Your Canadian credit history tells the story of your financial life, it’s comprised of all the financial decisions and mistakes you’ve made since the first day you started using credit. It represents your financial life and your creditworthiness to potential lenders, if you want to borrow money in Canada from a bank for an institutional lender then you need a Canadian credit history.
First Step: Get Credit
If you are new to Canada or are looking to get your first form of credit to start building a credit history then the first step you need to take is to get credit. Unfortunately, credit is a catch-22, good credit comes from properly using credit, but it can sometimes be difficult to get credit if you don’t already have credit. But don’t worry too much; this only really affects you if you’re trying to get a mortgage or large loan without already having an established credit history.
What you need to do is get a credit card; this is the best way to start building your credit history.
Almost anyone can get a credit card, even if they have zero previous credit history in Canada. We suggest you start by trying to get a credit card from the bank that you have an account with, if this doesn’t work you should then consider a secured credit card. A secured credit card is a great option for those looking to improve or build their credit history. It’s secured through a deposit that you must provide, so if your credit limit is $300 then you must put down a deposit of $300. It’s different than a typical credit card but it will still help you build a credit history.
Second Step: Use Credit Responsibly
For some people getting credit is the easy part, it’s the using it responsibly that’s the hard part. Having a credit history is important but having a good credit history that proves you’re trustworthy and can handle money and credit responsibly is essential. Here are our top tips for using your credit responsibly so that you can build a good credit history:
Do actually use your credit card. While some people have no trouble using their credit cards, others might be hesitant to create debt. It’s good to not want to be in debt, but you’re trying to build a credit history so you need to use your credit card to do so.
Pay your bills on time. After actually using your credit cards, paying them off on time is the most important thing you can do for yourself and your credit history. Late payments will only hurt your chances of creating a good credit history for yourself.
Try to avoid the minimum payment spiral. Credit cards have minimum payment requirements; this can be a good thing or a bad thing depending on your situation. You don’t have to pay off your balance in full each month but the money you leave on your card will incur interest. It takes years of minimum payments to become debt-free, so make sure you understand the consequences before you charge.
Be aware of what you owe. Do not ignore your credit card statements. It’s best to know exactly how much you owe so you can work towards paying it off. Since we’re discussing how to build a good credit history you shouldn’t have too much credit card debt anyway, you should be able to pay it off in full at the end of the billing period each month.
Don’t spend beyond your means. Sure your credit card might have a $5,000 limit but do you have $5,000 to spend? Just because you have a limit doesn’t mean you need to come anywhere close to it. Charging one monthly bill to your credit card and then paying it off in full will help build your credit history more efficiently than maxing your card out.
Do not cancel any credit cards. Having more than one credit card is usually a bad idea but cancelling cards is also a bad idea. How long your credit accounts have been open plays a role in the calculation of your overall credit health so keep those accounts open.
Step Three: Develop Your Credit
Credit cards are great for building your credit history and they are the perfect place to start but after a couple of years, you might want to think about expanding on the types of credit you have. Once you’ve established a good beginner’s credit history you’ll probably want to start improving it and making it the best it can be. Variety is the key here, so having more than just credit cards will greatly improve your credit history. This step isn’t for everyone, just those who are looking to really improve upon their credit history. Here are a few things you can do:
1) Take out a small personal loan
2) Apply for a line of credit
3) Take the plunge and apply for a mortgage to purchase your dream house
These types of credit will show variety in your credit history which is important for those looking to take the next step to create the best credit history possible for themselves.
Step Four: Get to Work
Now that you know how to build your Canadian credit history from the ground up it’s time to get working. Find the best credit card for you, make your payments on time and in full, make it a priority and start to see your credit history build and improve.