Starting a new life in a new country is exciting, but not without it's challenges. One of the most important things you can do to safeguard your financial future in Canada is to build a strong credit score and history. It is critical to start establishing your credit history as soon as possible.
What is a credit score and credit history?
Your credit history begins as soon as you get a loan, a credit card, a line of credit or overdraft facility in your bank account. Your credit file tracks how much you borrow and how quickly you pay it back, and accordingly it assigns you a credit score which reflects how financially responsible or credit-worthy you are. Essentially, lenders use your credit score to evaluate your level of risk to them.
How is credit score calculated?
Whenever you use your credit card, pay your bills, or borrow money, your financial transaction information is recorded by a credit reporting agency. In Canada, the two main ones are Equifax Canada and TransUnion of Canada. These credit reporting agencies then use this information to determine your credit score, which is determined through a complex algorithm.
The chart on the right will give you some idea about what makes up your credit score. These numbers are an approximation, and different credit bureaus will weigh things a bit differently.
Basically, different lenders will use your credit score to determine how reliable you are to lend money to. A high credit score will be looked upon more favorably and you will get a better interest rate on your loan, as well as be approved for a higher amount. This can translate to thousands of dollars in your favor - so keeping a close eye on your credit history and credit score is worth big money!
Your credit score and history will be reviewed every time you apply for a car loan, mortgage to buy a house, or any other kind of loan. Landlords will also want to review your score and history before they accept you as a financially responsible tenant.
How to build credit
So here's where it gets interesting. In order to build credit, you need to borrow money, get a credit card, or other loan. However the catch is that to get a loan or credit card, lenders want to see a strong credit score.
Here's how you can overcome this challenge:
- Apply for a secured credit card: The easiest way to build a credit history in Canada is to get, and responsibly use, a credit card. If you do not get approved from your bank, ask them to give you a secured credit card, where you give the issuer a deposit. It is sometimes a bit easier to qualify for credit cards from stores like The Bay or Canadian Tire. Using your credit card regularly and making payments on time, every time, will help you establish a strong credit history. IMPORTANT TIP: Once you get a credit card, use it. Use it for buying your coffee, groceries, gas...everything. Having a credit card that is never used will not help build your credit. However, make sure you pay it off every month to keep track of your financials, which is critical when you are new to the country and trying to get established.
- Avoid multiple credit cards: We talked about how important it is to get and use a credit card to build credit. However, do not rush out a get several credit cards in an attempt to build your credit faster. Every time you apply for a credit card, there is a credit enquiry into your file, which negatively impacts your credit score. Also, having several cards may tempt you to spend more than you can pay off, and late payments can have a terrible impact on your credit score.
Get separate credit cards for both spouses/partners: Both spouses or partners should apply for their own separate credit cards, not be supplementary card holders. This will create a credit history for both, and both spouses/partners having a strong credit report will be extremely beneficial when you apply for a mortgage to buy (or lease) a house.
Establish good financial habits: Develop and maintain sound financial management skills. Pay all your bills in full and on time, every time. This includes utility, insurance, phone and other bills. Unpaid bills go to collection agencies, which can dramatically hit your score. With regard to your credit card bills, make sure you pay at least the minimum balance each month, and if you must carry a balance, never let the balance owed exceed 80% of your total limit.
Open a regular or high-interest savings account: If you show a bank or lending institution that you can save money, they may trust you with small lines of credit or credit cards. ADDED BONUS: The Tax-Free Savings Account is a good way to take advantage of some tax-free savings.
Understanding your Score
One of the most common (and detrimental) mistakes Canadians make, is not keeping track of their credit score. Your credit score is your 'financial report card' that represents the risk you present to lenders. Lenders will check your credit report before approving your mortgage, car loan, business loan etc. and landlords will refer to your credit report to verify how financial responsible you are.
A credit score is a number ranging between 300 to 900 that is based on your payment history and outstanding debt. The higher the score, the less risk you pose to a potential lender. A score of 700 and above is good, while anything over 800 is considered excellent. The higher the score, the better rates and loan you will get. On the flip side, if you have a low credit score (less than 600) you will be considered a higher risk, and although you may still be able to get access to a loan, but you will be charged a higher interest rate and will be approved for a lower amount. Taking the right steps and building a strong credit score is definitely worth it.
Know your Score
It is important to regularly review your credit report, for several reasons. NOTE: Checking your own credit report does not impact your credit score/rating.
- Prevent fraud: Checking your credit report at least once a year can help safeguard against identity theft. If someone illegally gains access to your personal financial information, they can open a credit card or take a line of credit in your name. Regularly checking your credit report can help you detect and report such fraudulent activity.
- Understand why you have been declined: Reviewing your credit report can help you identify areas that need to be fixed so that you can achieve your financial goals.
- Keep your records updated: Regularly checking your credit report will allow you to keep your records accurate and updated. For example, you may see old credit cards on your report that you may have closed, or you may see inaccurate information on your line of credit. Regular review will give you the opportunity to correct such discrepancies.
You can check your credit score at Equifax.
If you have ANY QUESTIONS or need more information about how to establish credit in Canada and what pitfalls to avoid, I'd be happy to help you.
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