The federal government has proposed a new initiative to tie rent payments to credit scores as a way to help Canadians build their credit. This comes at a time when cost-of-living pressures are impacting some people’s ability to pay down debt and keep their scores in good standing. A credit score is a three-digit number derived from your credit report, which is a summary of your credit history created when you borrow money or apply for credit for the first time. Lenders use this score to assess the risk of lending you money for various financial products such as car loans or mortgages.
Equifax and TransUnion are the two main credit bureaus in Canada that collect, store, and share information about your credit usage. There are five key factors that determine a credit score, including payment history, credit history, credit mix, new credit inquiries, and credit utilization ratio. Personal finance expert Barry Choi recommends making payments on time and keeping your credit utilization ratio under 30 percent to protect or improve your score. Credit scores range from 300 to 900, with a good score typically averaging 650 or higher, though this can vary.
Having a high credit score can improve your chances of getting approved for loans and credit at favorable interest rates. On the other hand, having a lower score below the mid-600s benchmark, also known as “subprime,” can result in higher interest rates or denials. TransUnion reported that around 2.64 million Canadians were considered subprime borrowers in the first quarter of 2023. Additionally, there is a group of individuals known as the “credit invisible” who may face challenges due to not having sufficient credit history for lenders to calculate a score.
The term “credit invisible” refers to individuals without enough credit history for a credit reporting agency to calculate a score. It was reported that over three million Canadians fell into this category, with an additional seven million having limited credit history with two or fewer accounts. People who are credit invisible or have limited credit history may struggle to be approved for loans or credit. It is advisable for young Canadians and others in similar situations to explore options such as secured credit cards or secondary lenders to start building credit.
Once you have a credit score and are able to secure a loan, it is crucial to be realistic about your finances and what you can afford. It is not uncommon for individuals with healthy credit scores to seek debt relief through bankruptcy or a consumer proposal. Experts recommend paying bills on time, maintaining a low credit utilization ratio, and being patient as it takes time for a credit score to improve. Understanding and actively managing your credit score is essential for making informed financial decisions and ensuring a stable financial future.
