When $100 = $10,000

Many of you already know that Equifax and Trans Union are the 2 major credit reporting agencies in Canada and they collect and report the information that is provided to them by your creditors. Whether you have a vehicle lease/loan, a line of credit at your bank, or an American Express card you use for Costco, this information, including balance, payment and more importantly, how often you’ve been late on any of these obligations, appears on your credit report (even major communications companies are now reporting the balance owed on your cell phones and your monthly payment plan).

The fastest way to be denied credit is because of these missed payments as it tells creditors that you’re a potential risk to lend to as you’re not good at paying them back ON TIME and as agreed in the contract you signed with them.

We had a recent client that was going through a divorce, and while he almost managed to keep everything on the rails through such a turbulent time in his life, one little debt escaped him: a department store credit card. With a lowly balance of about $1000, the payment on this small debt was only about $35 per month, but in the last 6 months, not thinking too much of a relatively insignificant debt, he missed 3 payments. Now, missing $100 worth of payments might not sound like too much, but that was enough to send a torpedo with enough fire power to sink his credit score, costing him to have to part with thousands of more dollars.

When a property is purchased with less than 20% down payment (in most cases) you’re subject to a default loan insurance premium, provided by one of the 3 companies in Canada that insure home loans (The CMHC ,Genworth  and Canada Guaranty.) What many people don’t realize is that these premiums are portable to another property. This means if you’ve already paid these premiums, you can actually receive a credit on your next property. Unfortunately this is not well known and many bank lenders end up charging clients this premium again on their next property (unless they’re putting more than 20% down where a premium is not required).

What does this have to do with this particular client? Well, he was previously fully qualified to port 100% of his premium over to his new property as he was selling the matrimonial home and buying a lower priced home with a shorter amortization, so we were able to move him into his new house with $0 insuring premium, even thought he was only putting down 5% (Unheard of, right?)

This should have gone off without a hitch, but remember those missed payments totalling $100? This took the clients credit score from over 700, down under 600 (minimum mortgage qualifying is 620) and even after we brought the card up to date and updated the credit reporting agency, the damage was  already done. This lead to a struggle to get financing for the client at all, and while we managed to get the approval, they deem him as a high risk borrower because of these missed payments. The result, he now has to pay over $10,000 in these insuring premiums over again.

Missing payments (even small ones) as you can see here can cause more than 100X more financial damage than the payments themselves and your credit (like your word) is one of the most important things you have as it either moves us forward or holds us back!