credit bureaus are Equifax and TransUnion. Equifax suggests adding a consumer statement to your credit report. This statement should indicate that missed payments are because you’ve lost your job due to the Coronavirus pandemic and that you are committed to making full payment as soon as you are able.
You can verify that your credit report has been updated correctly by requesting your credit report from both Equifax and TransUnion. In fact, the government requires credit rating agencies to provide free credit reports upon request at least once a year. If you find any errors on your credit report, you can then apply to have them corrected.
Why It’s Important to Protect Your Credit Rating
Your credit rating is determined largely by your past debt history, and lenders use your credit score when assessing new loan applications. Applicants with a credit score below a certain threshold are deemed too risky and will likely be rejected.
Your credit score can also impact how much you pay to borrow. That’s because lenders reserve the lowest interest rates for those with the highest credit scores, so even if you are approved for a loan, you may be forced to pay a higher interest rate if your credit score is on the low side.
In addition to ensuring that you pay your bills on time, here are some other tips to help you protect your credit score.
- Avoid making just the minimum payment on your credit cards. You may think that paying the minimum amount on your credit card each month saves you from the negative impact of missing a payment, and to some extent, that is true. However, a pattern of making only the minimum payment each month suggests that you are just barely able to manage your debt, and over time this will drag your score lower.
- Keep credit utilization low. Credit utilization is determined by comparing the balance you carry on your credit cards with your total available credit. If your credit utilization is high and you are consistently near your credit limit each month, this will also reduce your credit score. You should aim to keep the amount you owe at no more than 30% of your available credit.
- Watch your overall credit capacity. Your credit capacity is your total amount of available debt. For example, if you have two credit cards, each with a $5,000 limit, your total credit capacity is $10,000. Even if you keep your outstanding balance owing well below your overall capacity, lenders still consider how much potential debt you could add at any time.
- Maintain a mix of credit types. Lenders like to see that you have a mix of credit types. This variety includes not just revolving credit like credit cards, but also installment credit, including loans of a fixed amount with a repayment schedule indicating the amount and date each payment is due. Showing that you can manage all credit types demonstrates that you are a responsible borrower.
- Don’t apply for credit you don’t need. Each time you request a new credit card or personal loan, the lender reviewing your application will do what is known as a “hard pull” on your credit. If you have several hard pulls over a short time, it may suggest to lenders that you are trying to arrange multiple credit lines, and this can drag your credit score lower. A “soft pull” on the other hand, occurs when a bank or utility inquiries about your credit when you open a new account. This type of credit request does not impact your credit rating.