What’s more, of those who went into debt over the holidays last year, 28% are still trying to pay it off. Other key takeaways from our survey looking at holiday spending by Canadian millennials include:
The good news is you don’t have to be haunted by the ghosts of holiday debt when the new year rolls around. Planning ahead, looking for deals and getting crafty can help keep your life merry and bright even after the holiday buzz wears off.
|Nearly 2 in 5 (36%) of Canadian millennials expect to go into debt this holiday season. Almost 2 in 5 (38%) of that group expects that debt to total more than $500.|
|Almost half (45%) of Canadian millennials feel debt is unavoidable during the holidays.|
|More than a quarter of Canada’s millennials (28%) who went into debt last year are still paying that debt off almost a year later.|
|Over half (51%) of Canadian millennials said they would skip holiday gift giving if they could.|
|More than 1 in 10 Canadian millennials (14%) plan to take out a loan for the holidays. Of them, 79% plan to keep it a secret from friends and family.|
|Most Canadian millennials who plan to go into holiday debt said they’ll likely go into debt to buy gifts for their immediate family or children (66%). Meanwhile, 27% think they’ll go into debt due to holiday travel and 22% think they’ll go into debt because of holiday meals.|
|Almost half of millennials in Canada (48%) feel immense personal stress leading up to and through the holidays. More than one quarter (27%) would rather pay down existing debt instead of holiday gift giving, while 22% wish they could use gift money to save for a home or car.|
Given the pressure millennials can feel to keep up with their peers, it’s no wonder nearly half of Canada’s millennials from our survey (45%) said they think holiday debt is unavoidable.
But just how much debt are millennials planning to take on this season? Most will pile up a few hundred dollars of debt over the holidays, our survey found — with nearly 2 in 5 (38%) planning to go more than $500 into debt.
|How much holiday debt will you have?||% of Canadian millennials|
Of the millennials who went into holiday debt last year, 76% said they used credit cards to do so. But we also found holiday loans might become increasingly common among Canada’s millennials, with more than 1 in 10 millennials (14%) planning to take out a loan this holiday season.
There are a number of purchases that people think they’ll make this holiday season that will lead to debt, and not all of them are related to gifts. Here’s what we found:
|What will make you go into debt this holiday season?||Percentage of millennial respondents|
|Gifts for immediate family members||37%|
|Gifts for my kid(s)||29%|
|Gifts for my significant other||28%|
|Travel to visit friends/family||27%|
Why are so many millennials taking on debt for these items and experiences? Data on millennials’ holiday spending last year could help shed some light on this.
Most (39%) said they went into holiday debt last year because they simply didn’t have enough money to begin with.
At the same time, social and family pressures are also a factor: A little over a quarter (26%) of millennial respondents said their spending is motivated by a desire to give their kids a better holiday experience than they had as kids themselves. Some 23% said they promised loved ones gifts that were over budget.
Nearly half (48%) of Canadian millennials from our survey said they feel a lot of personal stress leading up to the holidays. And there are consequences for people’s relationships and finances.
For instance, our survey found that among millennials who plan to take out a loan to finance the holidays this year, 79% plan to keep the debt a secret from friends and family. And more than 1 in 5 millennials (21%) admit they argue more with their partner about finances during the holidays.
In addition, holiday spending can have a long-term financial impact as people struggle to pay off debt. We found that more than a quarter (28%) of millennials who went into debt last year are still paying off that debt nearly a year later.
And all in all, more than half of millennials (51%) would choose to forego spending on holiday gifts if they could.
So what would millennials rather be spending money on? More than a quarter (27%) of millennial respondents said they’d use it to pay off existing debts, 22% would use it to save up for a home or car, and 21% would put it towards travel.
When it comes to the holidays, there can be a lot of demands on your time and money. But with a little planning and strategy, you can enjoy the fun of gift-giving and spending time with friends and family without the burden of debt.
And you’ll be in good company — 49% of millennials we surveyed plan to make changes to their spending to lower expenses this holiday season.
It might seem awkward at first, but talking with friends and family about expectations for spending during the holidays can help a lot. We found just about a third (33%) of millennials who plan to save money this holiday season will agree upon a set budget with those they’ll exchange gifts with.
The holidays happen around the same time each year, which can be really helpful when it comes to planning. Nearly a third (31%) of Canadian millennials who plan to save money this year plan to do it by shopping for holiday gifts year-round.
If you see something on sale in July and know you can gift it to someone in December, go for it. You won’t have to compete with crowds and you may even be able to get it for a bargain if you buy it during special times of year, like Canada Day, or special sales events.
Other ways millennials plan to save this year that could work for you include using coupons (40%), making sure you get price matching on purchases (37%), or shopping at outlet stores (31%).
Think about who on your list might appreciate something unique — a handmade hat, for example, or a pre-loved book. More than a quarter (26%) of millennials who want to save this holiday season plan to give homemade gifts to loved ones, while 17% plan to buy used or consignment items, and 13% plan to re-gift.
It’s easy to feel FOMO around the holidays. In particular, advertising may lead to some impulse buys. In fact, more than a quarter or millennial respondents (27%) said they’d probably buy an item during the holidays after seeing an ad for it on social media. Consider using an ad blocker online to eliminate temptation.
On behalf of Credit Karma, Qualtrics commissioned a nationally representative online survey of 1,009 Canadians ages 18 and over in September 2019 to better understand how they spend during the holidays.
Why this existential dread around personal debt? According to our survey, it may be because Canadian respondents are worried about how debt could affect their long-term capability to save or ability to pay off surprise expenses.
When asked about their top financial fears, Canadians in our survey said having an unexpected expense, not saving enough to retire, and never being able to get out of debt brought them the most fear. (Learn about our methodology.)
Though Canadians’ financial fears can run high, there’s good news — you can work to overcome your financial fears with a little planning and strategy. We’ve got some tips below.
|When asked to rank their biggest fears, Canadians in our survey ranked death and personal debt, respectively, as their top fears.|
|When it comes to financial fears in general, Canadian respondents said they are most afraid of incurring a sudden, unexpected expense (44%) and not having enough to retire (38%).|
|43% of Canadians in our survey said they lose sleep over their finances. The top financial concerns keeping these sleepless Canadians up at night are debt (57%), retirement planning (22%) and lack of savings (55%).|
|The older the Canadians in our survey were, the less optimistic they felt about retirement: 26% of Gen Z is worried about not saving enough to retire compared with 36% of millennials and 40% of Gen X and older.|
|Younger generations are becoming more comfortable turning to their peers for financial advice — 41% of Gen Z and millennials said they occasionally or often ask peers for advice on financial issues, compared with just 20% of Gen X and older.|
Canadians in our survey have a great fear of personal debt. We asked survey respondents to rank their greatest fears on a scale of 1 (greatest fear) to 5 (lesser fear).
Death ranked highest (2.6) followed closely by debt (2.8). Things Canadians were less afraid of than debt included public speaking (2.9), climate change (3.1) and spiders (3.6).
What are Canadians’ biggest financial fears? Our survey found unexpected expenses are the biggest worry (44%), followed by situations that could cause a change in their financial circumstances — retirement (38%), remaining in debt (25%) or unemployment (22%).
|What are Canadian respondents’ biggest financial fears?||Percentage|
|A sudden, unexpected expense||44%|
|I won’t save enough to retire||38%|
|I’ll never get out of debt||25%|
|I’ll never own a home||17%|
In addition to causing stress, financial worries lead 43% of Canadians to lose sleep. The top reasons Canadians lose sleep over finances are debt (57%), retirement planning (22%) and a lack of savings (55%).
