If you’re new to Canada, a student, or you’ve never applied for any type of credit before, you’ll need to build a credit score to prove you’re responsible with borrowing and repaying money. Having a good credit score is necessary to get approved for financial products like credit cards, loans and mortgages, but also for things like renting an apartment or applying for certain jobs. Read on to learn more about how credit scores work and how to build a credit score in Canada.
What is a credit score?
Your credit score is a numerical rating based on what’s in your credit report, which gives an overview of your borrowing history, repayment history (including late or missed payments), current debts and negative information such as bankruptcy, liens, or accounts sent to collections. Lenders periodically report the latest information from your credit report to one or both of Canada’s main credit bureaus, Equifax and TransUnion. In Canada, credit scores range from 300 (bad credit) to 900 (excellent credit).
Credit scores are calculated by considering various aspects of your financial behaviour, including whether you pay your bills on time, how much debt you have, how often you open new credit accounts, the age of your accounts and the types of loans you have (more on this below).
Why do credit scores exist?
A credit score provides lenders, landlords, employers or anyone else you authorize to run a credit check a quick snapshot of your current financial situation and your credit history. The higher your score, the more creditworthy you are in the eyes of lenders, giving you the best chance of securing loans, credit, housing, and sometimes even employment. A good score can help you secure better mortgage interest rates, higher credit limits, and more favourable loan terms.
Overall, having a high credit score makes managing your personal finances a lot easier, so understanding how to build your credit score is important.
What is the fastest way to build credit in Canada?
When it comes to the fastest way to build credit in Canada, it depends on how you define “fast.” The truth is, there’s no way to instantly improve your credit score. It also depends on your personal financial situation – for example, it’s easier to build a positive credit history from scratch than it is to rehabilitate a poor credit score with years of negative remarks on your credit report.
Here are the fastest ways to boost your credit score:
Pay your bills on time, every time: This is the number one way to build and maintain a high credit score. Consistently paying your bills on time proves to creditors that you can handle basic debt repayment obligations month after month. Your credit history will also show any late payments or missed payments.
Maintain a low balance on your credit cards: When a lender, employer or landlord checks your credit score, they want to see that you can use credit responsibly and aren’t struggling to stay on top of your debts. The general rule is that your total credit balance across all accounts should be under 30% of your total available credit limit. If you aren’t paying off your credit card in full every month, you should at least be making the minimum payment by the monthly deadline.
Check your score regularly: It’s important to keep an eye on your credit score to monitor your progress. Checking your own credit score doesn’t affect your score at all – you could technically check it every day, if you want, but your credit score only updates every 30 to 90 days. You should also monitor your credit report for mistakes with your personal information and account information, as well as signs of identity theft like fraudulent accounts opened in your name.
Use different types of credit: The credit bureaus like to see how you handle different types of loans such as revolving credit (credit cards, lines of credit, home equity lines of credit), installment loans (mortgages, car loans) or open credit accounts (internet or mobile plans, utility bills).
Consider a secured credit card: A secured credit card is a type of credit card where you pay a security deposit, which determines your credit limit and acts as collateral. You’re technically not borrowing any money (because the card is backed by your security deposit), but a secured credit card can be used like any other credit card and acts as a credit building tool – just remember to always make your payments on time. Secured credit cards are usually easier to qualify for because they’re aimed at people looking to build or rebuild credit.
Pay off high-interest loans first: If you’re carrying a lot of debt, the avalanche method focuses on paying off high-interest debt first by making the minimum payments on all your debts and funnelling any extra money to paying off the debt with the highest interest rate. This method helps you save money by paying less interest on your debts over time.
How is your credit score calculated?
Different credit bureaus have different scoring models, so it is possible to have slightly different credit scores depending on the information they have and how they weigh different factors that affect your credit score. The key components typically include your payment history, level of debt, credit age, mix of credit types, recent credit inquiries, and any public records like bankruptcy.
Understanding how each component affects your credit score goes a long way in figuring out how to improve a credit score fast. Here are a few factors that influence your credit score:
Payment history: Making payments on time accounts for about 35% of how your credit score is calculated. Accounts that are reported to the credit bureaus include credit cards, student loans, car loans, mortgages, lines of credit, internet and cell phone bills and sometimes utility bills. It can take time, but eventually your regular good habits will be reflected in your credit score.
Debt levels: The amount of debt you carry from month to month also matters significantly and accounts for about 30% of how your credit score is calculated. Lenders want to make sure you can make all your repayment obligations, and carrying a lot of debt looks risky.
Credit age: The credit bureaus also take into account how long you’ve had your accounts open. This counts for about 15% of your credit score. When you close an account, especially if it’s an older one, it shortens the length of your credit history, which may temporarily affect your score.
Types of credit: Credit mix accounts for a smaller slice of how your credit score is calculated (about 10%), but it’s still important because it signals you can handle different types of credit – for example, a credit card or two, a car loan, a mortgage and your internet and mobile phone bill.
Recent credit inquiries: When you apply for things like a credit card, it’s called a “hard inquiry” and usually causes your credit score to drop by about 5-10 points. It’s not a big deal, but applying for a flurry of new credit accounts at once can bring down your credit score. Even if you don’t get approved, your credit score will still get dinged. Hard inquiries stay on your credit report for two or three years.
Public records (such as bankruptcy): Your credit report will also show negative remarks such as bankruptcy or consumer proposals, liens, debt sent to collection agencies, accounts closed due to default or fraud, and bounced cheques or non-sufficient funds payments. First-time bankruptcy stays on your credit report for seven years, while a second bankruptcy stays on your report for 14 years from the date of discharge.
How long does it take to build credit in Canada?
The million-dollar question is, how long does it take to build credit Canada? “It takes 30 to 90 days for information to be updated in your credit report,” according to the Financial Consumer Agency of Canada.
But that doesn’t mean your credit score will shoot up to “excellent” after a month or two of reducing your debt and making on-time payments – it’s more about making consistent changes over time that snowball into a solid credit history and a credit score that reflects your positive habits. Certain things like high amounts of outstanding debt and a patchy payment history can hinder progress.
For an in-depth look at what affects your credit score, what causes a credit score to go down and how to improve your credit score, read more about how long does it take for a credit score to change?
Get a head start on improving your credit score
As part of your journey toward achieving a higher credit score, consider using one (or both) of KOHO’s affordable and interest-free credit building tools:
A KOHO line of credit: When you open a line of credit with KOHO, a small amount of money is set aside and reported by KOHO as a monthly payment to Equifax. All you have to do is pay a monthly fee – and as long as you do it on time every month, it’s reported to the credit bureau and will help build your credit score and credit history.
A flexible line of credit: This works like a secured credit card, where you use your own money as a deposit that determines your credit limit (between $30 to $500) and allows you to make withdrawals. Each monthly on-time repayment is reported to Equifax.
For more tips on improving your credit score, check out KOHO’s ultimate guide on how to improve your credit score.
Improving your credit score is often compared to running a marathon, but you also have to maintain your financial physique by regularly keeping up good habits. While there are certain things you can start doing immediately to improve your credit score, it's less about speed and more about your commitment to making long-term changes and adopting smart financial habits.
Jane Switzer is a writer and editor with more than a decade of experience producing content for major Canadian newspapers, magazines, fintech companies and banks. Jane got her start working in journalism as a reporter and copy editor before transitioning to content writing, editing and SEO.