How To Build Your Credit History In Canada

If you want to borrow money in Canada from a bank or another financial institution then you having a Canadian credit history is a good idea. This is because major banks and creditors will ask to check your credit before they approve you for a new loan or credit product. While not all lenders and creditors check credit, it’s still important to have a healthy credit history if you want to rent an apartment or even purchase insurance. 

What Is Credit History?

Your credit history tells the story of how you manage your credit accounts, for example, loans and credit cards. It’s comprised of all the credit decisions and mistakes you make. Your credit history is recorded in your credit reports, of which you have two, one from Equifax and one from TransUnion. Then the information stored in your credit reports is used to calculate your credit scores. 

In order to have credit reports and credit scores, you need to build a credit history.

How To Build A Healthy Canadian Credit History

Whether you’re new to Canada or a young adult looking to start from the ground up, building a credit history can seem like a daunting task, but it doesn’t have to be. Building a credit history simply takes time and a few healthy habits. Keep in mind that everyone’s credit history develops at a different pace and depends on a variety of factors, including what types of credit accounts you open, how long you keep them open, and how responsible you are with your payments.

 Building credit is different for all consumers, but to help you get started here are a few steps you can take. 

First Step: Get Credit

The first step you need to take is to get credit. Unfortunately, credit is a catch-22, good credit comes from properly using credit, but it can sometimes be difficult to get credit if you don’t already have credit. But don’t worry too much; this only really affects you if you’re trying to get a mortgage or large loan without already having an established credit history.

What you need to do is get a credit card; this is the best way to start building your credit history. Almost anyone can get a credit card, even if they have zero previous credit history in Canada. We suggest you start by trying to get a credit card from the bank that you have an account with, if this doesn’t work you should then consider a secured credit card. 

What Is A Secured Credit Card?

A secured credit card is a great option for those looking to improve or build their credit history. It’s secured through a deposit that you must provide. Typical your credit limit will be similar to the amount of security you put down, but not always. A secured credit card is different than a typical credit card but it will still help you build a credit history. 

A secured credit card is a good option, but remember that everyone’s credit reacts differently. It may take you longer to see the positive effects than someone else.

Second Step: Use Your Credit Responsibly

For some people accessing credit is easy, it’s using it responsibly that’s hard. While having a credit history is important, having a positive credit history is ideal. A positive credit history typically results in more attractive credit reports and scores. Lenders and creditors like this and will see you as a more trustworthy borrower. That’s because your credit scores are designed to predict your likelihood of paying your bills on time and the higher your scores the more likely you are.  Here are some tips to help you use your credit responsibly so that you can build a good credit history:

Build Your Payment History

• Pay Your Bills On Time – One of the most important ways you can help build a positive payment history is by paying off all your bills and debts on time. Late payments can negatively affect the calculation of your credit scores. Moreover, too many missed payments can cause your lender to sell your account to a collection agency, which can also have a more severe impact on your credit. 
• Use Your Credit Card – In order to build your payment history, you’ll need to actively use and pay off your credit card.  While you may be hesitant to create debt, making small occasional purchases can help build your payment history which may positively impact your credit. 
• Be Aware Of What You Owe – It’s best to keep track of how much you owe so can avoid overspending and missing any payments. 

Limit Your Credit Utilization

• Avoid Maxing Out Your Credit Limit – When using your credit cards avoid maxing out your available credit. Keeping your credit utilization low may help improve your credit scores. 
• Avoid The Minimum Payment Spiral – Credit cards have minimum payment requirements; this can be a good thing or a bad thing depending on your situation. While the minimum payment option can help you defer your payment to the next month, you’ll be incurring interest on the remaining balance. Moreover, if you continue to use your card while making the minimum payment only, you’ll likely be increasing your credit utilization ratio which may negatively impact your credit. If you only make minimum payments, it may take years to pay off your balance.

Avoid Applying For Too Much Credit 

• Only Apply For Credit When You Need It – In general, it is recommended that you only apply for credit when you actually need it. Too many hard inquiries within a short period of time can cause lenders to believe you are facing financial difficulties or are taking on more debt than you can handle. 
• Exceptions When Applying – When applying for a car loan or a mortgage, you don’t have to worry about multiple credit checks.  Depending on the credit score model, any inquiries made between 7 – 45 days for a car loan or mortgage will be considered as one inquiry. 

Let Your Accounts Age

• Do Not Cancel Any Credit Cards –  How long your credit accounts have been open is a common factor used to calculate your credit scores. As such, it’s important not to open or cancel multiple credit cards without good reason. 

Step Three: Develop And Expand Your Credit

Credit cards are great for building credit history and are the perfect place to start, but after a couple of years, you might want to think about expanding the types of credit you have. Adding variety to your credit accounts is a good option for many consumers, this is often referred to as “credit mix”. This could mean taking out a personal loan or a car loan, and later in life, a mortgage (note: not all mortgage lenders report mortgage to the credit bureaus). 

Just remember, this may not be the right option for everyone and there are some concerns that you should be aware of before you decide to open a new credit account to build credit:  

• The impact credit mix has on your credit scores varies based on the scoring model.
• Never take on debt you don’t need or can’t afford just to build credit.
• Having too many credit accounts or too much may hurt your credit.
• Don’t trust any companies, service providers, or lenders who guarantee they can help you improve your credit.

Additional Reading

What Your Credit Score Range Really Means

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Why Do I Have More Than One Credit Score?

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No Credit History vs. Bad Credit History

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Ways To Build Your Credit History If You Don’t Have Any Credit History

If you’re just started out and looking to develop healthy credit habits, you may want to consider one of the following options.

Become An Authorized User On Someone’s Credit Card

If you’re unable to qualify for a credit card on your own, you can become an authorized user on someone else’s credit card. This will link you to the primary owner’s credit card and you’ll be given a credit card that you can use to make purchases. However, you will not be responsible for any payments, only the primary owner can make payments. 

This may help build your credit history if the credit card company reports the payment information to the credit bureaus for both the primary and the authorized user. Before becoming an authorized user, contact the credit card company to ensure they do report information about the authorized user. If they do not, then doing this will not help build your credit history. 

Secured Loan

A loan that is secured by an asset like a car or house is called a secured loan. These types of loans typically come with lower interest rates and in some cases allow you to borrow more money. Offering an asset can also help you secure a loan when you’re unable to with your current finances. However, it’s important to remember that you can lose your asset if you’re unable to make your payments. That said, full on-time payments on your secured loan can help build your credit history. 

Use A Co-Signer To Get A Loan 

Getting a co-signer can not only help you qualify for a loan but gain access to lower interest rates. That’s because a co-signer is someone who agrees to take responsibility for your loan in the event that you cannot make your payments. Once your co-signer helps you gain access to a loan, you may be able to build your credit history by making on-time payments. 

Bottom Line

Now that you know how to get started building a credit history, it’s time to get working. Find the best credit card for you, make your payments on time, develop good credit habits, and be patient. While all credit histories develop differently, over time you should be able to build a healthy Canadian credit history.