Few concepts are more controversial than credit when it comes to a person’s financial decisions. On one hand, credit can be a fantastic tool to help you get a loan or a mortgage, save on interest rates and even rent a home or obtain certain jobs. On the other hand, if poorly managed, credit can haunt you for many years and make you miss out on financial opportunities.
Creditors can run a credit check on you to assess if you are a low-risk or a high-risk borrower, and decide to grant or deny you a loan, or to charge you a lower or higher interest rate.
Landlords can rent or deny you accommodation based on how consistently you pay your bills.
Certain jobs require credit checks to verify information listed on your resumé, or to avoid conflicts of interest in jobs where money and sensitive financial information are involved.
Your credit history speaks volumes to lenders about what kind of risks they take when they agree to lend you money. It takes a long time to build, it’s very easy to sabotage and it takes even longer to rebuild. Can you do without it? Yes. Should you try to do without it? No. Without credit, you will not be able to improve your living standards; at the very least, not quickly enough to get to enjoy the results.
Maintaining good credit history
Credit histories are recorded by credit reporting agencies. Equifax and TransUnion Canada are the two major such agencies in Canada. Your credit report will contain information on your loans, credit accounts, certain bills (outstanding cell phone bills can be listed on your credit report, for example), collections items (meaning if an outstanding debt was sent to a collections agency) and legal items (meaning if you had a court order issued against you for an outstanding debt). Collections items stay on your credit report for six years; legal items, for 10 years.
Take advantage of the fresh start to establish a good credit history in Canada. Get a credit card or two, and use them, but use them sensibly. It’s best to start with only one, until you are financially comfortable enough to afford more. Pay off your balance each month, to show potential lenders your reliability.
On top of paying your monthly bills and loan instalments on time, you need to be careful when signing up for services such as cable, telephone, internet, gym subscriptions and whatever else requires a monthly fee. Check the cancellation fees and deadlines when you sign up for such services.
Never move without cancelling or transferring your services, because sometimes final bills end up in collections out of sheer neglect, and from collections they land on your credit report for the next six years. Always keep track when you make such changes, by recording the date, the names of the agents you speak to and your case number.
If you hit a rough patch, such as an extended period of unemployment, do not be complacent about your credit. Call your creditors and try to renegotiate your monthly payments. They will likely be willing to help you, because sending outstanding accounts to collections would cost them a lot more money. Cancel or suspend services you can do without, rather than have the bills rack up.
All in all, credit is a rather sensitive tool, but you will definitely need it and you should learn to manage it to your advantage. Even if some aspects seem confusing, keep in mind that it’s always easier to prevent credit damage than fix it later.