Understanding Credit History and Why It’s So Important
Credit history is important for everyone - whether a Canadian citizen, a Permanent Resident, or a new immigrant. In fact, gradually building up a good credit history is absolutely essential to long-term financial health. And when the time comes to secure a credit card or borrow money, a good credit history can make the difference between approval and denial.
In Canada, consumer credit agencies keep credit histories on file, while monitoring credit card use, lines-of-credit, and residential mortgages. Like it or not, they also keep track of bill payments and payment history over the years. All consolidated, this information is compiled into a profile, creating a personal credit history, credit report, and credit score.
Today, there’s an almost certain need to borrow money, particularly for major purchases such as a house or a car. With a good credit profile, there’s a much better chance of being approved for a loan, and a good chance of securing the lowest possible interest rate. Conversely, a poor credit profile can make borrowing difficult, setting the stage for problems.
Credit cards, and credit card habits, can help or hurt a credit profile. Defaulting on a credit card bill, or habitually paying late creates a poor history. And all of this will remain on a credit report for years to come. In fact, credit card payment history is actually the most relevant factor when agencies determine a credit rating and/or a personal credit score.
When a credit card balance is paid off in full, and on time, it makes for a positive payment history. Over time, these habits will serve to enhance a credit profile. What’s most important is to keep credit card accounts and other billings in good standing. Any outstanding balances, especially for longer periods of time, will compromise the overall credit profile.
There are also circumstances where “credit utilization” is taken into consideration when creating a credit profile. For example, if a credit card consumer is consistently using a large proportion of available credit, this may be viewed as high risk – something that could well lead to a lower credit rating. In short, financial responsibility is the key to good credit.
An established credit history can also be of benefit, although for new immigrants this may not be possible. Lenders will always prefer borrowers who have an established credit history. And here, a good history and a long history will make for a good credit score. God or bad, payment histories remain in a profile for many more years than anyone would want.
For new immigrants, building good credit is key in a new country. It will likely impact employers, landlords, and various lenders, all of whom use credit history as a qualitative measure. Over the long term, the impact could be even greater - mortgage payments and insurance premiums might be affected, let alone home utilities, phone, or cable services.
Building good credit will take time and patience. It’s about proactively managing finances, small and large. Bill payments should be made on time, outstanding balances should be avoided or at least lessened, and living beyond means should be considered out-of-bounds.