Establishing Good Credit in Canada

Hello and welcome to another video. Today we’re joined by Jeffery Schwartz, our executive director and today we’re going to be talking about the importance of establishing good credit and why that’s important in Canada.

So, Jeff thanks again for joining us. Ben thank you very much it’s a pleasure to be here. I’m really excited for today as we’re going to be talking about one of my favorite topics, credit. I like it because it is rich with opportunity. So today we’re going to be talking about credit. More specifically, what is credit and why does it matter. So whether you are a newcomer to Canada or you’ve just turned 18 and you want to start building some good credit, today’s video will hopefully answer most of your questions and provide some tips to keep you from getting into trouble and helping those that have gotten into trouble with some bad debt is something Jeff has quite a bit of experience with.

Building credit without getting into trouble

So, let’s start with one of the most common questions I get and that is how can I build my credit without getting into trouble? Now I’m sure we’re going to delve into this in greater detail throughout this video and the next one however it really just boils down to learning, planning and discipline. Understand what a credit score and credit profile is made up of, make a plan to build or rebuild it and stick to the plan relentlessly. That’s a big part of it the discipline and you know some people are better than with that than others but that’s a great way to look at it. So obviously rather than just answering you know what is credit we’re also going to take a look at why credit specifically good credit matters so much here in Canada. A large part of that’s going to include your credit reports. Now there’s a ton of confusion around credit reports and how to read them and understand them so we’ll spend a bit of time looking at what I call credit report translation. We will also need to look at credit scores and more specifically how they are calculated and finally we’ll briefly look at credit ratings because those are important to understand as often potential lenders are going to be looking at those specific ratings when deciding whether or not to lend to you. So, all of these should help us round out a major concern from any new Canadian and that is how to build or establish good credit. Ben, I’m exhausted just by hearing what you’re talking about. I mean, that sounds like quite a bit of information we’re going to be going to cover so I’m going to try my best to keep it short and to the point. The first point would be to know where you are on the credit score spectrum. We see that there in the chart that credit scores are arranged between somewhere or 300 to 900 with anything over 760 being considered excellent and anything below 560 as being poor. There’s a lot to cover here so we’re just going to look at the basics but if you want to learn, there’s a ton of great information tools and resources that can be found on our website so if you want to learn more about what we talked about today in detail that would be a great place to start. So back to our main question, “what is credit?” Well the word credit could mean several things and is often used interchangeably with other things like lending risk or credit scores but largely it refers to your ability to obtain and repay loans and financial agreements. Credit history, credit scores and the lenders own criteria are the biggest parts of a consumer’s credit assessment based on the information in your credit reports. You’ll be assigned a three-digit score and as we just saw the higher the score the better. With high credit scores and clean credit reports, you’re more likely to be approved for loans and you’ll get the lowest interest rates in the most favorable terms and it will also show your lender your credit character. Now the lender of a financial institution may have some of their own lending criteria such as collateral or assets that you own but you can be sure that they will be looking at your credit information as well. Yes, and most of that credit information will be provided by one or both of Canada’s credit bureaus and they would be Equifax or TransUnion. You might have heard of them or I’ve seen their commercial’s, so you’ll want to check both credit reports at least once per year. It’s free if it’s done through the mail. No, don’t worry checking your own credit report won’t lower your credit score. So, you can head over to the bureau’s website download the credit report request forms. Once you fill out those form’s you’ll have include two photocopies of photo ID and then you’ll mail them to the address on the form. In 15 to 30 days you’ll receive the most recent and up-to-date credit information on those credit reports. So you know who cares about credit? Why do I need to worry about it? Why do I have to start building my credit when I’m young? Those are the questions that I hear all the time from either people in my workshops or people that are just financially frustrated. They’re fed up with credit. It might not seem fair that one or two blemishes on your credit report can affect your ability to get a low-interest mortgage or a loan but a bad credit history can be much more serious than that. So, chances are you’re probably going to need a place to live and your credit score is certainly going to be something that your landlord, leaseholder or property management company will be interested in. Certainly if you’re looking at buying a home, having the highest credit score possible will give you the best chance of landing the lowest interest rates which will save you tens of thousands of dollars throughout the life of your mortgage. Now you’re probably going to get jobs and in some industries, having bad credit, filing for bankruptcy or having certain judgments issued against you can be just enough to keep you from getting a job or worse losing the job that you have. Bad credit might also cost you more than you expected when trying to set up necessary utilities like hydro, water or natural gas at your home. The utility companies will look at your credit score as a way to assess whether or not to charge you a security deposit before hooking up your services. The same goes for insurance coverage. High credit scores, clean credit reports show to your insurance company that you’re great at paying your bills on time in full and as a result they may charge you a lower premium for your clean records, so credit does matter for so much more than just getting a good interest rate on a loan. So, lots of good reasons other than just getting loans and credit to establish some credit when you are young.