Almost all Canadians in our survey have some financial fears — 94% of Gen Z, 93% of millennials and 89% of Gen X (and older) said they are at least a little worried about their personal finances.
However, financial fears of survey respondents vary depending on age. Here’s what we found when looking at Canadian respondents’ top financial fears by generation:
|What are Canadian respondents’ biggest financial fears?||Gen Z||Millennials||Gen X+|
|A sudden, unexpected expense||35%||36%||49%|
|I won’t save enough to retire||26%||36%||40%|
|I’ll never get out of debt||27%||31%||23%|
|I’ll never own a home||31%||23%||12%|
A recent Credit Karma survey of U.S. millennials found that many experience the “money scaries” — that is, they feel too burned out to deal with their finances. Our survey on Canadians’ financial fears suggests millennials north of the U.S. border struggle too.
Nearly one-third (32%) of Canadian millennials in our survey with at least occasional financial fears have avoided calls from a lender, and almost as many (30%) have avoided looking at their credit card statement.
Survey respondents’ attitudes toward retirement vary by age too, and Canadians tend to be more optimistic about their ability to save enough for retirement the younger they are. Over one-quarter of Canadian Gen Zers (26%) in our survey were worried about not having enough saved to retire, compared with 36% of millennials and 40% of Gen X and older.
Despite the high percentage of survey respondents worried about their finances, we found there may be some good news for the future. The way Canadians talk about money is changing. Younger generations are becoming more comfortable turning to their peers for financial advice.
In fact, according to our survey, 41% of Gen Z and millennials said they occasionally ask peers for advice on financial issues, compared with just 20% of Gen X and older.
This comfort that younger Canadians have about financial conversations may have two causes, our survey indicated. For one thing, Gen X (and those older than Gen X) are much more likely to view finances as a private matter (50%) than millennials (37%) and Gen Z (29%). Another potential factor could be that Gen X and older respondents said they feel more confident about their financial knowledge compared with millennials and Gen Z, so they might not feel as if they need to ask for advice as often.
A little planning and strategy can help you overcome your financial fears before they become financial nightmares. See our tips below.
Our survey found 44% of Canadian respondents would rather organise their closet than plan a budget. However, knowing how to make a budget that works for you can be a key way to prepare so you don’t feel so anxious about your finances. The Financial Consumer Agency of Canada has tips on how to make a budget and advice on how to stick with it.
It might seem awkward at first, but talking with friends and family about expectations for spending could help a lot. After all, you’re not the only one worrying about finances — our survey found 90% of Canadians have at least a little financial fear. So if you get past the initial awkwardness of a conversation about money, you might find that your concerns are similar.
Credit scores can be intimidating — 44% of Canadians we surveyed would rather check their grade after an exam than check their credit scores. Still, it’s important to have an idea of your credit health since having poor credit could increase what you pay to borrow money, leaving you with less money in your pocket. There are many factors that go into improving your credit health like making on-time payments and paying off credit card balances in full and on time.
On behalf of Credit Karma, Qualtrics commissioned a nationally representative online survey of 1,052 Canadians ages 18 and over in October 2019 to better understand their fears around finances.
Residents of the metro areas of Toronto and Vancouver face more than $20,000 in student loan debt on average — almost twice as much as those in Manitoba, the region with the lowest student loan debt among members, our analysis found. (Learn about our methodology.)
We also found that Canadian millennials in particular are impacted by student loan debt, which shows that, as in the U.S., the effects of student loans can linger long after graduation.
But even student loan debt balances in the tens of thousands can be manageable. We provide some tips below to help you manage your payments. But first, let’s take a look at what student loan debt looks like among members across the Great White North.
|On average, Canadian Credit Karma members who have student loans owe $17,741 in student loan debt.|
|Nearly 1 in 10 Canadian Credit Karma members (9%) has student loan debt.|
|Among Canadian Credit Karma members, average student loan debt is highest in Nunavut and lowest in Manitoba.|
|Toronto is the metropolitan area where Credit Karma members carry the highest average student loan debt.|
|More millennial Credit Karma members in Canada have student loan debt (14.62%) compared to other generations.|
Canadian Credit Karma members living in Nunavut carry the highest average student loan debt, at $25,644, according to our analysis. That’s almost $4,000 more than in Yukon, the region with the second-highest average student loan debt among members, and more than twice the average student loan debt as members in Manitoba, the region with the lowest average student loan debt.
Student loan debt by province/territory
Average among members
|Newfoundland and Labrador||$15,989|
|Prince Edward Island||$13,927|
While it has the highest average student loan debt among Canadian Credit Karma members, there’s also some good news coming out of Nunavut. On average, Credit Karma members there have paid off more of their balances than any other region except the Northwest Territories.
When it comes to the largest metro areas in Canada — Toronto, Vancouver and Montreal — average student loan debt is higher or about the same as the average among all Canadian Credit Karma members carrying student loan debt. Among metro cities, Toronto has the highest average student loan debt among members, at $20,809, with Vancouver only about $300 behind. Compared to the average for all members in Quebec, Montreal’s student loan debt among members is about $2,000 higher than that of members in the rest of the province.
Student loan debt by major metropolitan area
Average among members
As we previously found in the U.S., more millennial Credit Karma members in Canada carry student loan debt (14.62%) than any other generation. And millennials also have the highest average student loan debt balances among Canadian Credit Karma members, at nearly $19,000.
Gen Z members have the least amount of student loan debt on average, at nearly $12,000. But Gen Z members are almost as likely as millennial members to have student loan debt (14.42%). And both millennials and Gen Z members are far more likely to have student loans than Gen X (4.22%) or Baby Boomer (1.53%) members.
Average student loan debt across generations of Canadian Credit Karma members
% with student loan debt
Average student loan debt balance
Student loan debt doesn’t have to drive you crazy. We’ve got some tips on how to manage your monthly payments below.
If your monthly student loan payment is more than you can afford, you may have options to renegotiate the terms or apply for a Repayment Assistance Plan. You can find out more about your repayment options at the National Student Loans Service Centre.
Do your monthly payments feel like too much? You may be able to extend your repayment term, which could reduce your monthly payments. Keep in mind, though, that this usually means you’ll be paying more interest over the life of the loan.
If you have an online account with the NSLSC, you can use the Customize Payment Terms tool to see how different repayment amounts might impact your loan. Then, if you find an adjustment that fits your budget, you can request a Revision of Terms.
If your monthly student loan bill is due within the few days before you get your paycheck, it can feel more difficult to make that payment, since you could already be strapped for cash at that point in your pay cycle. If you have an account with the NSLSC, consider requesting a change of your payment due date through your NSLSC online portal so that you can switch to a date that’s more convenient for your budget.
If you have more than one student loan, keeping track of them could be tough. Consolidating multiple student loans into a single consolidated loan may make the repayment process simpler.
To determine the average student loan debt among Canadian Credit Karma members, we analyzed, in aggregate, more than 170,000 members who had student loan debt reported on their TransUnion credit reports in Q1 and Q2 of 2019. Among Canadian Credit Karma members with student loans, we analyzed the amount of student loan debt carried by certain age groups as reported on their TransUnion credit reports. We also looked at aggregate postcode data reported on TransUnion credit reports of Canadian Credit Karma members with student loan debt to develop a list of provinces/territories and metro areas where members held the most student loan debt on average.
A Credit Karma analysis found that last year, vehicle loan originations in August were 11% higher than the monthly average for the year. This spike suggests end-of-summer may be a hot time to shop around for a new car.
