Why do I need to have Credit and What is the Importance of Building a Canadian Credit History?
Building a good credit history is important for your financial health. If you ever want to borrow money for a new vehicle, mortgage payment, commercial investment, or even utilities, a good credit score can mean the difference between your loan being approved or denied. Credit Agencies in Canada such as Equifax and TransUnion keep track of your credit history and also monitor how you use that credit, including credit cards, lines of credit, and mortgages. They also observe whether or not you make bill payments on time. All of this combined information is used to help Credit Bureaus create your personal Credit report and Credit score.
The importance of establishing a solid credit profile is exceedingly important as there is very likely to be a point in your life when you will need to take out a loan for a major purchase such as a house or a vehicle. Establishing a strong credit profile means you will have a better chance of being able to borrow money at the lowest interest rate. Having a poor credit profile will make it difficult for you to borrow money, you may even have difficulties finding employment or a place to live. It is more common than you would think for landlords and employers to access your credit profile.
Credit Cards have the ability to both help or hurt your credit profile. The easiest way to damage your credit is by defaulting on a loan or credit card bill. It's also easy to damage your credit by consistently forgetting to pay your credit card bills on time. Payment history is one of the most important factors a credit agency considers to determine your credit score. Defaulted accounts, or those in collections, can linger on your credit report for several years. By paying your credit card balance on time and in full each month, your credit report will reflect a positive payment history - typically boosting your credit score over time. If you cannot afford the entire balance by the due date, at least pay the minimum balance due.
Credit Utilization is the percentage of your available credit actively in use. This is the second most important factor in determining your credit score. If you use a large percentage of your available credit, lenders could view you as a higher risk and that can lead to a lower credit score (even if you pay your credit card balance in FULL each month).
The length of your credit history also plays an important roll. Lenders prefer lending funds to a borrower with an established credit history rather then someone with no history at all. The longer you have a credit card open and in good standing, the better it is for your credit score. This is one reason getting your first credit card can also be the most important one!
Lenders, employers, and landlords all use credit history to see if you are a suitable applicant. Making mistakes with Credit Cards can have high-cost long-term effects. Using your credit cards responsibly will help you in the long run.