Your credit starts when you borrow money, apply for a billing service, or apply for a loan or credit card. The definition of credit is the ability to get goods or services without payment, based on the trust that you will be able to pay the seller or loaner back in the future. Credit is a very important part of financial life in Canada as without credit, it is very difficult to apply for things like mortgages, car loans, cell phones or other services related to finance. This guide will explain the basics of credit rating, scores, and how to build it.
Your credit rating shows your financial “health” and how good you are at repaying debt. Credit ratings are given with a range from 1 to 9, with 1 being the best and 9 being the worst.
Why is credit rating important?
It shows the lender or service provider how much you can be trusted financially. A good credit rating will give you the freedom to borrow money, get a low-interest mortgage, and have household or personal bills in your name. A bad credit score (or no credit score at all) may cause problems for you in your financial life.
For example, if you wanted to get home internet or telephone service from TELUS or Shaw, the company could do a credit check to make sure you can be trusted with paying back the bill. If you do not have a good credit score, the company may need you to pay a security deposit. This deposit could be as low as $25 or as high as $1000, depending on what the service is.
After you receive a credit rating, you are given a credit score that represents how risky an investment you are to lenders, mortgage companies, car loans, and others. If credit rating is how dependable you are, credit score is how trustworthy you are. A credit score ranges from 300 to 900. The higher your credit score, the less risk you are to the lender or company providing the loan.
A credit score is based on your:
- Your payment history (how close to payment dates)
- Your amount of credit (how much you owe)
- Length of credit history (how long you’ve been building credit)
- Types of credit (car loans, credit cards, or mortgages)
- New credit (your credit score can change whenever you start a new credit card, loan, or mortgage)
If you are planning to buy a house or a car, the interest you have to pay on your home or car loan will be lower if you have a good credit score. If you have a low credit score (or no credit at all) the interest will be much higher.
If you would like a copy of your credit report, there are three ways:
- Check the statement from your credit card or loan. Some companies include your credit score as a courtesy. This happens more often when you have a poor score and the company is trying to urge you to make your payments sooner.
- Contact a credit bureau. Canada has two credit bureaus that can, for a fee, give you your current credit rating. These bureaus are:
- Contact your bank. Some banks offer free credit score services, whether through their phone app or an application form. Banks pull credit reports from the following credit bureaus:
- Bank of Montreal (BMO) – Pulls from Equifax Canada
- Royal Bank of Canada (RBC) – Pulls from Transunion Canada
- TD Canada Trust (TD Bank) – Pulls from Equifax Canada
- ScotiaBank – Pulls from Equifax Canada
- Canadian Imperial Bank of Commerce (CIBC) – Pulls from Equifax Canada
- Capital One VISA – Pulls from TransUnion Canada
- PC Financial – Pulls from Equifax Canada
Building Your Credit Score
Building Good Credit
The best ways to build a good credit score are to:
- Have bills in YOUR name. You want to build your personal credit score and can’t do this if the bills are in another person’s name.
- Pay your bills in full and on time. Paying your bills on time, and for more than the minimum payment, improves your credit score by showing you are trustworthy and not a risk for paying back products or services in the future.
- Never use your name to get services for people outside of your family. It can be dangerous to use your credit to help others because if they don’t pay it back, you are responsible.
The third way is very important. For example, you may have a friend who is new to Canada and in need of a cell phone, but cannot afford the security deposit. Some people will try to help their friend by putting the phone under their own name and letting their friend pay the bill. This is NOT a good idea. The best way to help your friend in this case is you tell them to pay the deposit. This will help build a credit score for your friend and insure that in the future, they will have fewer problems.
Fixing Bad Credit
The best way to fix a bad credit score is to pay your bills. After 7 years, any negative information on your credit report will go away. If you are paying your bills on time now, for more than the minimum payments, you can fix your mistakes from the past. Bad credit follows you everywhere you go in Canada. If you have bad credit in Alberta, you also have bad credit in all of the other provinces and territories in Canada.
The Government of Canada has a warning about credit repair agencies: do not pay a company to rebuild your credit rating. These companies are a scam and there is nothing they can do to repair your credit rating that you can’t do by yourself. It can take time, but there is no quick fix.