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The Importance of Building Good Credit in Canada

Adrian Zee

Feb 01, 2022 9 min read

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Why building good credit is important
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    Good credit is a cornerstone to sound financial health. It's an asset that lets you get approved for loans, mortgages, and higher credit limits. Your credit rating can further determine the interest rate of your loans and whether a landlord approves your rental application. Employers might even consider credit scores in their hiring process.

    Good credit shows you're good at managing debt and credit. Some extrapolate this to mean you're also good at managing other financial and non-financial aspects of your life. In contrast, bad credit suggests that you're a risky bet to lenders, employers, and landlords because you may be irresponsible with money. 

    This article expands on the importance and advantages of good credit. It details the factors that influence a credit score and the strategies to maintain a pristine standing. 

    Why Is Having Good Credit Important?

    Good credit is synonymous with loan and credit approvals. However, it does much more than that. Good credit can impact your chances of getting approved for things such as:

    • Mortgages

    • Car loans

    • Credit cards

    • Employment

    • Rentals

    • Utilities

    Here’s a breakdown of how your credit score can impact these different areas.

    Credit impacts your home-buying options 

    Mortgage lenders use your credit score to vet your risk as a borrower. The best mortgage rates require a credit score of 680 or above. As a credit score gets lower, your mortgage rates increase. If you have bad credit, you may have limited mortgage options. Any available options likely offer a high-interest rate. If you’re shopping around for a new home, take some time to improve your credit score above 680 in order to lock in a better mortgage rate from lenders. This can help you save hundreds of dollars (and sometimes thousands!) in long-term savings.

    Credit impacts what car you can buy 

    When it comes to the qualification and approval process, car loans function similar to mortgages and personal loans — a credit score is how a lender predicts your riskiness. As a result, the better your credit score, the lower the interest rate you’ll qualify for on a car loan. You'll need a credit score of 630 or above to qualify for most car loans, but higher-interest options remain open to those below 630. Again, to save money on interest payments, you could take some time to improve your credit score before deciding to buy a new set of wheels.

    Premium rewards cards require good credit

    To qualify for a credit card, you’ll need a credit score of 660 or above to qualify with most credit card providers in Canada. With a credit score of 660, you’ll qualify for most cards, but you might not qualify for high credit limits or the lowest interest rates. You also might not qualify for premium cards, such as travel cards or cashback cards. If you’re looking for travel points, high cashback rates, and other perks, work on increasing your credit score above 700. 

    Employers run credit checks 

    Some employers check credit history to understand a potential employee's trustworthiness. Credit scores can also reveal a person's financial management and organization skills. Generally, companies want to avoid someone who may make poor financial decisions on their business' behalf. 

    Landlords run credit checks

    Landlords usually check the credit scores of rental applicants. There's no credit score cut off to rent a place; however, those with scores over 660 are generally in a good position. Anything less than 660 and you may need other ways to position yourself as the ideal tenant (such as a higher upfront deposit or letters of recommendation from previous landlords).

    Utility providers prefer good-credit customers 

    A bad credit score can imply a track record of late and missed payments. Utility companies aren't fond of this. As a result, they may require someone with bad credit to provide a security deposit to mitigate the consequences of late or missed payments. 

    What Are The Advantages of Having Good Credit?

    Your credit score impacts significant portions of your daily life. A good credit score can help secure the following benefits: 

    • Lower interest rates

    • Better loans terms

    • Easier credit approval

    • Larger credit limits

    • Better insurance rates

    • Easier rental approvals

    • No security deposits on utilities

    • More benefits and rewards from lenders

    Lower interest rates 

    Good credit scores mean you're a lower risk to lenders. As a result, they can justify lending money to you at a lower interest rate because they believe the risk of default is lower. 

    Better loan terms 

    Lenders may also extend more favourable terms if you have good credit. For example, you could receive higher credit limits or have opportunities to take advantage of a low fixed-rate mortgage.

    Easier credit approval 

    Approving a loan involves weighing risks. If a creditor notices you have a good credit score, it makes it more apparent that you're a low-risk borrower that's easy to approve.

    Larger credit limits 

    If you have good credit, lenders won't fear that the ability to borrow more will lead you to spend wildly and be unable to make repayments. Therefore, it’s easier for financial institutions to raise your credit limit

    Better insurance rates

    Car insurers can check your credit score to calculate your premiums in some Canadian provinces. Canadians in Ontario or Newfoundland and Labrador have some relief as provincial laws ban insurers from using your credit score in premium calculations. 

    Easier rental approvals 

    Landlords fear renting to someone who can't make bills on time or who refuse to pay. A good credit score shows you have a track record of on-time payments, which can quell landlord fright.

