Building credit is an essential step for newcomers in Canada, as it plays a critical role in your financial stability and credibility. A credit score is a number between 300 and 900 that reflects how well an individual manages financial credit. This score is influenced by your financial habits and is a key metric used by lenders, landlords, and even some employers to assess your trustworthiness and financial reliability.

What is Credit and How Does it Work?

Credit comes in various forms, such as loans, credit cards, and lines of credit. How you manage these forms of credit is recorded as your credit history and reported to two primary credit bureaus in Canada: Equifax and TransUnion. Your credit history contributes to your credit score, which is accessible to institutions or individuals when:

• Applying for a loan or credit card

• Renting a property

• Undergoing a job background check

• Applying for certain services like utilities or phone plans

Factors That Influence Your Credit Score

Several factors determine your credit score. These include:

1. Payment History: Making on-time payments is crucial, as it accounts for a significant portion of your score. Late payments or defaults can lower your score substantially.

2. Credit Utilization: This refers to how much of your available credit you use. It's recommended to keep your utilization below 30% of your credit limit.

3. Credit Applications: Applying for multiple credit products within a short period results in "hard inquiries," which can negatively impact your score.

4. Type of Credit: A mix of credit types, such as credit cards and loans, shows that you can handle different forms of credit responsibly.

5. Credit Checks: Too many hard credit inquiries from frequent applications can hurt your score, while "soft inquiries" (like checking your own score) have no impact.

Why Build Credit?

Your credit score helps lenders and other individuals decide whether to extend credit to you. A strong credit score increases your chances of approval for:

• Loans (e.g., mortgages, personal loans)

• Renting a home or apartment

• Favorable interest rates on credit products

Moreover, a high credit score reflects your financial responsibility, which is often viewed positively by employers and service providers.

Credit Score Categories

According to Equifax, credit scores are ranked as follows:

• Poor: 560 and below

• Fair: 560 to 660

• Good: 660 to 724

• Very Good: 725 to 759

• Excellent: 760 to 900

When you have a score in the "Good" to "Excellent" range, it opens doors to better financial opportunities and lower interest rates when applying for loans.

Read How to Build Credit as a Newcomer in our next post.