Establishing credit

How to establish credit

June 29, 2011 Ingrid McGaughey 7 Comments

Lenders want to see great credit… But how do you even get started with establishing credit?

Mortgage lenders will definitely check your credit profile. When they do, you want to be sure that everything looks great. Not sure what your credit rating even looks like… or if you even have one? Check out your credit report at Equifax Canada or TransUnion Canada. This should tell you everything you need to know about what a lender might find when they check out your profile. Maybe you’ve heard that the more credit inquiries on your bureau, the worse your score? Checking your credit yourself does not negatively impact your bureau. You have a right to know what’s on your credit report, and what’s more, you should know what’s on your credit report.

The higher your credit score, the better your mortgage deal

You’ll get a better mortgage, both in terms of how much a lender is willing to lend you, and the interest rate you are charged. It may sound overly simplistic, but the bottom line is that you need to prove are responsible in paying back money you owe. That means you should always pay your bills on time and, ideally, in full.

Tips for establishing credit:

1) Apply for one or two “major” credit cards, such as MasterCard or Visa.

Use them regularly and wisely! Make the payments on or before the due date, and ideally, pay the entire balance in full. If you do carry a balance, make sure it is no more than 30-50% of the credit limit. NEVER go over the credit limit on your cards.

2) Consider applying for a small consumer loan, such as an RRSP loan or a student loan.

Make sure that the lender will be reporting your payment records to the credit bureau. For example, not all RRSP loans are reported to the credit bureau.

3) Pay all your other bills on time!

Just one example: cell phone companies sometimes report late payments to the credit bureau, and they are notorious for sending even tiny bills to a collection agency if they’re not paid. (That’s a huge red flag on your credit report.) In addition, being able to show that you take all your financial responsibilities seriously is a plus. If you don’t have a huge amount of credit, something like a letter from your landlord, showing that for 12 months or more you have been a star tenant with a track record of always paying your rent on time, can help to build your credit profile.

4) Consider a secured credit card

If you are having trouble obtaining a credit card, consider applying for a secured credit card, with a company such as Capital One or Home Trust. The credit card issuer will require you to deposit a certain amount of cash as security, and will set your credit limit as a percentage of your deposit. As with any other card, use the card regularly and make all your payments on time. Once your credit track record is considered satisfactory, you will be able to qualify for an unsecured credit card. Please note that this is NOT the same as applying for a pre-paid card. That does nothing to help your credit.

What not to do with your credit

1) Applying for every credit card offer available

Too many inquiries on your credit report will pull down your credit score. Beware that department store offer!

2) Carrying balances on department store cards

While these cards may be easier to get than a “major” credit card, the interest rates on these cards are usually quite high (sometimes 20 – 30%). This impacts your ability to save for your down payment.

3) Switching credit cards frequently

The longer your history with a particular card, the better. Ideally you should always keep your oldest card, use it regularly, and pay it off in full before the due date.

What if you find a mistake on your credit report?

It is not uncommon to find errors on your credit report. These can be due to identity theft, collection items mistakenly attributed to you, or even simple mistakes. Once these appear on your credit record, it is your right to have them corrected. The credit bureaux can be very slow to do this, so you need to deal with any mistakes you find immediately. For more information on how to do this, click here.

Next steps

In sum, you need to prove that you can handle credit and are a “good risk” for a lender. To learn more, check out my blog!

If you want to know more, and are getting kinda tired of my perspective, you can also get really in-depth on this topic by checking out the terrific information on the Financial Consumer Agency of Canada website, which talks about your credit report and credit score in more detail. Just click here.

Feel free to get in touch to review your own situation. I’m happy to help!