While our analysis found just 17% of Credit Karma members in Canada have an auto loan, those who do pay an average of $417 each month, our analysis found. And if you have a subprime credit score, you could pay more each month than those in other score bands, we found.
Canadian Credit Karma members with subprime credit paid an average $11 more per month than those with near-prime scores. Although this difference may seem small, it can add up to an extra $660 over the course of a 60-month loan.
If the idea of a hefty monthly payment seems intimidating, don’t sweat it. We offer some tips below to help you along your car-buying journey.
|Auto loan originations in Canada were 11% higher in August 2018 than the monthly average for the year.|
|The average Canadian monthly auto loan payment is $417.|
|Only 15% of Canadian millennials have auto loans.|
|In 2018, people with subprime credit scores paid an average of $11 per month more for their auto loans than those with near-prime credit scores.|
Based on our analysis, it’s clear that auto loans can be costly. But that doesn’t mean you can’t find the car you want at a price that fits your budget. We have some tips to help you along the way.
Only 17% of Canadian Credit Karma members have auto loans and of those, just 15% of Canadian millennial members have a car loan, according to our analysis. So, if you’re shopping around for your first car it might seem as if you’re on your own. But there are plenty of resources out there for first-time buyers. For instance, the Royal Bank of Canada has a checklist of things to consider when making your first car purchase, as does Carfax.
Our analysis found that the average monthly auto payment for Canadian Credit Karma members who have an auto loan is $417 — or about $5,000 a year — no small chunk of change. What’s more, Canadian members with subprime credit scores paid an average of $11 more per month (or $132 more per year) for their auto loans compared to those with near-prime credit scores. So when it comes to auto loans, it pays to know your budget and your credit health.
Once you’ve made up your mind to get a new vehicle, it can be tempting to rush to the dealer and buy the first car you see. But before you commit to adding a payment that could be hundreds of dollars a month, it’s a good idea to shop around for the best auto loan price and vehicle price.
Then, if you find a rate that you like, you may be able to apply for preapproval so you don’t have to haggle over financing at the dealer. Make sure you have a disclosure statement from your lender so you’ll be able to clearly see the terms of your loan. Just keep in mind that getting preapproved doesn’t mean you’re automatically approved for the loan, and you might have to submit more information when you formally apply. Once you formally apply make sure you have a disclosure statement from your lender to confirm the terms of your loan.
When it comes to used cars, checking a vehicle history report through a site like Carfax is key so you know if any damage to the car has been reported. If you run into any issues with the dealer, the Financial Consumer Agency of Canada has information that can help.
In order to determine auto loan trends in Canada for 2018, we examined, in aggregate, more than 2 million TransUnion credit reports belonging to members of Credit Karma Canada. All dollar amounts are in Canadian dollars (CAD) and all figures have been rounded to the nearest whole.
Unlike a traditional loan, you don’t get any money upfront. Instead, you make regular payments to fund the loan, and your payments are reported to credit bureaus.
Let’s take a closer look at how credit-builder loans work and what they can do for your credit.
A credit-builder loan is a type of loan that’s meant to help you build or reestablish your credit.Read more: How to build credit
Unlike a typical loan, though, you don’t get any money upfront. Instead, you provide the loan amount yourself with regular payments over a set period of time. In the case of some savings loans, those payments might be made into an account that earns interest over time.
The “credit-builder” portion of the loan should occur as you make those regular payments. If your lender reports to the credit bureaus, you can start creating a history of on-time payments that could affect your credit scores and reports.
But keep in mind that these payments aren’t a shortcut to building credit. Credit-builder and -savings loans are one option that can help you start building or rebuilding credit — but you should think about other options that have recurring payments, such as a secured credit card. And if you miss payments or otherwise don’t manage the loan responsibly, you could end up hurting your credit in the long run.
Here are some things to consider before taking out a credit-builder loan.
Unlike unsecured credit cards, secured cards require a security deposit to open the account and set the credit limit. But if you pay your bill on time and in full each month, you might build your credit enough to graduate to an unsecured credit card.
Let’s take a closer look at how secured credit cards work and when they might be right for you.
A secured credit card isn’t totally different from other types of credit cards — you can use it to make purchases up to your preset limit just like you would with any other credit card. And you still have to pay your bill on a regular schedule.
What sets secured cards apart is that you need to put down a security deposit with the card issuer to open the account if you’re approved. The deposit serves as collateral for the card issuer, which often makes secured cards easier to qualify for. And you can receive the deposit funds back if you close your account, as long as you’ve paid off your balance.
The deposit also helps determine the card’s credit limit, which is usually equal to or higher than your actual deposit amount.
Your deposit may be as low as a few hundred dollars or as high as a few thousand dollars, depending on the credit limit you request and are approved for. For example, if you make a $500 deposit, it’s likely your credit limit will be around that amount as well.
If you plan to use the card to build credit, make sure that the issuer reports your payment information to the credit bureaus. When you make on-time payments, that’s positive activity that can help build your credit history — but only if it’s reported. Regular payments might eventually improve your credit enough to help you qualify for an unsecured credit card with better terms. Some card issuers even consider you for an unsecured card automatically after a certain number of on-time payments.
But a secured credit card isn’t a guaranteed way to build credit. If you fail to make your payments in full and on time, you could end up with a negative credit history. Plus, being delinquent on your account means the card issuer may use your security deposit to pay the balance you owe.
While secured credit cards can be great, it’s important to know what you’re getting into before applying. Here are a few things to keep in mind.
If you frequently travel abroad or make purchases online in U.S. dollars or other foreign currencies, it’s important to be familiar with the costs. A foreign transaction fee is a fee your card issuer can charge for converting your foreign purchases into Canadian dollars. For many credit cards, the foreign transaction fee is about 2.5%.
You may also see foreign transaction fees referred to as “foreign currency conversion mark-ups,” “foreign currency charges” or “foreign currency conversion fee.”
These fees can end up costing you big time if you’re not careful. Let’s take a closer look at foreign transaction fees and how to avoid them when travelling abroad.
Depending on your card, you may be charged a foreign transaction fee when you use your credit card to make purchases outside of Canada or in a foreign currency. For example, when you use your card to pay for something in U.S. dollars when travelling to the U.S., or when buying goods or services from U.S. websites.
When you make a purchase abroad or in another currency, your credit card company can do two things.
The currency exchange rate that your card applies to your purchase is often determined by the card network, such as Mastercard or Visa. Once your purchase amount has been converted into Canadian dollars, the foreign transaction fee is applied.
Here’s an example. Let’s say you make a purchase for $500 U.S. on your credit card.
$500 U.S. x 1.32 = $660 Canadian
$660 x 0.025 = $16.50
$660 + $16.50 = $676.50
When searching, review the credit card’s website and check for a foreign currency conversion or transaction fee.
It’s not so easy to find a credit card these days without a fee for spending abroad. Although you may be able to find one, you might still have to pay an annual fee. You’ll want to do the math to see if paying the annual fee in exchange for no foreign transaction fee is worth it to you.
If you’re given the option, it almost always makes sense to choose to pay in the local currency when paying for goods and services abroad. For example, if you’re in the U.S and you’re given the option of paying in U.S. dollars or Canadian dollars, you’re probably better off choosing U.S. dollars.
Having the choice to pay in the local currency or have the transaction converted to your home currency is known as “dynamic currency conversion,” which certain retailers, restaurants and even ATMs have. If you’re given that choice, it’s usually better to pay in the local currency than to have it converted to the local currency, because that conversion will probably cost a lot more. And you’ll likely still be charged the foreign transaction fee anyway.
Next time you travel or make a purchase abroad, plan ahead to avoid being hit with a big foreign transaction fee.
