Credit is king. In most western countries, and specifically Canada, your credit score will determine your quality of life in a few ways: your access to loans, your ability to take advantage of lower interest rates and have access to credit cards, and better insurance plans and easier approval ratings when buying apartments or condominiums. This is why you often find people asking: “how to build credit in Canada?” “what is a good credit score?” and “how to improve credit score?”.
Financial institutions will usually start using your credit history after it’s been established in good standing for a period of 18 months. That’s why it’s imperative you get started building your credit as soon as you can. But other factors will be taken into consideration as well, including your savings history, net worth, income and ability to provide a security deposit, such as a down payment on a mortgage.
A strong credit score in Canada is important because it is a sign that you are a low-risk, reliable, and trustworthy customer. So when you ask “how to build credit in Canada?” you’re essentially trying to build your reputation in the eyes of lending institutions, credit unions and banks.
While credit score isn’t something you can increase immediately, it is possible to make your score positive in relatively quickly – typically around one year given the state of an individual’s current score. Convincing lenders that you can be trusted to repay a loan and that they can be confident in giving you one is best done through diligent spending habits. This is the first step to improving the score.
Finding Out Your Credit Score
The first thing you should do, before all else, is finding out and checking your credit score. You can receive free credit score checks from the largest credit institutions in Canada: Equifax Canada and TransUnion Canada. All you’ll need to do is provide some simple information concerning your past history and wait a couple of weeks to receive your credit report. Otherwise, for a small fee, you could begin the process online with both companies.
The credit score in the report indicates the general strength of your credit and so it is extremely important. Your report will come with additional information about specific accounts, which can be a lot to handle if you aren’t aware of what the numbers may mean. The Government of Canada has a digital interpreter and example of credit reports so you can understand what everything means and how it relates back to your specific situation. Your first move is the free credit score check.
So, the question again: “how to build credit in Canada and improve credit score?” Once you get a credit score, there are steps you can take to start building up your reputation. In this article we will go over the 5 key steps you can take to improve credit score that revolve around understanding what it means, paying on time and in full every month, and appreciating the influence different kinds of credit can have on you.
Understanding Credit Reports and Scores
The first thing I would do is check my credit score. As already mentioned Equifax Canada and TransUnion Canada allow you to do this online or by mail and give you a thorough explanation to what everything means. Once you have the necessary knowledge, you can start making your moves up the credit ladder. And for a start, you should go through your report, keep past debts there and fix any errors.
You cannot increase your score if there’s no credit on your account. The longer your history is with credit the better so keep past accounts open. If lenders see that you have paid off the previous debt they will look upon you favorably and in turn, you will strengthen your score.
You should also ensure that you go through your report a few times a year to make sure everything is updated and accurate. If there are any miscalculations or inaccuracies, get in touch with the credit bureaus and request they correct it. Some common inaccuracies include incorrect payment histories, debts that have been paid off completely, debts that don’t belong to you and – more generally – information that isn’t yours.
Pay Your Credit Card Bill on Time
Punctuality is key. If you are using credit cards to build credit, you had better pay your bills back on time. You should make sure you pay before the deadline regardless of how much of the entire debt you pay off. If you break down your credit score, roughly 35% revolves around payment history. Late payments will impact your credit history negatively. When you pay on time you are not required to put up the entire balance but it is necessary to match the monthly base.
Clear Your Balance Every Month
In an effort to increase your score you may try things that prove risky or are beyond your means to sustain. Remember, that isn’t how to build credit in Canada. Yes, keeping a balance and paying punctually will increase your score faster than clearing your debt each month. But maintaining a balance for the sole purpose of building your score is rash because you’re going to face much higher interest rates. You would be better advised to take the slower but surer option: paying off your credit card every month. Otherwise, Improving credit scores is a patient and enduring process. There are no shortcuts.
Collect Different Types of Credit
If you have a variety of credit in your portfolio, banks, credit unions, and lending institutions will value you more. The more you branch out the more you strengthen your credit score and history. Be versatile and accumulate auto loans, credit cards, and furniture acquisitions.
