How to build credit history in Canada

If you’re a newcomer to Canada, a recent graduate, a student or a young adult, your credit score—a number calculated based on your credit history—is likely low or non-existent, meaning that you don’t have enough credit activity to determine a score. One of the most beneficial things you can do for your financial health is to learn how to build your credit history in Canada.

What is a credit history?

Since Canada is a credit-based economy, creditors (banks, financial institutions, credit card issuers and other lenders) need a way to gauge how likely you would be to pay back what you owe or borrowed in a reliable and timely manner. For this, the credit score system has been devised. Your credit score is a three-digit number from 300 to 900, which aims to quantify your creditworthiness. The higher the number, the better your credit.

Here are some instances when lenders, companies and institutions may check your credit report:

• When you apply to rent an apartment
• When you apply for an internet connection or mobile phone plan
• When you apply to lease or finance a car
• When you apply for certain types of insurance
• When you apply for certain types of jobs
• When you apply for a mortgage

While many people focus on their credit score—and strategize about how to increase it—the more beneficial way to think about credit is to focus on how credit history is built. And, if you take the steps to build your credit history systematically, your credit score will also likely improve as a result.

How credit scores are calculated

Who determines your credit score? Canada has two main credit bureaus, TransUnion and Equifax, which monitor your credit history. Here’s how they calculate your credit score—the various criteria used and how much weight each one carries:

Note that TransUnion and Equifax have different formulas for credit scores, which they don’t disclose to the public. If you check your credit score with both, the numbers may be different.

Why is credit history important?

Let’s say you want to rent an apartment. Your credit history is vital because most landlords will want to see your credit score and credit report to judge whether you’ll pay your rent on time. If you get the apartment, you’ll want an internet connection—and for this, too, the large providers will query your credit score.

If you need to buy or lease a car, your credit history will not only determine whether you’re approved for a loan, but also what interest rate you’re offered: the higher your credit score, the lower the interest rate. Insurance companies may check your credit history before providing coverage. And finally, if you want to buy a home, your credit history is key to qualifying for a mortgage, as well as what interest rates lenders will offer. A lower rate could save you tens of thousands of dollars over the life of your mortgage.

How to build a good credit history

Credit history is usually built organically as people start using credit. In Canada, young people who have reached the age of majority (18 or 19, depending on where they live) can apply for a credit card and start building a history of borrowing and repayment.

If you’re a newcomer to Canada, or if you’re a student, recent grad or young adult who doesn’t have much of a credit history, your credit score may be low—which is a hurdle in getting approved for credit. It’s a frustrating cycle—you need credit history to access credit, and you need credit to build that history. So, what’s the solution? Here are a few steps anybody can take to build their credit history:

• Get a credit card as soon as possible—don’t decline a card offered when you open a bank account—and pay off your balance in full and on time every month.
• Search for credit cards aimed specifically at newcomers, students and young adults. For these cards, lenders put less emphasis on credit history, and annual fees are low or $0.
• Take advantage of financial products designed to help you build your credit history (more on this below).

How a line of credit can affect your credit score

Using a credit card is an effective way to build a credit history (as long as you pay your bill on time), but it’s not your only option. You can also build a credit history using a line of credit, which is a type of loan with a pre-set limit. Once your line of credit is set up with a bank or other lender, you can borrow money from it anytime.

Canadian fintech company KOHO offers lines of credit designed to help customers build a credit history. Approval is guaranteed, you won’t be charged any interest, and opening one won’t damage your credit score. 

To access these products: Open a KOHO account for free at koho.ca and download the mobile app. Click “credit” in the app, and choose either “Credit Building” or “Flexible Credit Building.”

Here’s how these lines of credit work:

• The Credit Building product asks you to make a payment of $10 per month. If you make the payment on time, this information is reported to credit bureau Equifax. You can build your credit history in six months for $10 a month.
• The Flexible Credit Building product is a secured line of credit, meaning that you’ll deposit your own money ($30 to $500) to create a line of credit. You withdraw the money you need, and when you repay it on time, this is reported to Equifax.

Both products provide access to your credit score, as well as access to a financial coach. If you want to build a credit history even faster, you can open both the Credit Building and Flexible Credit Building lines of credit. On average, KOHO credit building subscribers increase their credit score by 22 points in under three months.

Building your credit history little by little will help you take control of your financial future. Even if you don’t have a credit history at the moment, or if your credit score has suffered for any reason, there are ways to build it. With credit-building products, consistent payments and some good old financial discipline, you can build or rebuild your credit history—and take advantage of the opportunities a good credit score can make possible.

More about credit scores:

• How to improve your credit score
• Credit card mistakes and the secret to avoiding the impulse buy
• Best credit cards for bad credit in Canada
• The best secured credit cards in Canada
• Upwardly mobile: Cellphones and credit scores

About Aditya Nain

Aditya Nain is an author, speaker and educator who writes about Canadian investments, personal finance and crypto. He has co-authored two books and taught at universities for 12 years.

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