Start by reviewing the credit cards that you already have. If you do a lot of foreign travel or make lots of purchases outside Canada, you might consider signing up for a credit card without any foreign transaction fees — but make sure that the amount you think you’d save in foreign transaction fees outweighs the cost of any annual fee that may come with the card.
The answer depends on your present and future borrowing needs, your overall credit picture and the specific credit line or loan product you’re looking at.
We’ll run through some of the key differences between lines of credit and personal loans, and explore how those specifics might figure into which one is best for you.
Lines of credit and loans have some similarities, but there are several key differences, such as the repayment schedule and how often you can draw the funds.
A line of credit allows the borrower to draw funds up to a preset limit. Lines of credit offer a lot of flexibility — you don’t have to take all the money available to you in a lump sum, so you can borrow money only when you need it. You also don’t have to apply for a new loan if you need more money later. Instead, you can use your available line of credit for a new withdrawal up to your preset limit. When you repay any portion of the funds, they become available to borrow again if needed.
Loans are structured a little differently. With a loan, the borrower receives a lump sum from the lender and agrees to pay it back over a preset time period. If you want to change the loan amount or the length of the repayment period, you may need to apply for a new loan.
With a line of credit, you pay interest only on what’s been borrowed, not on the entire amount available to you. This is different from a loan, where you receive — and are charged interest on — the outstanding amount.
If your lender approves, the monthly minimum payments on a line of credit could consist of only interest. That may sound nice — it makes your monthly payment obligation minimal — but it’s also dangerous. If you continue to borrow, paying only the interest can be a recipe for getting into serious debt.
With loans, the monthly payments consist of principal (the amount you’ve borrowed) and interest, which could make for a more demanding monthly payment obligation.
A line of credit doesn’t need to have a defined repayment period (that’s up to the lender). If there’s no defined repayment period, you can pay off a line of credit in as much or as little time as you want, as long as you make your minimum monthly payments. Just keep in mind that the longer you take to pay off a line of credit, the more interest charges will accrue.
Personal loans usually have to be paid off in six to 60 months, depending on the time period specified in the loan agreement.
A line of credit is worth considering when you need to borrow money for several reasons over a short or long period of time. The revolving nature of the line of credit means you can borrow and repay funds as needed.
For instance, if you have credit card debt you’d like to consolidate but also may need to borrow more in the coming months, you might consider taking out a line of credit. The line of credit could allow you to pay off the existing credit card debt (at a potentially lower interest rate) while freeing up the ability to borrow for an unexpected repair, for example.
Likewise, if you’re planning to borrow money for ongoing home renovations that could end up being more or less extensive than you think, the flexibility of a line of credit might be ideal.
Be careful, though: A line of credit requires discipline. If you think it might be hard to limit yourself to necessary withdrawals only, the open-endedness of a line of credit could be a dangerous choice.
Personal loans are typically a good option for covering specific expenses, or for borrowers who want the stability of a fixed repayment schedule.
Loans can be ideal for one-time needs and expenses. For instance, if you have credit card debt you want to pay off, and you don’t anticipate needing to borrow again any time soon, a personal loan could make sense. It also could be the right choice if you need to pay for an emergency car repair or another sudden expense.
Similarly, if you’re in debt because of past missteps and you’re afraid you lack the discipline to handle revolving credit, a loan could be an attractive option. In this case, the limitations on what and how you borrow, and the certainty of a set repayment plan, could provide some welcome structure.
Lines of credit and loans have different features and frameworks. Whether one or the other is a good fit depends on the borrower and the terms of the credit line or loan product.
Carefully consider your current and future borrowing needs — and your spending habits — before deciding which option is best for your situation.
A line of credit is a revolving amount of credit that allows you continual access to funds up to a set limit. Unlike with a personal loan, you can withdraw funds as you need them, instead of having to receive your approved funds as a lump sum.
Once your line of credit’s limit has been set, you can draw as much as you like and pay it back over time. As you pay back what you’ve borrowed, you regain access to those funds for future borrowing.
Unlike some loans, lines of credit do not need to be used for a specific purpose and can usually be paid back on a less defined timeline. You may be able to access the funds at a lower interest rate than you’d get on a credit card, as well.
In this article, we’ll take a close look at how a line of credit works, the two key types, and the pros and cons of using one.
A line of credit is a revolving form of credit, which means you’re not limited to taking your money in one lump sum. Its flexible nature means that you’re able to borrow up to a predetermined limit as many times as you like.
Unlike a mortgage, auto loan or student loan, you don’t have to use the money you borrow from a line of credit for a specific purpose. You can borrow as much or as little as you need up to your approved limit, for as many reasons as necessary, and then repay the money you’ve borrowed.
At the same time, a line of credit isn’t free money — you’ll be assessed interest on what you borrow. Your interest rate, as well as your credit limit, may be affected by your credit scores and reports, and lenders may offer you a higher interest rate if you have a negative credit history.
While many lenders only require interest-only minimum payments on a line of credit, you’ll begin getting charged interest as soon as you withdraw funds and until you pay back that sum. If you never pay back more than the minimum payment on your line of credit, interest will pile up and you could end up with a heap of debt.
A line of credit can either be secured by collateral or be unsecured. This has a big effect on what lenders offer.
With a secured line of credit, an asset that’s used as collateral “secures” the money you borrow from the lender. That asset serves as security if you fail to repay the line of credit according to the loan terms.
A home or car is often used as collateral in these cases, but any item with a value high enough to secure the funds may work. In this scenario, the risk should be clear — if you don’t pay back the money you owe, then the lender can move to take the asset. The main benefit of a secured line of credit is that you’ll typically get a lower interest rate than you’d otherwise be offered on an unsecured line of credit.
A home equity line of credit, or HELOC, is a common secured line of credit. In this situation, the borrower’s home is the collateral. Because homes tend to be especially valuable assets, HELOCs often have a higher limit and lower interest rate than other lines of credit.
With an unsecured line of credit, no assets are put up as collateral, so the interest rate depends largely on information in the borrower’s credit profile.
When setting the limit on your unsecured line of credit, your lender will consider several factors, like your income, any existing debt and your credit reports. According to the Financial Consumer Agency of Canada, lenders usually require a household income of at least $35,000 or $50,000 to approve a line of credit.
Many personal lines of credit and student lines of credit are unsecured. A personal line of credit may be ideal if you need money to consolidate debt. Meanwhile, a student line of credit is money you can borrow for attending college or university. It can be used to help cover related expenses, like books, tuition and student rent.
While lines of credit can be useful, they are not right for every borrower. Here are a few of their pros and cons.
Keep in mind that what works for one borrower might not be best for another. Before getting a line of credit, consider the pros and cons, how you’d use it, and whether you’ll have the discipline and ability to pay back what you borrow without getting into too much debt.
A new Credit Karma/Qualtrics survey of 1,050 Canadians aged 18 to 38 shows half of young adults have spent money they didn’t have and gone into debt in order to keep up with their peers.
And some young Canadians may be falling into habits that perpetuate a cycle of overspending. More than a third (35%) of respondents said they don’t feel comfortable telling their friends “no” when friends suggest an activity they can’t afford. And 63% of those who have overspent to keep up have kept their debt a secret from friends. (Learn about our methodology.)