Credit Reports

Jeff will let us know a little bit more about what these are and where you can get them. So with respect to credit reports, often this is where lenders will start when determining your lending risk so it makes sense for us to start there too. Now we won’t go in too much detail here today. We’re just going to look at the basics so if you wanted to learn more about how to read your credit report be sure to watch our next video which will give you a much more in-depth look at credit reports.

So what is a credit report?

Essentially your credit report is your credit history. It’s a seven-year history of your credit and loan accounts although there can be information reported on there for longer than seven years and that’s okay as long as it’s good information. Typically, each account on your credit report will fall under one of the following categories: “R” “I” “O” or “M”. Revolving accounts for “R”. These are things like credit cards. “I” would be installment loans and they’d be things for like car loans or student loans, “O” – open sources of credit are things like utility bills or cellphone contracts and “M” is for of course mortgages. In addition to your credit history and types of credit accounts, your credit report will also make note of both negative and positive information such as paying on time or by how late you paid. Even things like if the debt was sold to collections or if you filed a bankruptcy. So, it’s your job to ensure that all the information is correct. If you find an error on your credit report, you need to dispute it and get it fixed as soon as possible. We see it all the time where someone has some incorrect information or an error reporting on the credit report and that could reflect on your credit score so be sure you check those out if there is any mistakes. Like Jeff said, you need to get those things, so the first question is you know how do I get those credit reports. Well there are many ways to get your credit report but the cheapest and easiest is through the mail. All it costs is the price of postage, you just need to buy a stamp. You can request your credit reports from both credit bureaus once per year all you need to do is go to the bureau websites and download the consumer disclosure request Forms so you’ll mail in those to the addresses with the photocopies of your ID that I mentioned earlier and like I said fifteen to thirty days later you’ll have your credit reports. But that’s only half the battle. What’s next Jeff? That’s a good question. Getting the reports is the easy part, understanding what’s on them is what matters. Let’s start with the basics. Make sure everything is correct and that you recognize every account that on that’s on that report. If you see something you don’t recognize it could be a sign of identity theft so check your reports carefully and be sure to check them annually. Now you can also get your credit reports online from the bureaus themselves instantly but they’re going to charge a fee for that. Another good option is to ask your bank or financial institution as they’ll often give you a credit report for free. It’ll be likely from one of the two bureaus but not likely both and your other option is to look to someone like a free online service that offers credit reports and scores. But just be mindful that these websites are often loan comparison or brokerage sites which will also recommend loans and credit cards that reflect on your credit score so just be aware. Right so that would be like those ones you see the commercials for like Intuit Credit Karma or Borewell so yeah they’re not just doing it sort out of the goodness of their heart but if you’re in the market for getting a new credit card that might be a good place to look. So here we see an Equifax credit report. Here’s an example of the one that you can get from the Equifax website and you can see there it’s not exactly the easiest document to read, especially if you’re new to the whole credit system. Now what we’re going to do is go we’re not going to go into too much detail regarding these actual reports today. We’re gonna save that for our next video and that is “what is a credit report” but today we’re just going to look at the basics. Firstly, you’ll have your personal information, names, birthdays, addresses … so ensure that this information is all correct. Next, you’ll see your employment information. So there may or may not be employment information there if you’ve ever applied for credit or supplied your employment information to a lender. Say for example you’re filling out a loan, then there’s a good chance that that will show up on your credit report but again you want to make sure that the information is correct. Next, we’ve got things like special services and consumer statements which will go into detail a little bit more in the next video. Special services are things like credit monitoring or fraud alerts. That’s where you place those. So, a consumer statement is more like a personal statement. You know you can add sentence or two just to try and explain why there was a mistake, or you know what couldn’t be fixed through a dispute. So, we’re going to detail more about fraud and consumer statements in our next video and when they should be used when they shouldn’t use but for now it’s good to know that they are available if you need them. And finally, we’re going to get to the credit information. So this is a list of each credit or a loan account that you’ve had and some basic information about it things like what type of credit it is, if it’s revolving installment, how long the account has been open, what the balances are if you’ve paid late or on time. I’m getting ahead of myself there so if you’ve late or paid on time that’s all going to be recorded there. So that’s a credit report and essentially it’s your credit history so based on that history and any of that credit information that’s in there both the good stuff and the bad stuff you’re going to be given a credit score based on that and as Jeff mentioned earlier, credit scores typically range between 300 and 900 and the higher they are the better but if you’re new to the country or you’re a young person with no credit history, your credit score might be a big old zero.