    No security deposits on utilities 

    Security deposits reduce a creditor's risks because they can take possession of the deposit if you're unable to make a payment. But great credit shows you're fantastic at paying bills on time, reducing a need for such a measure. 

    More benefits/rewards 

    Good credit leads to offers and promotions from different financial institutions. For example, a bank may notice your excellent credit score and offer a low-interest line of credit without you even applying for it!

    What Is Considered a Good Credit Score?

    In Canada, a good credit score ranges between 713 and 740. A credit score between 741 and 900 is excellent. 

    Credit scores otherwise fall between 300 and 900, with most Canadians sitting between 600 and 750. Here’s a breakdown of all five categories:

    • Excellent: 741-900

    • Good: 713-740

    • Fair: 660-712

    • Below Average: 575-659

    • Poor: 300-574

    What Factors Influence a Person's Credit Score?

    Obtaining good credit isn’t a mystery. Canada’s credit bureaus, Equifax and TransUnion, calculate your credit score based on the financial information in your credit report. They generally focus on the following five factors that make up a portion of your overall score: 

    • Payment history (35%)

    • Credit utilization (30%)

    • Credit history (15%)

    • Credit mix (10%)

    • Credit inquiries (10%)

    Payment history 

    Payment history is the most significant factor in your credit score. A track record of on-time payments assures that future payments will also be on time. However, even one missed or late payment could drastically drop your credit.

    Credit utilization

    A credit utilization rate is the percentage of available credit that you actually use. For example, suppose your credit cards and lines of credit amount to $10,000. If you only use $1,000 of it, your credit utilization rate is 10%. To maintain a good credit score, we recommend that you keep your overall credit utilization rate under 30%.

    Credit history

    A history of on-time payments doesn't mean much if you got your first credit card a month ago. That's why credit bureaus also look at the average age of your credit products. Credit history accounts for approximately 15% of your credit score and is weighed based on how long your accounts have been open, how long it’s been since you’ve used them and whether they’re still active. Most credit bureaus look for a minimum of six months of responsible credit in order to calculate your credit score.

    If you don't yet have any credit history, you can start building it with a secured credit card or credit builder loan.

    Credit mix

    A good credit score usually involves properly managing a mix of credit products. Someone who responsibly uses a car loan, line of credit, and credit card generally sees a better score than a person who only uses credit cards. 

    Credit inquiries 

    When you apply for a credit card, loan, or mortgage, your lender will usually make a hard credit inquiry to formally review your credit report. When this happens, your credit score may decrease temporarily. Because of this, it’s important that you don’t apply for many different credit products in a short time frame, as each application could result in a formal credit check that could impact your credit score. 

    Checking your own credit score with a service like Borrowell is considered a soft credit inquiry, and this won’t impact your credit score! 

    How to Keep a Good Credit in Canada?

    Maintaining good credit habits is the best way to keep a good credit score. This includes steps such as: 

    • Making full bill payments on time: It could help to enroll in automatic payments to ensure you don't forget to pay a credit card or loan when payments are due. 

    • Ensuring credit utilization is under 30%: This in part means limiting the amount of credit you use. But, you can also reduce your credit utilization rate by applying for more credit while keeping usage the same. 

    • Keeping older credit accounts: Older credit accounts help maintain a lengthy credit history and age. You can add a recurring subscription to old credit cards to ensure a credit card company doesn't cancel your card for lack of usage. 

    • Having a variety of credit products: Including a car loan, lines of credit, or a mortgage can improve your credit compared to only having a credit card. 

    • Limiting the number of hard credit inquiries: Try not to apply for multiple credit products at once, or you might see a significant drop in your credit score due to numerous hard inquiries. 

    What Is The Best Way to Track Your Credit Score?

    Borrowell lets you regularly track your credit score for free. Its system doesn't create a hard inquiry meaning your credit score is safe every time you view your score. 

    Regularly tracking your credit score helps maintain financial health because you can see any improvements every week. A close eye on your credit further ensures issues like an unnoticed late payment or identity theft don't wrongly cause your score to decline. 

    Take Your Next Steps Towards Good Credit

    Good credit is a vital asset to obtaining favourable loans. It also aids in your employment and rental search. Lenders, employers, and landlords believe that a good credit score ultimately means you can make payments on time and wisely manage your finances. 

    Good credit also has other benefits. You could find yourself with a better car insurance rate, easier rental and credit approvals, and even access to sweet rewards and benefits. 

    Steps like on-time bill payments and a low credit utilization rate let you maintain the excellent credit score you've built or help you improve your existing one. 

    Adrian Zee
    Adrian Zee

    Adrian is a judicial law clerk and personal finance writer who breaks down complex personal finance topics into easy-to-consume articles. His work has been featured in the National Post and Apollo Magazine, along with other publications.

    Article Contents

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