But it doesn’t have to be this way. We’ll give some tips below to help you curb the fear of missing out, or FOMO. But first, let’s take a closer look at why many young Canadians are overspending.
|Half (50%) of respondents spent money they didn’t have to keep up with their friends.|
|63% of those who went into debt to keep up typically keep the debt a secret from friends.|
|35% of respondents don’t feel comfortable saying “no” when one of their friends suggests an activity they can’t afford.|
|A full third (33%) of young Canadians who have gone into FOMO debt went more than $500 into debt. More than two-thirds (68%) went more than $100 into debt.|
|The top situations causing FOMO were vacations (45%), weekend trips (42%) and weekend or after-work dinner or drinks (36%).|
We’ve already dug into FOMO-fueled spending among young adults living in the U.S. A previous Credit Karma survey found that 39% of U.S. millennials have gone into debt to avoid FOMO and participate in activities with friends, which typically involve spending on things like food and drinks on nights out.
Similarly, in Canada, we found that experiences with friends — and their associated costs — are a big driver of overspending. According to our survey, just over half (56%) of young adults in Canada who went into debt to hang out with friends did so to buy food, while 41% did so to buy two-fours and other booze.
When it comes to planned events, nearly a third (31%) of respondents who overspent did so to travel with friends.
Still, not all FOMO spending is about trips or nights out with friends.
To keep up with friends, many young Canadians feel pressured to go into debt to buy stuff like clothes (32%), electronics (29%) and even cars (13%) or homes (11%). And 30% of respondents said they spend money on an item or experience at least a few times a year just so they can post about it on social media.
There’s some good news: 83% of respondents have a weekly/monthly budget they try to stick to. And 14% say they never spend impulsively.
Unfortunately, more than a third (34%) of those surveyed feel pressured by friends or social situations to spend money at least once a month. Some young Canadians are even going into debt as a result.
How much debt? Here’s a breakdown:
|In the past year, how much debt have you gone into to keep up with your friends?||Percentage of respondents who have gone into FOMO debt|
|$100 or less||32%|
|$101 to $250||17%|
|$251 to $500||18%|
|More than $501||33%|
As you can see, a little over two-thirds (68%) of those who’ve gone into debt to keep up with friends have gone more than $100 into debt in the last year.
That might seem a bit loonie. But a whole third (33%) have gone more than $500 in FOMO debt — enough for a couple of hundred double-doubles at Timmies.
By now, it should be pretty clear that many young Canadians experience a lot of FOMO that drives them to overspend. But why? Our research suggests it may all come down to social anxiety.
Of those who have gone into debt to keep up with friends:
Young adults in Canada clearly care about maintaining strong friendships and social lives — which is great — but it shouldn’t come at the cost of your financial stability.
Here are some suggestions to help avoid FOMO on a budget.
Be honest about your finances.
Our survey found that 69% of young adults in Canada think their friends make more money than they do. But in reality, far less (41%) actually know how much their friends make. You don’t have to have a big salary reveal with your friends, but being open about what you can and can’t afford might lead you you learn they’ve been feeling the same as you.
Suggest free or low-cost alternatives.
Sticking to a budget doesn’t mean you can’t have fun with friends. Consider things like a potluck, going for a hike in a park, or going over to someone’s house for a party instead of going out.
Plan how you pay.
Leave the credit cards at home to help avoid overspending. Consider keeping a separate savings account that you can use for short-term spending when you want to go out with friends. Consider taking cash or a card linked to that account when you go out, so you have a fixed amount you can spend.
On behalf of Credit Karma, Qualtrics conducted a nationally representative online survey in February 2019 of 1,050 Canadians aged 18 to 38 to learn about their spending habits related to FOMO, or the fear of missing out.
Before we discuss the importance of putting a fraud alert on your credit account, let’s talk about what identity theft is.
Identity theft is when your personal information is collected illegally and used for a criminal purpose. Personal information includes your name, address, phone number, date of birth, Social Insurance Number and credit card information. For example, if someone accesses your bank account without your permission or takes out credit in your name, this is identity theft.
“When you’ve been the victim of identity theft, it can cause serious harm to your credit health and make it difficult to obtain credit from lenders,” says Laurie Campbell, CEO of Credit Canada Debt Solutions.
Although the total reported dollar loss from identity theft is falling, the number of victims is on the rise. According to statistics from the Canadian Anti-Fraud Centre, the reported dollar loss from identity theft in Canada was nearly $10.5 million in 2014, down from $16 million in 2012. However, the number of victims is up 20 percent between 2012 and 2014.
In today’s increasingly digital world, we need to be more vigilant than ever to protect ourselves against identity theft. Setting up a fraud alert with both credit bureaus makes sense if you suspect you’ve been a victim of identity theft.
For example, if you receive a credit card in the mail that you never applied for or find a loan on your credit reports that isn’t yours, those are signs you could be a victim of identity theft. You may also want to set up an alert if your home has been broken into or you’ve recently lost your wallet — both offer criminals the opportunity to use your stolen information to commit credit fraud.
A fraud alert on your credit file indicates to lenders that they need to take additional precautions before offering credit.
When you apply for a credit card or line of credit, a lender will pull your credit report to make sure it’s in good standing before approving your application. That’s when they will see the fraud alert. Once a creditor sees that you have a fraud alert, they must take extra steps to verify your identity, which can help stop thieves from opening new credit in your name and may reduce the likelihood of you being a victim of identity theft.
The process of placing a fraud alert is slightly different with each of the credit bureaus.
You can place a fraud alert on your TransUnion® credit account by completing this form. In addition to filling it out, you’ll need to include a photocopy of both sides of your personal identification. You then submit the completed form and ID photocopies by mail or fax. Or, you can call TransUnion at 1-800-663-9980 and follow the automated prompts to place a fraud alert. To place a credit alert on your file, you’re charged a $5 non-refundable fee (plus applicable taxes). The alert lasts six years.
To place a fraud alert on your Equifax® credit account, you can call Equifax at 1-800-465-7166 and follow the voice prompts. Be prepared to supply your SIN and other basic information. The fraud alert is good for six years and costs $6, plus applicable taxes.
If you’d like to extend the alert, contact each bureau to discuss the process.
While fraud alerts can be a great way to protect your credit, it’s possible you could be notified of one on your account that you didn’t place, possibly in error.
If this happens, Campbell suggests you contact the credit bureaus immediately. “Get a copy of your credit reports and check for suspicious/fraudulent activity. You may need to contact government agencies, such as Service Canada, the Canadian Anti-Fraud Centre, your creditors and financial institutions, including those you do not recognize on your credit reports,” Campbell says.
By better understanding what a fraud alert is, you can place one on your account if you suspect you’ve been the victim of identity theft. Each of the credit bureaus has its own fraud alert, so you’ll want to place one with both of them. Fraud alerts last for up to six years, but can be extended or removed by contacting the relevant bureau.
One of the best ways to prevent identity theft is to be cautious with personal information. Be careful about whom you give personal information. When you’re entering your credit card PIN, shield it with your hand from people around you. Take the time to regularly check your bank and credit card statements for any fraudulent charges. If you see anything suspicious, report it immediately and place a fraud alert on your credit files.
In a worst-case scenario, identity theft can result in major financial losses and even filing for a consumer proposal or bankruptcy, so it’s best to avoid it at all costs.
Over time, your credit history helps the lender when determining whether you’re approved for loans, credit cards and mortgages.
Your credit history is used to create your credit scores, an important benchmark that many businesses use to assess your credit risk. It’s important to know how they’re calculated and how your credit behaviour can shape your scores, so you can make smart financial choices.
On Credit Karma, you can see your TransUnion CreditVision Risk Score.
The CreditVision Risk Score ranges on a numbered scale from 300 to 900 points, and the higher the score you have, the better.Wondering what’s a good credit score? Learn more.
This type of rating system might look familiar, but what sets this TransUnion model apart from other credit scoring models is its use of trended data.
