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If you’re a newcomer to Canada, a recent graduate, a student or a young adult, your credit score—a number calculated based on your credit history—is likely low or non-existent, meaning that you don’t have enough credit activity to determine a score. One of the most beneficial things you can do for your financial health is to learn how to build your credit history in Canada.
What is a credit history?
Since Canada is a credit-based economy, creditors (banks, financial institutions, credit card issuers and other lenders) need a way to gauge how likely you would be to pay back what you owe or borrowed in a reliable and timely manner. For this, the credit score system has been devised. Your credit score is a three-digit number from 300 to 900, which aims to quantify your creditworthiness. The higher the number, the better your credit.
Here are some instances when lenders, companies and institutions may check your credit report:
- When you apply to rent an apartment
- When you apply for an internet connection or mobile phone plan
- When you apply to lease or finance a car
- When you apply for certain types of insurance
- When you apply for certain types of jobs
- When you apply for a mortgage
While many people focus on their credit score—and strategize about how to increase it—the more beneficial way to think about credit is to focus on how credit history is built. And, if you take the steps to build your credit history systematically, your credit score will also likely improve as a result.
How credit scores are calculated
Who determines your credit score? Canada has two main credit bureaus, TransUnion and Equifax, which monitor your credit history. Here’s how they calculate your credit score—the various criteria used and how much weight each one carries:
Scoring criteria | Weight | Explanation | Tip |
Payment history | 35% | Whether you’ve made your payments on time. Missed or delayed payments will lower your score. | Always make timely payments. |
Credit utilization | 30% | The amount of credit you use divided by the total credit available to you—expressed as a percentage. | Try to use under 30% of your total credit limit. |
Credit history | 15% | The average age of all your open Canadian credit accounts—such as credit cards, mortgage(s), lines of credit. | When possible, don’t close old accounts like credit cards. |
Types of credit | 10% | The more diverse your credit accounts, the better your credit score. Types of credit include loans, credit cards and lines of credit, among others. | Get diverse types of credit without over-extending your finances. |
Credit inquiries | 10% | Refers to how often a credit provider asks a credit bureau to access your credit report—the more inquiries, the lower your score. | Only apply for credit that you truly need or that benefits you. |
Note that TransUnion and Equifax have different formulas for credit scores, which they don’t disclose to the public. If you check your credit score with both, the numbers may be different.
Why is credit history important?
Let’s say you want to rent an apartment. Your credit history is vital because most landlords will want to see your credit score and credit report to judge whether you’ll pay your rent on time. If you get the apartment, you’ll want an internet connection—and for this, too, the large providers will query your credit score.
If you need to buy or lease a car, your credit history will not only determine whether you’re approved for a loan, but also what interest rate you’re offered: the higher your credit score, the lower the interest rate. Insurance companies may check your credit history before providing coverage. And finally, if you want to buy a home, your credit history is key to qualifying for a mortgage, as well as what interest rates lenders will offer. A lower rate could save you tens of thousands of dollars over the life of your mortgage.
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