How to build your credit score in Canada?

Getting an access to your first credit is one of the most important moments in everyone’s life.

It turns out you can purchase something without your own money, and once you start doing it you are being watched.

Your credit score ranging from 300 to 900 shows lenders whether you are trustworthy and whether you deserve a good deal on a credit product.

It’s vital to keep it as high as possible. So, where should you start?

As a rule, Canadians start building their credit history with the first credit card, which they can receive by the age of 18 or 19 (depends on the region). The same scenario is recommended for immigrants.

When you start using your card, your credit card provider, utility companies and other lenders will be reporting your financial behaviour to Canada’s main credit bureaus. After six months, the bureaus will have enough information to create a credit report and calculate your credit score.

Don’t worry, you will not start with the lowest number, as 300 applies only to those who have ruined their reputation with missing payments and bankruptcies.

You begin without a score. And when the formula is first applied, your credit score will probably be somewhere around the middle. You haven’t had time to harm the score, and you didn’t have the opportunity to reach a higher level, either.

Large loans and great interest rates will be available to you only when you reach the upper numbers.

Although Canada’s two large credit bureaus (Equifax and TransUnion) have access to a little bit different information and they use slightly different methods, they still pay attention to the same indicators:

Payment history (35%)

It’s the most important factor affecting your creditworthiness. All your missed payment can hurt your credit report for up to six years. Be careful with your payments, if you want to increase the score.

Credit utilization (30%)

In case you’re using the credit limit almost to the full, it’s reducing your score.

Credit utilization is the ratio of credit used versus the total credit available to you. In other words, if you use $700 of debt on a card with a $1,000 limit, your utilization rate will be 70%. Meanwhile, it’s important to keep it lower than 30-40%.

Credit length (15%)

Lenders like to see a long history of responsible borrowing. If you’ve just started, use your first card with this goal. In addition to it, don’t cancel cards without a strong reason, as an old card on your file, even not used, is a sign that you are an experienced borrower.

Credit mix (10%)

Lenders want to see the diversity of borrowing as well (car loans, mortgages, student loans etc.), as it shows that you are responsible with all types of loans.

Hard inquiries (10%)

Each time you apply for a loan or credit card, lenders study your financial history. However, too many of such hard inquiries during a short period of time may suggest that you’re churning credit cards, or you need a new loan in order to pay off old debts.

What should I do if I have bad credit or none at all?

In case you can’t get a normal credit card, you can receive a secured credit card and build your history with it.

Such cards require a deposit, which is used as collateral until the card is canceled. If you don’t pay your bills, the deposit is kept by the lender. Secured credit cards are quite easy to receive, but they can be as great as the usual ones in terms of improving your score.

There’s also one more way to build a credit history. You can get a credit-builder loan only to prove your ability to make payments. The lender holds on to the sum you “borrow” and releases it to you after you’ve paid off the balance. Nevertheless, such loans are not free, so be ready for various interest rates.

How can I check my credit score?

As so many things influence your score each month, it’s quite difficult to predict it. You can monitor the current score and credit history on Equifax and Transunion websites. Yes, there are other free online services, but it’s better to use the data from official providers, as they are more accurate. Moreover, when providing a loan, banks use their data.