Traditional credit models calculate scores based on your credit status at the exact moment in time that a lender accesses your credit.
On the other hand, the CreditVision Risk Score looks at historic and trended information over the past 24 months. This includes a historic look at your balances, payment behaviours and how many credit applications you’ve made.
In other words, this long-term, comprehensive view of each account on your report provides a more accurate assessment of your financial profile.
Unlike other scoring models you may have encountered, the CreditVision model uses trended data to provide:
Knowing what does and doesn’t factor into your credit scores is an important step toward truly understanding your credit profile. The CreditVision model components that influence your CreditVision Risk Score include:
Add up the limits of all your credit cards, then divide the total limit by the amount of credit you’re using.
For example, if you have two cards with limits of $4,000 and $6,000, then you have a total credit limit of $10,000. Now imagine you have a total of $800 in balances on both cards. That means your credit utilization rate is 8 percent, well below the recommended 35 percent.
TransUnion recommends that you try to use less than 35 percent of your available credit limit — however, it’s important to note that, even if your utilization is below the recommended amount, your credit score is calculated from many factors so it doesn’t mean you’ll automatically have a good score.
TransUnion suggests consumers focus on the following:
You may have more control over these two factors, so it’s a good place to start when aiming to build your CreditVision Risk Score.
However, even if you do both of these things, they alone may not be enough to keep your score from being negatively affected by other factors, including derogatory items, which we’ll cover next.
Negative credit details, also known as derogatory marks, are instances of poor credit behaviour that might predict how you manage your credit in the future. Derogatory marks can include items like:
Note that soft inquiries on your credit reports do not negatively impact your credit scores. It’s considered a soft inquiry when you check your own credit on Credit Karma. This means you can check your score any time without worrying about the impact on your credit.
The good news is that in Canada your positive credit information can stay on your credit reports for up to 20 years.
In addition, derogatory marks can stay on your credit for up to 14 years, but this will depend on the negative mark and the province where you live. Here’s how long each derogatory mark may stay on your reports:
Credit scores aren’t just about data and algorithms. They could hold the key to your next big financial decision, from a new house to a new car or small-business loan.
Beyond knowing that your TransUnion CreditVision score is using the latest updates to give lenders a better look into your credit profile, it’s important to know when a credit score will matter in your life and how you can build a good credit score for when it counts.
In order to learn more about your credit scores, a good habit you can pick up right now (and to keep top-of-mind when making financial decisions) is to review your credit regularly. That’s where a service like Credit Karma comes in.
Your financial future can depend on the story that your credit history is telling lenders. Why not ensure that story is as accurate as possible?
To get a copy of your TransUnion Canada credit report and score, sign up for a Credit Karma account. You’ll receive updates on your credit status and tips for improving your financial profile, as well as alerts if anything requires your attention.
And the best part? With Credit Karma, your score from TransUnion Canada is always free.
This guide covers how to get a credit card, but first let’s review the benefits of having a credit card.
If you’re a newcomer to Canada or a young Canadian who lacks a credit history, credit cards can be a great way to build or improve your credit when used responsibly.
Stephen Weyman, founder and CEO of creditcardGenius and HowToSaveMoney.ca, explains that credit cards also offer consumers more protection than paying for a product or service with cash.
“If a company you purchase a product or service from doesn’t deliver or misrepresents themselves, then you can petition your credit card company to charge them back,” Weyman says.
Credit cards also offer cardholders various forms of insurance. Weyman explains, “Insurance coverage ranges from extended warranty and short-term protection for the physical items you purchase with your credit card all the way to travel medical and trip cancellation insurance for non-cancellable travel arrangements.”
Now that we’ve seen some of the benefits credit cards offer, let’s discuss how to get a credit card, including how to find and apply for the right one. Here’s the step-by-step process:
Before choosing a credit card to apply for, it helps to know your needs and what you intend to use your credit card for.
Do you want to open a credit card so you can start building credit? Or perhaps you already have excellent credit and you want to be rewarded for your purchases?
If you’re looking to earn credit card rewards, it’s helpful to evaluate where you spend the most money. There are cards that give higher rewards for spending at grocery stores, gas stations, restaurants, as well as on travel. When you know where you spend the most, you can pick a card that gives extra rewards for that type of spending.
Perhaps you’re looking for a credit card with specific features or benefits. When you know what you want to get out of a card, you can narrow down what kind of card you’re looking for.
Now that you have determined what is most important to you in a credit card, check out the different types of credit cards on the market and who they’re designed for. This can give you a better idea of what kind of card meets your needs, helping you to further narrow down which card is right for you.
Here’s a chart of some of the most common types of credit cards.
|Credit Card Type||Ideal If You…|
|Cash back||Regularly pay off your balance in full and want to be rewarded for your spending|
|Travel rewards||Frequently travel and want to earn travel rewards|
|Balance transfer card with 0% intro APR offer||Carry a balance on another credit card and want to transfer your balance to save on interest|
|Secured credit cards||Want to build your credit and may not qualify for a traditional, unsecured credit card|
|Student Credit Cards||Are young, have less credit experience and are looking to build your credit history|
Now that you’ve chosen your ideal credit card type, you’ll want to narrow down your credit card search even further by choosing a credit card with features that you’ll benefit most from.
If you regularly carry a balance on your credit card, consider choosing a card that offers a low interest rate. Note that you won’t get to choose your exact APR since the issuer determines it once you are approved for the card. But you can see what the APR range is and how it compares to the other cards you’re considering.
(The APR is less important if you always pay your monthly balance in full and on time.)
Credit cards aren’t just a great way to earn rewards — they can offer additional perks. Common travel perks include travel insurance, trip cancellation insurance, roadside assistance and car rental insurance. Some credit cards also offer extended warranties on goods beyond the manufacturer’s warranty.
To entice you to sign up, many credit cards offer you a sign-up bonus. Some credit cards also offer higher reward accrual for the first few months when you sign up. However, make sure you read the fine print. You often have to spend a certain amount within a specific timeframe to qualify.
Choose a credit card with rewards that you’ll not only value, but are easy to redeem. There are many different types of reward programs to choose from, including cash back, reward points and travel rewards.
It’s important to note that some reward programs are simple, while others are more complicated, but may earn you more rewards. You should consider this tradeoff when shopping for a card.
This is important to consider, especially if you’re a big spender or you and your partner plan to share the same credit card. You’ll want a credit limit that’s high enough to meet your spending needs.
You don’t get to choose the exact credit limit you’ll get as this is something the issuer decides based on their evaluation of your application. But you can look at the minimum and maximum credit limit offered for a card to get an idea of what credit limit you might get if you’re approved.
Some credit cards charge you an annual fee to keep your account open (often in exchange for a more valuable rewards). Make sure the rewards are worth it for the annual fee you’ll be incurring, otherwise you might be better off with a no-annual fee credit card.
If you travel a lot for business or pleasure, consider a credit card that has no foreign transaction fee. This will help save money when making purchases outside Canada or any purchase you make in a foreign currency.
Be aware of any other additional fees you may be required to pay. Before you open a card, knowing what fees a credit card has and how much they are can help you avoid surprises. Here are some common fees to be on the lookout for.
To improve your chances of being approved for a credit card, you’ll want to know what types of credit cards you should apply for based on your credit profile. Each credit card is designed for a specific credit score range, so you want to apply for cards that you are likely to be approved for.
One way to do this is to look at the featured credit cards on Credit Karma’s credit card page. If you’re a member and logged into your account, the “Top Picks” section presents you with recommended offers based on your credit score from TransUnion, helping you find cards that you may be more likely to be approved for.
