The 2017 Guide For How To Build Credit In Canada
(~ 10 minute read)
I want to start this guide by saying I am not a credit coach. What I am sharing is the most common advice I regularly hear my credit coaches say to our rent to own clients. Each credit situation is unique and you should do your own due diligence as to what it will take to repair your credit. One must keep in mind that the better your credit file and score, the greater your benefits will be. Among which: a better interest rate for your mortgage!
First of all, it is important to know the difference between your credit file and your credit score.
So What Is My Credit File and Credit Score?
This is a document gathering past and current information about your financial situation. It includes your credit history. Financial institutions or lenders send information about your accounts to agencies such as Equifax or TransUnion. Your file helps them identify you, know your debt level, but more importantly, to know if you reimburse your debts.
A credit file contains the following information:
o Personal information
o Information about your credit: credit cards, credit lines, loans and mortgages, debts that you were not able to meet, etc.
o Banking information: bank accounts, uncovered cheques, etc.
o Public information: bankruptcies, court orders, legal proceedings against you, etc.
o Complementary information: for instance, a note mentioning that you were the victim of an identity theft or any other useful information about your file.
o Information about the persons or institutions that consulted your file.
In Canada, the credit score ranges on a scale from 300 to 900 points with 900 being the highest score.
Every time you use your credit towards a transaction you will get points essentially you’re using this to create a ‘history’ to shows to the lenders that you know how to use the credit instrument in a responsible way. On the flip side, you lose points for transactions when you have difficulties in handling your credit (For example, you make late payments or you max out the limit).
The lending institutions use your history to determine the risk that they would take by lending you money, based on your score (which is impacted by a mortgage, personal loan, credit margin, credit cards, etc.).
How to Rebuild Credit
When it comes to rebuilding your credit, I’d highly suggest you have a look at your credit file at least once a year to see your progress and to ensure that all the information in it is accurate. If you want to know how to check your credit file, you can see how to do that by scrolling to the bottom of this article.
If you notice that there are any mistakes make sure you ask the rating agencies to correct them for you! Here are a few more key factors to consider when you want to get your credit rating restored (or created if you’re doing this for the first time!):
- Pay all your invoices on time. Never be late on your payments. Pay the overall amount of your invoices, before the due date. If you are not able to pay the overall amount, pay at least the minimum monthly payment. Be careful with cell phones companies even if they don’t appear on your file. These companies can and do report your late payments to the rating agencies (Equifax, TransUnion, others) and lower your credit score.
- Use at least 35% of your available credit. For every type of credit available (credit card, line of credit and personal credit); be cautious not to exceed 60% of the loan. You will inspire confidence in your lenders by not exceeding 35%. The higher your debt is, the more your score will be lowered. (Example: for a credit card of $1 000, aim for a usage of $350 maximum)
- Use your credit responsibly. Keep your older accounts and use them once in a while. This shows lenders that you are a settled and reliable borrower.
- Avoid any unnecessary debt. Keep control on your indebtedness and you will show to lenders that you are a responsible borrower. The use of credit is profitable for your reputation.
- Reimburse your debts as fast as possible. If you have several credit cards, start by paying off the one with the highest interest rate. For the other cards, pay only the minimum and you will put the difference on the one with the highest interest rate. When this one is paid, restart the process with the next highest one. Do not transfer the balance of a card on the other. You will only postpone the unavoidable!
- Establish a monthly budget and respect it! Your expenses must never exceed your income. Having a stable job is a good start to establishing a budget. This will help you save money and will prevent you from spending what you don’t have and avoid accumulating debts.
- Save money. Saving money is a good way to handle unexpected situations. No matter the amount you are able to save, $10 per week or $100 per month. A good rule of thumb is to save 10% of your net monthly income, no matter what. This will prevent you from resorting to margins or credit cards in case of emergency and therefore avoid any high interest rate and unnecessary debts.
Avoid These 7 Mistakes So You Can Keep a Healthy Credit Score!
- Avoid certain credit repair companies. It is important to beware of false promises. These companies often promise things that they cannot deliver. Example: the type that will fix your credit enough to get you financing to buy a car from them (often at high interest rates).
- Avoid destroying or cutting your credit cards and not using them anymore. This method might prevent you from being able to re-establish credit. The only way to repair your credit score is to adequately use your credit cards.
- Avoid paying some of your accounts and neglecting to pay the others. Never miss to execute your payments, even if that must be the minimum on all of your accounts.
- Avoid cancelling a credit card. Indeed, closing a credit account has consequences on the credit score; particularly if there is still an amount to be paid. Closing these accounts will not improve your file.
- Avoid not doing anything about your credit file. You must be proactive. If you want to improve your credit score, consult your report and analyze your situation. Ask that mistakes be corrected, but keep yourself from contesting everything. The agencies will not believe you! Consulting your file will help you be conscious about identity thief.
- Avoid going bankrupt. This will not help you fix your credit file. On the other hand, you will get a bad score attached to your file for up to a 10-year period and this will follow you for much more time. (1st bankruptcy six or seven years, 2nd bankruptcy: 14 years)
- Avoid requesting too much credit. Reduce the number of credit request. Be moderate. If too many lenders obtain information about your credit in a short period of time, your score will be lowered. If you pull your own credit report it will not impact your score.
If you begin to implement and actually stick to these parameters, these practices will help you acquire financial discipline.
