Credit is essential in Canada because it is one of the main ways financial institutions decide whether to approve your loan and the rate. A good credit score means you’re a low-risk borrower, which could translate into significant savings over the life of a loan. If you do not have a credit history or poor credit, don’t despair — there are steps you can take. Following these tips can build credit and get you on the path to financial success.
If you’re looking to build credit in Canada, you can do a few things. Get a credit card and a loan from a major financial institution. Make sure to use the credit card responsibly and pay on time. Follow the 2+2+2 rule: two forms of credit, established for a minimum of two years with a minimum spending limit of $2,000 per account.
Get a Credit Card
A credit card is an excellent place to start if you want to establish or build your credit score, and mortgage lenders like to see how applicants manage their credit card debt. The primary reason is that credit card debt falls under the “discretionary spending” category. Borrowers have to purposefully make payments different from a set loan where the payment amount automatically comes from your bank account on the same day every month.
Make sure the credit card has a minimum limit of $2,000. Anything less than this is not generally accepted as a primary source of credit. It needs to be an accurate reflection of how you manage discretionary credit. Most people can get out of trouble with maxed-out balances of $500 or $1,000.
Consider your spending habits. If you carry a balance on your credit card, look for a card with low-interest rates and no annual fee. Conversely, if you pay your balance in full monthly, look for a card that offers cash back or points toward travel.
Get a Bank Loan
A bank loan from a chartered bank or credit union is an excellent way to have a second form of credit. Again, make sure the loan is for a minimum of $2,000.
If you need help getting approved, save $2,000 and tell the bank you want to purchase a $2,000 GIC and use it as collateral against the loan. You will make monthly payments on the loan, and at the end of the one-year term, you will have the GIC plus interest available for your down payment. Repeat this process in year two to ensure you meet the minimum credit requirements outlined above.
Another great strategy is to get a $2,000 loan from the bank and put it into an RSP. You will likely not need to come up with $2,000 like the GIC approach, as the bank can lock the RSP until the loan is repaid. If you’re a first-time home buyer, each borrower can withdraw up to $35,000 from your RSP under the Home Buyers’ Plan (HBP) to use towards any part of the real estate transaction.
Pay Your Bills on Time
As soon as your credit card statement is issued, your previous month’s activity is sent to the credit reporting agency. Therefore, making the payment after the statement date and no later than the due date is important.
If you are in the habit of making a payment before your statement is issued, stop! You are masking the fact that you are not a credit risk. Part of the credit score algorithm looks at the balance from the last statement and the transactions during the past 30-day window. When you make a payment inside this window, you are “hiding” the payment transaction.
Monitor Your Credit Score and Check for Errors in Your Report
Credit scores are numerical representations of your credit history and the likelihood you’ll repay a loan. They’re calculated using the information in your credit file, which Equifax Canada maintains. You can get your free credit score from Equifax Canada by signing up for Credit Tracker.
If you have a bad credit score, errors keep your score down. You can check for errors on your free Equifax Canada Credit Report Card. If there are any errors, you can dispute them with the reporting agency to have them removed from your report. If you have a bad credit score, errors keep your score down. You can check for errors on your free Equifax Canada Credit Report Card. If there are any errors, you can dispute them with the reporting agency to have them removed from your report.
Conclusion
The importance of credit scores is that they can negatively affect your life. Whether you’re applying for credit cards or car loans or even trying to rent an apartment, the higher your credit score, the better your chances of getting what you want. You can help your credit score by paying your bills on time, keeping your balances low, and not applying for too much credit. If you need more information about your credit score, let’s connect for a no-obligation consultation.
