INDER CHAWLA, REAL ESTATE BROKER
Imagine this: You’ve applied for your first credit card or found an apartment you want to rent. The only problem is, when a credit score is run, you’re told that there is “no file on record.” It may sound like bad news, but it’s not.
No credit does not mean bad credit; it simply means that your personal credit hasn’t been scored yet. By the end of this article, you’ll understand why a Canadian can have no credit score, what it means and how to fix it in just a few months.
What does it mean to have no credit score in Canada?
Having no credit score, or being credit invisible, affects more people than you may think. Equifax Canada estimates that more than 2.5 million adult Canadians are credit invisible, while Statistics Canada estimates that 1.1 million Canadian families have no credit history at all (1).
Another huge portion of the population has what is referred to as a “thin file” credit score. This means that there has been too little activity to generate a proper credit score, and it’s a common status for young adults or newcomers to Canada. In fact, Statistics Canada found that nearly 15% of newcomer families to Canada are credit invisible, compared to just 7.5% of Canadian-born households (2).
In Canada, credit scores range from 300 to 900. Being credit invisible is not a sign of having bad credit, but rather, not doing enough to register as a credit score in the system. Unfortunately, even if one had a strong credit score in another country, it will start over at zero in the Canadian credit system.
Why does not having a credit score matter in Canada?
Credit scores in Canada are a classic catch-22 problem: Lenders need credit history to approve you for things like loans, but you first need approval to build your credit history. It’s a chicken-and-egg problem that frustrates millions of Canadians who are trying to access basic financial services.
Without a credit score, it can be difficult to rent an apartment or qualify for loans, especially at competitive interest rates. You can pretty much say goodbye to being able to be approved for an affordable mortgage. For things like auto loans, a Canadian with no credit score may be stuck owing a 15% rate from a non-prime lender, rather than a much lower rate if they had established credit.
That gap can cost that person thousands of dollars over time.
Why does not having a credit score matter in Canada?
Credit scores in Canada are a classic catch-22 problem: Lenders need credit history to approve you for things like loans, but you first need approval to build your credit history. It’s a chicken-and-egg problem that frustrates millions of Canadians who are trying to access basic financial services.
Without a credit score, it can be difficult to rent an apartment or qualify for loans, especially at competitive interest rates. You can pretty much say goodbye to being able to be approved for an affordable mortgage. For things like auto loans, a Canadian with no credit score may be stuck owing a 15% rate from a non-prime lender, rather than a much lower rate if they had established credit.
That gap can cost that person thousands of dollars over time.
What’s the fastest way to get a credit score in Canada?
To get a credit score in Canada, the only thing you need is to open a credit account that reports activity. Once you have that, the lender will report your activity to Equifax or TransUnion, which will start the process for building your credit score.
The easiest way to do this for most Canadians is to open a secured credit card. For this type of card, the user would put a deposit of, say, $500 for collateral, which then becomes the card’s limit. After that, the card functions as a normal credit card and with responsible usage, it can begin building your credit score within 90 to 180 days.
Another option is a credit builder loan. These are offered by some credit unions and fintech lenders. You make fixed monthly payments into a locked savings account, which are then reported to the bureaus. At the end of the term, the accumulated funds are returned, and a credit score is born.
Rent reporting is also gaining traction, especially among newcomers to Canada. Services linked to platforms like Borrowell or KOHO can report your on-time rent payments, helping build credit faster. This is a recommended method by Statistics Canada for newcomers to Canada. The only caveat is that your landlord must approve of it and participate in the program.
Finally, you can also become an authorized user on someone else’s credit card. This method takes some teamwork, as any missed payments by the primary cardholder can also have a negative impact on your own credit score.
How do you keep your credit score growing once you have one?
For most Canadians, the only two things that need to be monitored are paying bills on time and keeping balances low.
Payment history makes up about 35% of your credit score in Canada. Even one missed payment can have a negative impact on a new credit file. Setting up automatic scheduled payments is a smart safeguard to avoid any missed payments.
Credit utilization accounts for about 30% of your credit score in Canada. This measures how much of your limit you use. To ensure a strong credit score, you’ll want to stay below 30% and ideally, below 10%. This means that on a $500 limit, you’ll want to keep your balance below $150, but ideally below $50.
You’ll also want to avoid applying for multiple products at once. Paying off multiple credit cards or loans will not provide you with a good credit score faster in Canada. If you need to close an account, close a newer one. The age of the account can help your credit score over time.
How do you check your credit score for free in Canada?
Borrowell offers free weekly Equifax scores for Canadians. This is considered a soft inquiry and will not have an impact on your credit score. A hard inquiry is when a lender checks your file as part of a credit application. A
You can also request a full credit report directly from Equifax Canada or TransUnion Canada if you need to. Checking your own score never hurts it, as it’s considered a soft inquiry. If you require a full report, you should always check it over for errors. The Financial Consumer Agency of Canada (FCAC) has guidelines on disputing credit report errors if you find one (3).
For more information/consultation, feel free to Contact anytime at 647-701-1486 or email at info@homesbyic.com
Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial, investment, or tax advice. While we strive to provide accurate information, tax laws are subject to change and vary by jurisdiction. You should consult with a qualified CPA, tax attorney, or financial advisor before making any decisions based on the content of this blog. Inder Chawla Real Estate Inc. is not responsible for any financial losses or tax penalties incurred.
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