Once you’ve decided on the right credit card for you, it’s time to actually apply.
In many cases, you can apply for a credit card online, and sometimes you’ll know within seconds if you’ve been approved.
Before you apply for a credit card, take the time to read the credit card application disclosure agreement to make sure you know the terms and conditions of what you’re signing up for.
Once you start completing the application, you’ll be asked for basic information. This could include your:
You’ll want to have your Social Insurance number handy, as you may be asked for it (although providing it is optional in many cases).
A credit card can be a powerful tool when used responsibly. Weyman offers several tips on how to use your credit card responsibly.
There are so many credit cards to pick from, so it can be easy to feel overwhelmed. But after going through the above steps outlining how to get a credit card, you have the tools to choose a card well suited for you.
Being responsible with your credit card can also help you build a strong credit history, which in turn can help you achieve milestones later in life. For example, with a good credit profile, you may be able to borrow money at lower interest rates to buy a car or home.
Picking a credit card that best meets your financial needs is one exciting step in your larger financial journey.
Like any unexpected problem, fraudulent activity or credit errors can throw a wrench into life’s most carefully laid plans. In fact, in a 2016 Credit Karma study 64 percent of Canadians surveyed said they were concerned about identity theft.
Also, 61 percent of those surveyed in the Credit Karma study said they felt it was essential to periodically review their credit reports, an action that can help you identify fraud. However, 63 percent of these respondents also admitted that they didn’t regularly review their reports.
The takeaway here is that although we know that checking up on our credit scores is important, it doesn’t always get done. That’s where Credit Karma’s credit monitoring feature can help.
Credit Karma’s credit monitoring is a service that monitors its members’ TransUnion credit reports on a daily basis and alerts you if it notices any significant changes. This feature can be of great assistance to help you stay informed about your credit. And the best part is that it’s free!
Sign up for Credit Karma to start receiving free credit monitoring.
Read on to learn more about credit monitoring.
There are a couple of major reasons to monitor your credit on a regular basis:
Putting a monitoring service in place is a great way to catch potential issues faster without any additional effort on your part.
If you sign up for Credit Karma’s free credit monitoring service, we will monitor and notify you of noteworthy activity on your TransUnion credit report. If there is an important change to your report, Credit Karma will let you know via email and in your free Credit Karma account.
Credit monitoring can help you identify fraudulent activity and errors in your reports. Along with peace of mind about your credit report accuracy, it can also help you understand how your financial decisions affect your scores.
If you get a notification of a change to your TransUnion report, you’ll be prompted to take a look at the change in your Credit Karma account. You’ll also receive educational materials that can help you address any issues.
If, for example, you receive a new collection alert, you’ll be equipped with information on how to deal with an account in collections.
Note that in order to get credit monitoring services, your account has to be set up to receive email communications from Credit Karma. If you have email notifications turned off, change this setting so we can send you credit monitoring emails.
Already a member? Check your communication preferences to make sure you’re set up to receive credit monitoring alerts.
Currently, there are 12 different alerts that Credit Karma tracks for you. If there is an alert on your account, we’ll let you know.
Here are the 12 credit changes that Credit Karma keeps an eye out for:
Fraud alert: When fraudulent activity is reported and TransUnion places a statement on your report that you have been a victim of criminal credit activity.
New trade alert: When a new account has been opened in your name.
Negative information reported: When a creditor submits negative information such as an account is past due. This indicates a negative mark on your credit.
Improved trade rating alert: When a creditor submits information that your account payment status has improved.
New collection alert: When a debt agency adds a new collection to your file. This alert may include the collection agency name, the original creditor and the total amount you owe.
New bankruptcy alert: When a new bankruptcy is added to your file.
New inquiry alert: When a lender, creditor, potential landlord or employer submits a hard inquiry to review your credit records.
New address alert: When a new address is filed as your current contact information.
New name alert: When a new name is added to your report.
New employment alert: When new employment information is added to your credit profile.
New legal record alert: When a publicly available legal record is filed on your credit report.
New registered item alerts: When registered property items, which are usually part of a secured loan you’ve taken out, are added to your public records. These alerts may include the creditor name.
These are the credit changes that Credit Karma will monitor and notify you about. The sooner you know about changes to your report, the sooner you can correct errors, dispute fraud or understand how your financial decisions affect your scores.
Your credit score isn’t something you typically watch like a weather report. Maintaining a good one, however, is as important as having the right winter gear come January.
A good credit score is one of the most important signals of your trustworthiness as a potential client for banks, mortgage lenders and other businesses. Canadian credit scores are calculated by two major credit bureaus: Equifax and TransUnion.
These credit bureaus use factors such as the number of credit cards, loans or total debt you have; your payment history; and how long you’ve been using credit to calculate a score between 300 and 900. A high score indicates to potential lenders that you have a history of using credit responsibly.
However, there are also potential issues you need to protect against. It’s important to understand risks to your credit, such as identity and financial fraud. Although there is no guaranteed protection from fraud and identity theft, it’s a smart financial habit to put safeguards in place to try to avoid having them affect your credit scores (and your financial plans) in a serious way.
It’s important to review your scores on a regular basis and stay informed of changes to your credit reports.
But changes can happen at any time, so a credit monitoring service can help you stay informed about your credit at all times. It’s great to feel as if someone has your back when it comes to your credit scores, and Credit Karma does that by helping you monitor your credit.
Sign up for Credit Karma to start receiving free credit monitoring today, and then go ahead and check “smart credit habits” off your to-do list! It might be the easiest thing you’ll accomplish all week.
When you don’t have a positive credit history, you may have to pay more in interest on loans — or you may not be able to qualify for credit at all.
Let’s take a closer look at credit, and how to go about responsibly building yours.
When you apply for financial products like credit cards and loans, those lenders will often review your credit reports and credit scores to help with their decision. Your credit history can help them determine how risky it is to lend to you.
If you have low credit — or no credit at all — you may receive less-generous borrowing terms, such as a lower credit limit or a higher interest rate. If you don’t pay off your balance on time and in full every month, then a higher interest rate can end up costing you a lot more money over time on any money you borrow.Read more: 3 big reasons why your credit score matters
You could also have your credit application denied, which might force you to seek out other lenders with worse terms and interest rates.
By building good credit, you may be able to save money in the short term and eventually get approved for bigger items, such as a home or car. To put it another way, building credit can make it easier to live the kind of life you want.
There are a variety of credit products that can help you build credit over time, but one of the simplest and fastest ways to build is with a credit card. With some credit cards, you can be guaranteed approval if you meet qualifying conditions, making the application process even easier. In addition to a secured or retail card, you could look into a credit-builder loan to start constructing a credit history.
A secured credit card can be a great option when you want to build your credit, but you may not qualify for a card with a higher limit.
Otherwise, secured credit cards work mostly the same as any other credit card. The main difference is that you typically need to pay a deposit after you’re approved in order to access the account. Your credit limit is then usually based on the deposit you put down up front. For example, if you make a $500 deposit, that amount serves as your credit limit.
Here are some points to keep in mind before applying for a secured card.
Another option is to apply for a retail credit card. A retail credit card is similar to a traditional credit card, except it’s offered by your favourite retailer. Major stores, like Hudson’s Bay, Walmart, Canadian Tire and others, offer them.
Retail credit cards often offer instant approvals. If your application is approved, you can start shopping with the card, earning rewards, and building your credit shortly after completing the application. They can be a useful option for individuals with low scores or a limited credit history.
Retail cards come with plenty of features worthy of a closer look.
If a credit card isn’t right (or enough) for your credit-building needs, you can also apply for a credit-builder or credit-savings loan.
