Building your credit history for your financial future
Credit to Author: Staff Writer| Date: Mon, 20 Mar 2023 19:30:46 +0000
As a newcomer to Canada, you have probably already heard about the importance of building a credit history in your new country. After all, you’re rebuilding your life and your finances and that means navigating an essential part of the Canadian financial landscape: credit and credit history..
Why is a credit history important for building your financial future in Canada? Think of it as your passport to being leant the money you’ll need to make your most significant purchases in Canada, from buying a car or a home to borrowing funds to launch your own business. Simply put, your credit history is one of the data points al financial institution or lender uses to predict your ability to pay back credit, debt or loans.
Without a solid credit history, newcomers can find it challenging to get a credit card, apply for a mortgage or get a loan.
Defining credit
So, what exactly is a credit history, and how does it differ from other terms you may hear like credit score or credit report? Here are some helpful definitions to clear up any confusion.
A credit history is a record of your banking transactions, from the available credit you have, to the debt you owe, to how consistently you pay your monthly bills, to how often you apply for financing.
All this information is analyzed to give you a credit score, which is a number between 300 and 850. The higher the score, the better! A high score means you are considered financially reliable and an acceptable risk for borrowing money from a bank or lender.
A summary of your transactions and your credit score are then outlined in a credit report, prepared by a credit bureau. There are two widely-recognized credit bureaus in Canada: Equifax and TransUnion. When you apply for a loan or financing, the lender will access your credit score and report to see if you’re a good risk to lend money to.
See more financial terms defined here.
Now we understand what it is and why it’s important, here are five things you should know about building a credit history in Canada.
- Get a credit card and use it wisely
More and more financial institutions, today, recognize that newcomers face unnecessary barriers in accessing credit and loans after arriving, so they offer newcomer-tailored banking packages that include a first Canadian credit card.
Even though the credit limit may be low and the interest rate high, having a credit card and using it conservatively and conscientiously is an important part of building your Canadian credit history. The trick, here, is to use the credit card to pay for some purchases regularly and pay off the balance each month. If you can’t, then you must at least pay the minimum balance on time.
A few notes of caution: if you miss a payment, it can hurt your score drastically. So can letting debt build. Also, leave room on your credit card balance; borrowing too close to your overall credit limit can impact your score negatively.
- Pay your bills on time
Beyond credit cards, your credit history also looks at your ability to pay your other monthly bills, such as rent, hydro, cell phone, cable, on time and in full. Consider setting up your bills to be paid automatically each month through online banking to ensure you never miss a payment.
If you don’t pay your bills, the companies you owe may involve a debt collection agency, which would have a drastic effect on your financial reputation.
- Consider a microloan
If you’re looking to upgrade your skills or get recertified in your profession, you may need some help to pay for it. But securing a loan from a traditional bank or financial institution may be a challenge as a newcomer, especially with no credit history. Windmill Microlending, a registered charity, offers affordable loans up to $15,000 to immigrants and refugees to help pay for the costs of training, education and professional development in Canada. No Canadian credit history is required for these microloans.
Repayment plans are tailored to your career journey, and your Windmill loan will be registered with a credit bureau so that you can build your Canadian credit rating.
- Be cautious of too much credit
Be careful about applying for other types of unnecessary financing, such as store-specific credit cards or “buy now, pay later” offers. Be wary of high-interest payday lenders, as well. Their repayment terms are often predatory, interest rates high and a loan from a payday lender could negatively affect your Canadian credit rating. These may seem appealing because they may be a quick source of funds or they come with discounts or immediate benefits but they can also have some awful drawbacks.
- Check your score
Finally, keep track of your credit score. You can check your credit score with one of two credit bureaus. This way you can check for any potential mistakes or review what type of habits may be negatively impacting your score. Best of all, checking your score has no impact on the score itself.
Adding it all up
By following these credit guidelines, you’ll be able to steadily build a strong credit history and credit score in Canada. As your score increases, your credit limit will too. When you’re ready to apply for a mortgage for purchases such as your first Canadian home, you’ll be a more attractive borrower to financial institutions thanks to the responsible choices you made in your first years in Canada, with that first credit card or other credit product.
Although it may take some time to establish a strong credit history in Canada, it’s an important step to enable you to build your financial pathway to prosperity.
The New Canadian’s Financial Pathway to Prosperity, an informative guide presented by Canadian charity, Windmill Microlending, shares tools and tips to help you build a financial foundation in Canada while setting you up for long-term prosperity. As a charitable organization, Windmill focuses on supporting immigrants and refugees in establishing their lives and careers in Canada, offering affordable loans to pay for the costs of training, education and professional development. Learn more on Windmill Microlending’s website here.
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