If you’ve never had credit before, you might be wondering what credit is and why it’s so important?
Fundamentally, credit is all about trust.
If a lender gives you money, they want to know that you’ll pay it back. For that reason, your credit history is used as an indicator of how trustworthy you are, and building up a solid credit profile is a central factor of your financial life. It will make or break or chances of getting approved for a car loan, mortgage, personal loan, and more.
Whether you’re new to Canada or new to this personal finance game, starting your credit profile as early as possible is a wise decision. If you’re reading this, you’ve realized this and are ready to take the first step to establish credit.
When it comes to building credit, it’s all about getting your foot in the door. Let’s take a look at how you can do that.
How to build credit for the first time
Making payments that are reported to credit bureaus is the best way to start building credit in Canada. Getting approved isn't impossible, but since you'll have limited credit history, lenders will rely more on your income and employment to approve you.
Loans, credit cards, and cellphone bill payments are a few common types of payments that are reported to the credit bureaus. A history of good payments on these types of accounts will help you establish and build your credit. Failure to pay them can also hurt your credit score.
Even if you don't have much Canadian documentation, anything that demonstrates your creditworthiness can help you get your foot in the door for the first time.
You can utilize some or all of these methods to start building your credit from nothing:
1. Find a co-signer
A co-signer is a family member or trusted friend with an already-established credit profile who takes on the risk and responsibility of your loan. They’re vouching for you and putting their names (and their own credit score) on the line for you. You should only do this if you know you’re going to be able to make payments on time, otherwise, you may hurt someone else’s credit.
2. Apply for a secured credit card
If you can’t get a standard credit card, a secured card is a great way to start building credit. A secured credit card requires you to put down the card’s max limit as collateral. Lenders are happy to issue them because there is no risk involved. If you default, the lenders can access the collateral for payment. Capital One offers secured credit cards with guaranteed approval and zero liability protection.
3. Get a secured loan
A secured loan is when you offer up something of value as collateral for the loan, so if you don’t pay your loan on time, the lender will retain the collateral. Collateral makes it easier for the lender to approve since they can collect the collateral if you default.
4. Join a credit builder loan program
A credit builder loan is not a typical loan. Think of it more as a saving strategy to help you build or repair credit. When you sign up for a credit builder program a positive tradeline gets opened on your credit file and payments start getting reported to the credit bureaus. Once you pay all installments on time and in full, you will have started a decent nest egg and improved your credit score.
5 Get a student credit card
Lots of banks have student cards that essentially have low limits and often are fee-free. Some of them are secured, some are unsecured. Some of them even have cashback perks or other rewards! Shop around to get the best deal, or talk to your bank to see what they offer.
6. Get added as an authorized user on a credit card or a utility bill
Check with a trusted friend or family member to see if they’d be willing to add you to a credit card account. Not all lenders do this, so check with your institution to see what options might be available.
If you’re new to Canada, apply for credit with supporting documentation from your previous home. Proof of your previous financial good health may assist lenders in determining how trustworthy you are as a borrower.
Credit basics for newbies
What exactly is a credit score and credit report?
What is a credit score?
A credit score is a number that is between 0 and 900. The higher the number, the better you look to potential lenders. There are two main credit bureaus (companies that keep track of this information) in Canada, Equifax & TransUnion. Each company has slightly different ways that they calculate a credit score, but they’re mostly the same. The higher your number, the lower the risk it is for a company to lend you money.
Once you start building your credit score, you can check your credit score, absolutely free, with online services like Borrowell!
What is a credit report?
A credit report, not to be confused with your score, is a document that includes personal information (like your name, Social Insurance Number and address) as well as the details of your entire financial history, as it pertains to credit. It’s also known as “consumer disclosure”. Think about it like a report card. Financial information you’d find on your credit report might include:
- Payment history
- Negative bank account information (overdraft)
- Collection debt or bankruptcy information
- Types of credit used (lines of credit, loans, credit cards, etc.) and when you opened the accounts, how much you’ve been approved for, how much you’re currently using (at the time of the report pull) if you’ve ever been late with payments, and more.
It’s also important to keep an eye out for errors on your report. Check out our quick guide on checking and disputing errors on your credit report, and also about how to protect yourself from identity theft.
What is considered good credit?
A “Good” credit score is considered to be anything over 660, but the real favourable conditions begin after 760 (“Excellent” credit score). Once you’ve established good credit, the key is to maintain and build on it with the right behaviours.
How to maintain and continue building your credit
To keep improving your credit score, consider:
- Paying your bills on time, every time (even if it’s just the minimum payment)
- Keep your balances to a minimum or paid off every month
- Looking for cards or services that help you build credit by reporting to the credit bureaus
- Increasing your credit limit while keeping your credit utilization low
- Having a healthy and well-thought-out mix of credit (car loan, student loan, credit cards, etc)
Fresh Start Can Help...
Fresh Start Finance can help you build credit from scratch! We serve Canadians facing all types of credit situations with practical advice and credit-building solutions. We also offer quick-and-easy secured and unsecured installment loans to help you take those first steps to a better financial future. Apply today to see how we can help!