How do they calculate your credit score?

Well that’s what the next slides for and Jeff is going to walk us through the basics of credit score calculation. Thanks Ben and I hate to say it but it’s a tricky question so we’ll have to speak in broad strokes here, very broad strokes actually I mean. It’s been mentioned credit scores fall between 300 and 900 but how each credit bureau arrives at your credit score is different. In fact, the credit score you see might not be the credit score your lender or bank will see. That is why it’s important to check both credit reports from both credit bureaus and ensure the information is the same or as close to the same as possible. Some lenders use Equifax, other lenders use TransUnion and they might even place a higher weight on some credit information than others. Plus, each lender and financial institution will also have its own lending criteria outside of your credit reports and scores to consider but that’s a discussion for a different video. Anyways getting back to those very broad strokes. We can generally calculate your credit scores like this chart here. You can see that the biggest factor in your credit score is payment history. Do you always pay on time and in full? Then chances are if the answer to that is yes then chances are you’ve got a good credit score as 35% of your score depends on whether you pay on time or late. Now we see that 30% of your score depends on the amounts owed or rather how much debt you are in. A general rule of thumb is to never carry a balance higher than 30% of your limit so this is also called utilization. For example, let’s say I have a $1,000 limit on a credit card and for some reason I don’t think I’ll be able to pay it off in full this month. Maybe my car broke down. If I were to carry a balance on that card of $300 – 30% of its limit – for just 2 or 3 months, my credit score would start to go down because I’m over utilized. So, when people start maxing out credit cards and their lines of credit, month after month their credit scores start to suffer. Next on the chart is the length of credit. A length of credit use so newcomers and young people starting to establish credit are a bit of a disadvantage because the longer you use credit responsibly the higher your credit score will climb. Moving on, we have new credit or rather credit applications or inquiries. When you apply for loans and credit you’re agreeing to a hard credit check sometimes called a “hard credit pull”. This means a lender is checking your credit. It’s part of the application process and it can also signal a bit of a credit risk. As a result, too many hard credit checks or inquiries can start to lower your credit score so only apply for credit when you need it. Just ask yourself why do I need this loan or credit card? If the answer is to buy a car a home or for emergencies, collecting rewards points or building credit then that’s a good reason to apply. However, if the answer is to pay off another loan or to make ends meet then looking for credit will only delay inevitable financial problems. Finally, we’ve got the last 10% which is types of new credit or your credit mix. Having different types of credit shows that you can handle different financial obligations. For instance if you’re paying down student a student loan and using a credit card responsibly every month, then you’ll have excellent credit scores in a year or two. So, some good information there to consider when you’re trying to build your credit but this calculation models a little old I’d say at least fifty years or so. There’s been a little bit of advancement since then but broadly this chart still helps to highlight the most important parts of a credit score. If we wanted to look at it in terms of a credit score let’s take 600 as our example as that’s usually what’s considered fair credit by most lenders. A 600 means you’ll most likely be considered for most loans and credit cards but there’s going to be a little bit more restrictive term it could be lower credit limits and definitely higher interest rates so at 600 your credit score could essentially be broken down like this. 210 points would be awarded to your effort to pay on time. 180 points would be credited for how much debt you currently owe or your utilization that we mentioned. 90 points will be awarded to how long you’ve used credit and 60 points each would be counted towards how many credit applications you’ve applied for and what your current credit mix is. By maintaining good credit habits such as paying your bills on time and in full every month and by not applying for credit that you don’t really need, your score is only going to go up from there. However if you started to make mistakes like you’re maxing out credit cards, not paying them off, if you’re paying late or you’re having your debts turn over to collection agencies, then you’ll expect your credit score to start to slide below the 600 which puts it into poor credit territory.

