We often hear how necessary building a credit history is to settling into Canada. It's a key part of the process used to determine whether a person is eligible for a loan, including how much one can borrow. Canada's central credit bureaus gather information from all the lenders that you do business with to determine your credit score. The better the credit score, the more likely you are to qualify for credit.
Your credit rating is based on your record of managing your finances responsibly. Lenders look at how you handle your financial obligations, such as whether you pay your monthly bills on time, carry a balance, or regularly miss payments.
Many newcomers to Canada are surprised at how important credit scores are, or how they work. The credit system in Canada may not always take into account financial history in another country and the concept of building a credit history can be unfamiliar, especially in places where cash or your bank balance is the most important financial consideration.
I've found that understanding what it takes to create and maintain a good credit score is one of the most important determinants of financial success in Canada.
Let's have some fun. Test your knowledge with the following True or False statements:
Everyone needs their own credit score.
TRUE: Your credit score is yours and yours alone. If you're married, you both need credit in your name in order to establish a credit score. If your credit card, car loan or mortgage is in your spouse's name only, you're missing a valuable opportunity to build your own credit score. You can't rely on your spouse's credit history for your personal credit needs.
Credit history data stays on your ranking forever.
FALSE: In Canada, data stays on your credit rating for seven years.
My bank account balance is more important than my credit score.
FALSE: Banks and other companies determine your creditworthiness based on a number of factors and the amount of money you have in the bank will not always be relevant or the only information necessary. In Canada there is heavy reliance on credit score to determine eligibility for lending.
Missed payments show on your credit score.
TRUE: Credit scores are maintained by credit reporting agencies, and include whether you have paid your bills such as utilities, mobile phone and credit card on time, if you have missed payments, and if you have outstanding debt. Over time, this data will form a pattern of how well you pay back - or don't pay - your debt. This is why it's so important to pay at least the minimum payment on all of your bills, on time, even if they seem small or insignificant.
My credit history from my home country will be reflected in my Canadian Credit Score.
FALSE: Your credit score in Canada starts with your activity here in Canada; for example the first time you borrow money, set up utilities, or purchase a cell phone.
One last tip: It's a good idea to check your own credit history once a year by requesting a report from one of Canada's credit bureaus TransUnion or Equifax. This will not only help you track how you are doing, but also help you detect any errors and protect yourself against identity fraud by ensuring the information is accurate.
Understanding the credit system in Canada is the first step in creating a solid financial footing in your new home.