Criteria to Qualify for a Mortgage with Banks
So now that you’ve got a good sense on what it takes to build or repair your credit rating, let’s talk about that next logical step in regards to home ownership! A minimum credit score of 660 will help you be admitted to most credit cards and loans. The higher your score is; the better will be the offered interest rates, however if you’re not at 660 or above yet, don’t stress too much! Just make sure to follow the tips in this guide and start taking control of your credit rating. With a bit of focused effort you can get right back on track.
That reminds me to talk about one last category: If you have declared bankruptcy:
- You must have been released from bankruptcy or a consumer proposal. The bankruptcy will still appear after six or seven years in your file as from the date of bankruptcy. For a consumer proposal it will take 3 years or more from the date of release.
- You must have two years of re-established credit and be at about 680 and more of your credit score to qualify for a standard mortgage.
- This score will not insure you the best rates, aim for a minimum of 701 and up.
So let’s talk about the opportunities available based on your credit score:
Keep in mind, this is just a ball-park idea. I am not a certified broker and any advice I share here is just based upon some of the things I’ve observed from having my credit coach help the over 100 rent to own applicants and families that I have helped over the past couple of years. Here’s what I’ve seen:
- 701 and more; you should be able to get the best rates and the best loan capacities based on your income for a purchase
- 680-700; higher interest rates will be 1% to 3% more expensive than the displayed market rate and borrowing capacity based on your income will be reduced
- 679 and less; private borrowers with rates from 9% to 12% for a first mortgage with 75% loan maximum value. Aim to stay above 680.
So you may be wondering “how is all this calculated?” – it’s a bit complicated, but the basics is that you have to meet the GDS/TDS ratios of 39%/44% for a CMHC (Canadian Mortgage and Housing Corporation) approved mortgage. CMHC approved mortgages are extremely common for all first time home buyers.
I know, that may read very confusing to most people, so let me try to simplify. If you have a credit score of 681 and more (meaning your credit is good enough to get a mortgage), you can use up to 39% of your gross income for household costs (GDS) and 44% of household costs and payments for personal debts combined (TDS).
So let’s use an example to show what this would mean in the real world – Here is what to expect if your individual or combined household income is $100,000 gross yearly:
- With the 39% /44 % ratios, this means: 39% of your yearly gross income can be used to pay fees for maintenance of the property (tax, mortgage, heating). In your case, the house could cost you a maximum of $39, 000 per year or $3, 250 per month (tax, mortgage and heating included).
- 44% corresponds simply to the 39 % allocated for household fees plus up to 5% of your gross income is allowed for personal debt. So, the costs of the property and your personal debt combined can not exceed 44 % of your yearly gross income.
- In this example, this corresponds to $44 000 per year or $3667 per month.
It’s also important to let you know that this applies to those with a credit score of 681 or higher and with CMHC insurance. Therefore, the more personal debt you have, less you can affordable for a property.
Your minimum target is to get a credit score of 681 and up.
How To Restore Your Credit Score After Bankruptcy or After a Release of a Consumer Proposal
How to restore your credit after a bankruptcy or consumer proposal starts with one simple step that will get your score rising. Apply for a prepaid credit card with Capital ONE with a minimum limit of $2000 to start with as soon as possible. If you are unable to get $2000, aim for at least 500$ and you can start to work your way up. After six months of constant activity and making payments on time you could ask for a credit card without guarantee and raise your limit between $2500 and $5000.
After six months without late payments on your new increase, you could ask a traditional financial institution like TD, Scotia, BMO, Laurentienne, etc. to give you a loan or some credit. The reason for this is the only way to help get a good credit score and a mortgage is by getting credit cards with ONLY big banks. It’s also a good idea to avoid the bank where you filed for proposal or bankruptcy.
Another thing you can do to help restore your credit score after bankruptcy is to ask for a credit card or a line of credit of minimum $2500. If you don’t obtain it right away, ask if you could do a security deposit in order to obtain it.
So now that you’ve got a credit card with a major bank, it’s important to be accountable. This is one of those areas that is really easy to do in theory but it requires consistent discipline to actually stick to it. You’re going to need to have systems and reminders in place, ask friends or family to remind you every month to make your monthly payments if you need to. It’s absolutely CRITICAL to make sure you are not late for a payment over the next 24-36 months. Always payoff the full amount on time (3 days before payment date ideally). If not, aim at least 3 days before your due date to have made a little more than your minimum payment.
An example: if your minimum payment is $10/mo, pay $15 or $20/mo instead. Banks like to see that you are able to pay down your amounts as well. In addition, maintain your credit score above 681 at all times!
If you follow these recommendations, a world of possibilities will open to you. Don’t forget that credit is a privilege and -not- a right. You must work hard to show that you deserve the money that is loaned (-not- given) to you by financial institutions and alternative lenders. Manage your finances, show discipline and you will not have to run after money anymore, money will begin to come to you!
If you want to learn more about where your credit rating stands you can reach out to either of these two organizations in Canada:
By post/registered mail
Relations aux consommateurs
C.P. 1433, succ. St-Martin
Laval (QC) H7V 3P7
Phone (without fees) :1- 877-713-3393
Division des relations consommateurs
C.P. 190, succ. Jean-Talon
Montréal (QC) H1S 2Z2
Phone (without fees): 1-800-465-7166
Facsimile : 514-355-8502
Online : www.equifax.ca
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