So how do we establish that good credit?

Well that’s the big question, how do I build good credit. Well the first thing your lenders will want to see is that you’re earning an income. This shows that you have the capacity to repay your loans and financial obligations. Once you’ve obtained the source of credit maybe a secured credit Card, a small loan or something like that, preferably one that reports to both credit bureaus. Some only report to Equifax some might only report to TransUnion but if you can find one that reports to both its best so it’s time to start using it and paying the balance in full every month. That’s going to show a steady history of using credit responsibly. It’s even better if you can get two sources of credit reporting to both credit bureaus and if you’re worried that you can’t get approved for credit because you’re too new or because you made some mistakes in the past I don’t write there are programs out there to help you with that now. That’s right Ben. I mean anyone, no matter what their credit score, can also get what’s called a secured credit card. All that means is that you’ll have to provide a deposit to secure the limit so if you put down $1,000 deposit at a bank for a secured credit card they’ll give you a real credit card with a $1,000 limit. A real credit but also real interest rates too so make sure you use it and pay it off in full and if the thousand dollar deposit is a bit of a barrier you might want to look to get alternative credit card companies or credit union cards where you might be able to find one for around $500 to get you started. Monitor your credit and in a few months you’ll be able to apply for an unsecured credit card and get your deposit back. You can also look at credit building loans or programs. These are often GIC or savings loans program where you’ll pay into what you’ll do is you’ll pay into that each and every month each month that you make a payment on time it will be reported to the credit bureaus at the end of the program the loan will be paid out minus the fees from the credit program company of course so if you’re seriously considering a credit rebuilding program or credit building  program be sure you understand their fee structure and also make sure that these programs will be reported to both credit bureaus to net the best score for you. Right so there’s some options out there for people with no credit or maybe building credit to try and just bring themselves back into that good credit territory so really the mantra here is to borrow, pay and then repeat and it’s something I often recommend to my class workshop attendees. You now use a credit card for some monthly needs. Leave the credit card at home if you have to, that way you’re not tempted to take your friends out for drinks or pay for the family dinner but set it up to be automatically charged to your credit card then be sure to pay off your balance before the end of the month so you know what is an easily affordable monthly expense for you. Whether it’s a monthly expense like your hydro bill or your cell phone bill or something could be more affordable like maybe your internet bill or even just a Netflix subscription, try and use your credit card pay it off and then do it again the next month. By doing it with a monthly expense one, you’re paying for something that you essentially need every month and – you’ll be establishing a great credit history. Eventually, you might even get to the point where you’re approved for a cashback or rewards point credit card then you’re not only paying your monthly bills and building your credit but now you’re getting something in return like maybe free gas or groceries or my personal favorite, cash.

So that brings us to the end of our video on the importance of establishing good credit in Canada. Next,8 we’ll be taking a much closer look at things like disputing errors, what the different credit reports mean and a whole lot more so that video will be coming up shortly and it’s called what is a credit report?

For now if you had any specific questions you’d like to contact either Jeff or myself you can reach us at the email address you see there and for a whole host of educational resources and tools you’ll find them at that website there as well.

So that’s all for today, thanks again for watching us and I’d like to thank Jeff again for being with us and lending his expertise to this video and it’s always a pleasure to be here and I know wow there was a lot of information today it really was the very broad strokes I think as we dive into our next video I think we’ll get into a little bit more detail and it might make all sense it might all make sense at the end of it all but thank you very much right so stay tuned for our next one if you want to get into the kind of 200 level of credit reports so thanks for watching and have a great day.