New To Credit: Guide to Building Great Credit in Canada
May 25, 2017
So you checked your Equifax credit score for free with Borrowell and there wasn’t enough information to produce your credit score. Why is this? What do you do now?
The credit score provided by Borrowell is calculated by Equifax and is called the Equifax Risk Score 2.0 (ERS 2.0). To calculate your score, Equifax gathers credit information from your financial institutions (e.g. your payment history), phone and utility companies and use complex models using this information to produce credit scores. When there isn’t enough information to produce your credit score, it means that Equifax was not able to gather enough credit information about you to accurately calculate your credit score.
Someone can have limited or no credit information for a number of reasons. It could be because you’re a student, young adult, new immigrant to Canada, or have limited credit under your name.
Below we answered the most common questions for those new to credit.
- Is limited or no credit history bad?
- What tools can I use to build credit responsibly?
- What are the benefits of building credit?
- What are the common mistakes when new to credit?
Is limited or no credit history bad?
No, it’s not a bad thing, everyone starts off like this. However, building credit is important for your financial health. If you plan to get a new job, sign a lease, finance a car, or get a mortgage your credit score will be taken into account. Building your credit makes it easier to do these things.
What tools can I use to build credit responsibly?
The two biggest factors that determine your credit score are payment history, which makes up 35% of your credit score, and credit utilization, which makes up 30%. The easiest and fastest way to build credit responsibly is by keeping a credit card in good standing. You can do this by making on time payments in full every month. This will help build payment history while keeping your credit utilization low. You could also choose to open the credit card but not use it. You will still build credit history, which makes up 15% of your credit score.
The BMO SPC®* Air Miles®MasterCard®* and BMO SPC®**CashBack®MasterCard®* are two examples of student credit cards which require no credit history or income and are available to students between the provincial age of majority and 24 years of age.
Newcomer’s to credit can also start with a secured credit card. Most secured credit cards require a security deposit for eligibility. The Guaranteed Mastercard® from Capital One® only requires security funds between $75 and $300, with credit limits ranging from $300 to $7,000 depending on the applicant.
As you use your credit card and make monthly payments, your payment history is reported to our two national credit bureaus (Equifax and TransUnion) every month helping establish payment and credit history.
Additionally, the level of diversity within your credit makes up 10% of your credit score. In comparison to other factors, it’s not as high – but every percentage counts. Having a diverse credit mix should not be a priority starting off but can help improve your credit score as your credit profile matures. Different types of credit include student loans, car loans, mortgages, home equity lines of credit, unsecured lines of credit, credit cards and utility bills.
It’s not recommended you open new accounts to create diversity unless you are planning to use them. Generally, if you stay responsible with your money, your credit score will be good.
What are the benefits of establishing credit?
In cases when you’re applying for credit (like a loan or credit card) limited credit history can lead to less generous terms, like a lower credit limit or higher interest rate, and reduce your chances of approval. Without credit history, it’s difficult for a financial institution, insurance company or landlord to trust that you’ll make payments on time. It’s safe to say, establishing great credit will make things easier on you.
What are the common mistakes when new to credit?
Applying for too much credit.
Only apply for the amount of credit you think is necessary. Each credit application is a hard inquiry which negatively affects your credit score. Credit inquiries make up 10% of your credit score.
Missing payments or not paying the full amount.
Payment history accounts for 35% of your credit score so it is extremely important to keep up with payments, or be aware of whether you may be late, as even one late payment can affect your credit score. For two easy steps to control on time payments check out our article on The Importance Of On Time Payments.
Want to learn more about credit scores?
Read our Ultimate Guide to Canadian Credit Scores.