The simplest way to establish credit is to apply for a credit card and demonstrate that you can use it responsibly—by making payments on time. For the average person, using a credit card frequently and paying off the balance on time will increase your credit score. After immigrating to Canada, it is highly recommended to obtain a credit card if you decide to live there long-term.
Credit bureaus provide two types of information to display your credit history: a Credit Report and a Credit Score. Canadian credit bureaus Equifax and TransUnion use a scale of 300 to 900 to determine credit scores. The personal credit score provided by Equifax is called the Beacon Score, while the personal credit score provided by TransUnion is called the Empirica Score.
When applying for loans at banks or financial institutions, you will often see requirements for a Beacon score, with the threshold typically set at 680. A score above 680 is generally considered good credit, while those below 680 often face certain restrictions when applying for loans.
For example, banks may require a higher income, a larger down payment, or simply demand a higher interest rate. Although 680 may appear to be an average benchmark, in reality, the credit scores of Canadians are often much higher than this. Therefore, do not be complacent just because you have reached the passing mark; if you want better loan interest rates, strive to improve your credit score.
The method for calculating credit scores is a patented secret of the Americans, much like the secret recipe for Coca-Cola, and is not publicly disclosed. On July 22, 1999, the Fair Isaac Corporation demonstrated a credit scoring model while testifying before the U.S. Federal Trade Commission.
The calculation formula is complex but is divided into the following items:
1. Credit card payment history;
2. Amount used/repaid on credit cards each time;
3. Length of credit history;
4. Recent credit activity;
5. Types of credit;
6. Number of credit accounts;
7. Credit utilization.
These are weighted from most to least important. Among them, the most critical factors determining your credit score are: payment history, whether there is a record of bankruptcy, and the amount of outstanding debt.
Methods for improving your credit score regarding credit card usage/repayment amounts:
A higher credit limit not only proves your high creditworthiness but also demonstrates your spending power. However, when living in Canada, a higher credit limit is not necessarily better. An excessively high credit limit not only results in greater losses if the card is stolen but also does not necessarily help improve your credit score further. Of course, if you have a high credit limit and can maintain a good balance between your credit usage and the limit, then a high credit limit is beneficial to you without any drawbacks.
So, what is the most cost-effective credit utilization ratio? Generally, it is recommended that your usage does not exceed 30% of your credit card's maximum limit, with a maximum of 50%. If your credit card is essentially maxed out every month, the system will automatically determine that you are overly dependent on credit, which will negatively impact your credit record.