How to build credit history in Canada

What is credit?

Credit is the practice of borrowing money from a lender and buying items with this borrowed money. Each time you use credit you’re building a credit history. There are two key aspects to every credit interaction: the principal and the interest. The principal is the original cost of the item you purchase, while the interest is the additional cost you pay for borrowing from a lender to make a purchase. After a purchase is made, you’re responsible for paying the original purchase amount and any interest you accumulated on the borrowed money.

You can access credit through lending products like a credit card, a loan, or a mortgage. For example, you may apply for a credit card through your bank with a $5,000 credit limit, which means you have access to $5,000 of credit to purchase items. The credit card will also come with an interest rate set by the lender, which is the amount of interest you will need to pay on any items you purchase with the credit card.

What is a credit history and credit reports?

Your credit history includes any transactions you make using your credit. This history is then recorded in a credit report. Your credit history includes credit card transactions, the various credit accounts you have open, amount owed, payment history, bankruptcy, and debt collections. Your credit history is important because lenders use it to determine whether you’re financially stable enough to receive additional credit products such as credit cards, mortgages, and loans.

What is a credit score?

If you’re looking to apply for a mortgage, buy a car, or lease an apartment your credit score may determine whether you’ll be approved or not. A credit score is a three-digit number that represents how creditworthy you are and is determined by a variety of factors. In Canada, credit scores range from 300 to 900, with scores above 735 considered very good and above 760 is excellent. Maintaining a good credit history means you’ll have a good credit score.

Here’s how your credit score is calculated (approximately), according to Equifax: ^{footnote 11}

• Your payment history: Whether you are making payments on time
• Amount owed: How much you owe borrowers based on your past credit transactions
• Length of credit history: How long your credit accounts have been open
• Credit mix: The different types of credit accounts you have
• New credit: How frequently you are applying for new credit accounts

How do I view my credit score?

When it comes to checking your credit score, it’s important to understand the difference between hard and soft credit checks. A soft credit check is when your credit report is checked either by you or a company. For example, this could be a preapproved credit card offer or a new employer conducting a background check. You will also be doing a soft credit check when you check your score or request a free credit report on BMO CreditView. Soft credit checks do not have any affect on your credit score.

A hard credit check occurs when a lender or company requests to review your credit report for a loan application, such as during a mortgage application. This will make a small negative impact on your credit score because you’re applying for a new credit service that requires an assessment of your credit history. 

How do I build credit as a newcomer or student?

Both newcomers to Canada and students find themselves in a unique position, starting a new kind of financial journey. While it may feel challenging, building your credit for the first time is exciting opportunity to develop good financial habits and aim for the highest possible credit score.

Here are a few tips on how newcomers and students can build a good credit history:

• Be consistent with paying your personal bills on time by automating bill payments
• Pay your credit card balance on time and in full each month
• Use less than 35% of your total balance each billing cycle ^{footnote 22}
• Get a monthly cell phone plan
• Apply for a low interest credit card from BMO or a student credit card

How can I rebuild my credit score?

Your credit score can fluctuate at different points in your life, so don’t worry if it isn’t where you’d like it to be. To rebuild your credit score, start by analyzing your credit report and focus on making changes in the areas where you can improve. You can use your credit history as a starting point to establish good financial habits.

Using a secured credit card is also great way to rebuild your credit score, especially if you’re having trouble with getting approved for a new credit card. A secured credit card requires a cash deposit that is equal to your credit limit. This will prevent you from spending more than you can afford to.

You should also take the necessary steps to pay down any outstanding debt that you may owe. It’s important to remember that the amount you owe makes up a large percentage of your credit score, so limiting your debt can make a big difference. And try to prioritize making the minimum payment by the due date each month, it’s a small step that can go a long way in rebuilding your credit score.

Final Thoughts

Building a credit history can feel daunting, but you can take steps to establish financial credit in Canada. For additional support, connect with a financial advisor at BMO to better understand your options and put together a plan to help you build your credit in Canada.