In this article we will talk about credit scores and how to improve one's score as a new immigrant.
What exactly is a credit score?
A credit score is a quantification of your creditworthiness as a borrower. In Canada, it can range from 300 to 900 depending on a variety of factors, which are described later in this article.
What is it used for?
Your credit score is taken under consideration when you apply for any kind of credit - a mortgage, a new credit card, a line of credit, a car loan - you get the idea. It is also checked by your potential landlord when you rent a home. An employer may also check it before hiring you - though that is less common. If you have a low credit score, it may negatively affect your chances of obtaining the loan, the home or the job that you want. Though there is no hard and fast rule, 650 is considered to be the bare minimum for getting most kinds of credit.
Who calculates it?
In Canada, two credit scoring agencies calculate it - Equifax and TransUnion. Not much is known about the exact methodology, but we do have a basic idea of how it is done.
How is it calculated?
A credit score has four main components:
1. Payment History - 35% - How timely your payments are.
2. Utilization Ratio - 30% - How much of your credit limit you are utilizing.
3. Length of credit - 15% - How long has it been since you have a credit score.
4. Types of credit - 10% - How many different types of credit you have - auto, credit card, mortgage, line of credit, etc.
5. Inquiries - 10% - How often someone does a hard credit check on you. A hard credit check is one that affects your inquiries score.
How do I improve my credit score?
One way is to avoid doing things that damage your credit score. First, always pay your bills on time. Don't keep anything outstanding unless you absolutely need to. Second, don't put in too many requests for credit in a short period of time. If you get a hard credit check, you may want to wait for about six months before re-applying.
Another way to improve your credit score is to do positive things that improve your credit score. First, your limit utilization should ideally be below 30%. Pay your bill before the end of the billing period if you're close to utilizing more than 30% of your credit card limit. For example, if you have a limit of $1,000, transfer some money every time you utilize over $300. Another way to reduce the utilization ratio is to take an additional free credit card when offered one. Second, get different types of credit - a credit card, a line of credit, a small loan on your car, etc. It is actually bad for your credit score if you have no debt at all.
Where can I check my credit score?
You can get your report for free once a year from both credit scoring agencies, and it is highly recommended that you take advantage of this. Certain apps like Mogo Financial also give you an overview of your credit score via a soft credit check once a month for free.
Building your credit is critical to your financial future in Canada, so make sure you actively pay attention to it!
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