Over my five plus years of banking experience, about four of those years involve credit and the process of trying to get clients approved for credit cards, loans, mortgages/refinances, lines of credit, overdraft etc. I have done this for three of the five major banks in Canada and I can tell you that the criterion is more or less the same.
Before I go over that criteria, I will not be telling you specific companies and their entire criteria as that is company information. I will be giving a general idea of what they are looking for to help you be prepared and get you approved for what you want. This would be extremely helpful when it comes to trying to get a mortgage with a large bank or a credit card/credit line with a large enough limit for easy access to cash if in an emergency.
There are differences between the companies though, and that lies within their risk tolerance/risk appetite. Risk tolerance/appetite is how willing a company will be to lend to any given client based on an established criteria/guidelines. Most banks use similar criteria but tweak it to the amount of risk they are willing to take on. A company would set their own criteria and either you fit it or you don’t. The criterion is based on how they want to position themselves in the market - some are willing to take more risks than others. Also, the more established companies would be able to provide special programs for many different circumstances including foreign workers, professional students, foreign income, new to Canada etc. These special programs will cater/give lieu way to those who are in specific situations and can give them a preferred criterion to qualify for credit.
How do you get approved?!
1. Have a low Debt servicing ratio (DSR) - this is the amount of debt that you have compared to your income; the lower the better! Companies will have their own methods of calculating this and will have a certain ratio that they will require you to be able to meet. Generally the DSR is calculated using: 1) housing costs - rent, mortgage payment, condo fees, property tax and heating 2) monthly loan payments 3) 3-5% or balances on credit lines and cards 4) the payment of what you are applying for 5) gross income. Any other monthly expenses like insurance, cell phone bill, cable etc. are usually left out of the calculation as they are not “debt” related. From my experience it is best to have your ratio at 40% - as mentioned previously, the lower the better. Noting that the calculation is done on a monthly basis so Sometimes debts have biweekly/weekly/semi-monthly payment schedules and would need to be calculated into a monthly payment. For example, a $50 biweekly payment is $108.33 monthly ($50*26/12). The DSR can make or break the decision!
2. Credit bureau score - this is a number which gives you an idea of how well or poorly you are managing your credit. It looks at the utilization of your revolving debts (how close you are to your limits and how long you’ve had the balance), timely payments all credit, amount of different credit facilities, how many times you’ve checked your credit/applied for credit, how long you’ve had credit etc. A good score is greater than 700. Anything lower than 660-650 will raise some eyebrows. Most banks require you to be over a certain amount and usually 600 is the cut off. If you are less than 600 you should really consider getting some advice on how to rebuild your credit - I will also have an article later pertaining to this. Often times when a client has a score that is low questions will be asked. This is an opportunity to explain yourself and inform the lender the reason why. If you have a legitimate excuse, they may make an exception - there’s always exceptions! A good reason for having poor credit/low score: life events and a not so acceptable reason: forgot to pay your bills.
3. Savings - lenders always want to see good “character” and savings is the best way to show them that you are responsible. The more savings you have the better. Granted you may not need a loan if you have the savings but it is something that lenders will look for. There is no magic number as to the amount you should have, but it all depends on your life stage.
4. Life Stage - this categorizes a person by their current situation and the banks look for certain things within those stages. If the bank determines you to be in a specific life stage they will deem you less risky as your profile would fit the norm. Mainly you have three stages of life:
Student - expected to have debt, little savings, few credit facilities, school loans
Working adult - establishing savings, less debt, larger expenses (car, life events that cost money etc), mortgage
Retiree - very little debt, accumulated good net worth, near the end of mortgage/no mortgage
5. Debt Repayment - bankruptcy and collections will significantly affect whether or not you get credit. Whatever you do, do not allow your credit to go into collections, if you can help it. Debt repayment is a huge factor as it affects your score and if an institution is lending you money they want to be sure you are trustworthy and will pay it back. If you are late a couple of days a company would not report it as a late payment to the credit bureau but do your best to meet the deadlines.
6. Relationship with the respective company - this only has some weight in the credit decision. Many clients believe that because they have been a customer with a bank for 30 years with just a bank account that they should be entitled to everything. That is not the case. A company will look to see how much of a relationship it is that you have with them - are your savings there? Where is your pay check deposited? Do you have credit cards with them? loans? mortgage? Etc. If that institution is your bank of choice and you have diverse profile with them then they would be more inclined to keep your relationship.
7. Responsibility with revolving debts - companies want to see that you have revolving debts (credit cards and credit lines) and that you can use them in a responsible matter. That means not holding a balance, paying them off every month and not going over the limit. This is a great way of showing good character. Always try your best to pay off your revolving debts every month. This will also help you build your credit faster.
These 7 things are not the only things a bank would look at when trying to qualify you but if you can satisfy them then I'm sure you would be able to qualify for whatever it is you're looking for. Not only is this information useful when applying for credit but don't forget that when you do apply for jobs, companies will do a credit check as well!
Remember, the people who often need the credit are the ones that cannot qualify. Banks do not want to take on a risky application. It is always best to plan ahead and keep credit facilities open for when you do have an emergency! When you don't need the credit is when you should evaluate your situation and see if you could benefit from applying! Preparation and planning is the key to success!