Remember, there is no need to collect different types of credit just for the sake of it. If it is too costly or risky you do not need to go for it. You’d rather stay on the safe side. However, if presented with the opportunity, diversifying credit is a quick way to build a credit score.
Consider Automatic Payments
This is again following the rule: punctuality is key. If your credit score is taking hits due to missed or late payments in the past, you should consider setting up automatic payments for those debts that have fixed payments. This includes, but is not limited to student loans, personal loans, mortgages, and car loans. You’ll never forget to pay a bill again, which can seriously hurt your credit score. There’s nothing worse than being willing and able to pay a bill only to forget to do so. Automatic payments are the best way to ensure timely and methodical payments.
How to build credit in Canada and what influences credit score? There are 5 factors: payment history, credit mix and credit history, credit utilization, public records and judgment, and a number of credit accounts you’re seeking at one time.
A credit score range is typically wide enough that if you perform poorly on one or more of these factors, your score will go tumbling down. Remember, it’s easier to lose your score than build it. Because once a lot of untimely, faulty payments start showing up, your reputation will precede you.
Punctuality, versatility, judgment, and research are how to build credit in Canada. But the process is a long one.
How consistently you pay your credit obligations is crucial to improve credit scores in Canada. Missing it by an hour is considered late and is going to be a blemish on your score. Automatic payments can help save your day in this situation. Payment history makes up the largest percentage of credit score out of all the other factors at around 31%. This should be the first thing you aim to get done as efficiently and regularly as possible.
Credit Mix and Credit History
Credit unions, lending institution, and banks want to see a variety of use and payment. Balanced usage across different types of credit is a better indicator of reliability because it is the equivalent of multitasking and having a proactive mentality. If you have a car loan and credit card and cell phone and are consistently paying each off, this will work better than five credit cards and an unsecured loan. Avail free credit score checks frequently and keep an eye on where you stand.
How much credit are you using at a time? Let’s say a person has a credit limit on their card of $5000. If they reach $4,500 or more that will tell the lending institution a lot about the kind of customer that person is. The closer and more consistently you hit your limit, the more of an impact it will have on your score. It’s not good practice to have credit cards with consistently high balance. Lending institutions and credit unions keep track of your credit utilization ratio: not paying off your cards when they are maxed out regularly is a bad sign of things to come. Generally, you should keep your credit balance to around 30% or less of your available credit. For example, a credit limit of $5,000 should have only $1500 of that used up per month.
Public Records and Judgments
You want to avoid all situations that would tarnish your image in the public eye, such as bankruptcy and having a bunch of debts and debt collectors chasing you around. A bad personal history of paying off loans or debts is no way to go about building a strong credit score. As has been said many times during this article, your score is your reputation. And if your past is checkered with instances of faulty and delayed payment or even no payment at all, that’s going to speak volumes more about your score than you ever could.
To give you an example, think of the employment process. When you go into a job interview the first thing they get you to talk about is your past employment, why you left and what you hope to achieve. Your potential employer needs to know if you’re the right fit and trustworthy. The same is true with potential lenders.
Number of Credit Accounts You’re Seeking at One Time
Make an informed decision on the loan you need and the rate you want. What hurts someone taking out a loan is having multiple applications on file because they didn’t do their research beforehand. For example, if you’re buying a house and applying for a mortgage, shop for rates first before applying for a mortgage. Your credit profile can take a big hit with multiple applications because it shows uncertainty and is essentially seen as a desperate attempt to get funds. That’s not what credit unions and lending institutions want to see.
What is a good credit score? A good score is 700 or above and the way to achieve it is by knowing what makes up your credit score and how you can go about building it. Unnecessary risks taken to speed up the process can come back and hurt you in the long run. Get credit cards to build credit, diversify where you take your credit, pay your bills on time and know your credit limit. These are the simple things you need to do to build your credit score in Canada.
It is a long and tough process but if you follow the rules, best practices and do your own research to stay up-to-date and well informed, a good credit score is waiting for you around the corner. Remember, it’s a long project – not a short-term one. Stay punctual, aware and informed. That’s how to build credit in Canada.