Unlike many other loans, these credit-building loans provide no money upfront. Instead, you provide the loan amount yourself with regular monthly payments that are then reported to credit agencies.
If you make your payments on time and in full, then you can end the process with your full loan amount and positive activity reflected in your credit reports. With some savings loans, you might also finish the process with a savings account that earns interest.
As with any loan, the terms may not be right for your needs. Assess the interest rates, payment schedule, monthly payment amounts and fees associated with any loan before applying.
Once you’ve obtained credit, you’ll want to use it to build your credit history responsibly. Here are some tips on how to do this.
Make payments in full and on time. Not only can late penalties result in interest charges and fees, but they can also have a negative impact on your credit health. If you are in the habit of forgetting, consider adding a reminder of your credit card due date (for example, on your cellphone or a physical calendar) or setting up automatic payments.
Paying in full and on time can go a long way in improving your credit health. According to the Financial Consumer Agency of Canada, payment history is the most impactful factor that contributes to your credit scores.
If you’re unable to make full payments, aim to at least make the minimum payment on time. Making no payment and hoping it will go away will be detrimental to your credit health. The lender may report a late payment to the credit bureaus, Equifax and TransUnion. This can, in turn, negatively affect your credit health.
If you have an auto loan or mortgage and can’t make the payment in full, contact your lender to see if an alternative arrangement can be made. For example, some lenders like Royal Bank of Canada may let you skip a payment on your mortgage if you run into financial difficulties. However, this decision is at the lender’s discretion.
If you can avoid it, don’t get in a habit of only paying the minimum. It’s probably OK to do so once in a while if that’s all you can afford, but interest will add up if you regularly carry a balance on your credit card.
If possible, consider diversifying your credit mix. When you’re in the early stages of building credit, you may only have one form of credit, like a credit card. But when you’re on your way to having good credit, consider mixing it up with a variety of credit types. These could include a car loan, a line of credit or a student loan.
Even different types of credit cards may help your credit health. However, while having more credit types can help, don’t apply for too many in a short amount of time. Limit the number of credit applications you make, because each hard inquiry that goes along with an application can negatively impact your credit health. Also, make sure you can afford to repay any funds that you do borrow.
By understanding how to build credit, whether you’re new to Canada or you’re a young person, you can take the necessary steps to improve your credit. An easy way for many is a secured credit card, but a retail credit card or credit-builder loan might be an option for you.
Whichever option you choose, it’s important to borrow responsibly. That means making your payments in full and on time and avoiding common mistakes, like paying only the minimum every month.
So, what if you check your credit report and see an error? According to a 2012 CBC report, many Canadians have had errors on their credit reports that affected their ability to get approved for credit.
So if you spot one, how can you get it fixed?
Your credit report is a history of how you’re using and have used credit in the past.
Before making a major purchase such as a home or car, it’s a good idea to check your credit report, as it can affect your ability to be approved for more credit, as well as get hired for a job or rent an apartment.
By checking your credit report on a regular basis, you can spot errors and signs of identity theft.
You can request a copy of your credit report directly from the two main credit reporting agencies in Canada, Equifax and TransUnion. You’re entitled to one free copy of your credit report from each credit reporting agency once a year.
You can also view your TransUnion credit report for free any time at Credit Karma.
Your credit report may include personal information, including your name, address, employment information, date of birth, telephone number, Social Insurance Number (SIN), driver’s licence and passport number.
It also contains credit history information, including:
If you fail to make payments on credit such as a car loan or mortgage and the lender takes actions to seize the assets, those may appear as well.
Although TransUnion wasn’t able to provide specific statistics on the number of errors typically found on credit reports, they say errors are relatively infrequent.
“In comparison to the total number of credit-active individuals in Canada, we see relatively few file disputes per year,” says David Blumberg, public relations director of TransUnion.
He adds that commonly disputed items on credit reports “tend to relate to payment information or updates related to debt repayment programs, such as bankruptcy and credit counselling.”
Other errors can include personal information errors (for example, your name could be spelled incorrectly or inaccurate addresses are listed for you) and signs of identity theft and fraud (for example, accounts that have been opened in your name that you didn’t authorize).
What can’t be changed?
While you may be able to fix some errors on your credit report, some information can’t be changed.
Any information that is factual and accurate can’t be changed. For example, if you paid your car loan or credit card late, even if you paid off the amount owing or closed the account, the negative mark will still remain on your credit report for six or seven years, depending on the type of information and the province or territory where you live.
It can take a while for some negative information to fall off your credit report. The amount of time it takes to disappear depends on what type of information it is and the province or territory where you reside.
For the majority of negative information, it will appear for at most six or seven years on your credit report.
Watch out for firms that claim they can get rid of negative information from your credit report sooner than the six or seven years. These companies often charge a fee for their services and generally, it’s not possible for them to remove negative information before its expiry date.
If you find any errors on your credit report, you can file a dispute with the credit reporting agencies to get them corrected.
“Consumers have the right to dispute any information reported on their file. This could include anything from addresses and phone numbers to account information and judgments,” Blumberg says.
Disputing errors on your credit report is free. Before filing a dispute, make sure you gather all your supporting documentation, such as receipts, statements and anything else you can use to prove your case.
Once you’re ready to file your dispute, contact the credit reporting agencies that are reporting the error. Equifax and TransUnion both have forms you can complete for correcting errors and updating your personal information.
Before the agencies will make any changes to your credit report, they’ll verify your dispute with the lender. If the lender confirms there’s an error, the credit reporting agency reporting the error will update your credit report.
However, if the bureaus disagree with your dispute, they may not update your report. For example, you could claim you have fully repaid your credit card balance, while it shows as unpaid with your lender. In this case, the bureau may require additional information or deny your request for change.
If you spot an error on your credit report, it’s important to file a dispute right away to get it corrected, especially if it could be affecting your scores.
Errors can occur in personal information and credit history information. Take the steps needed to correct this information before applying for credit like a mortgage or car loan.
Your credit report is important to your financial health, as it’s a record of how you’re using and have used credit in the past. The information on your report is used to calculate your credit scores.
It’s a good idea to request a copy of your credit reports at least once a year. You may not realize it, but errors on your credit report are more common than you may think (more on common errors below). Regularly reviewing them can help you catch errors and identity theft.
Here’s what to do if you find an error on your credit report and how to dispute it.
If you find an error, such as mistakes in personal information like your mailing address or date of birth, or don’t recognize information on your credit report, you may be able to dispute it by requesting an investigation.
So why would you want to dispute errors? One big reason is that inaccurate information on your report could potentially negatively impact your credit scores.
In most provinces, the credit reporting agencies – Transunion and Equifax in Canada – are required by law to verify the accuracy of any information you’re disputing.
But before you file a dispute, you should understand this: Only information that’s considered inaccurate can be taken off your credit report. Any information that’s accurate (even if it’s negative) will remain on your credit report — usually for six or seven years.
After the investigation, if the credit reporting agency determines that there is an error in your report, changes will be made to your credit report.
Filing a dispute is free and you can file a dispute yourself. Whether you file it yourself or through a company, though, the outcome should be the same (provided the same documentation is provided in both cases).
Before you file a dispute, gather documentation to support your claim, such as receipts, financial statements and valid pieces of identification.
With Equifax, you can file a dispute by completing and submitting a Consumer Credit Report Update Form.
With TransUnion, you can file a dispute by downloading and completing an Investigation Request Form.
For assistance filing a dispute, you can contact Equifax at 1-800-465-7166 and TransUnion at 1-800-663-9980.
“We recommend having all of the related information on hand and submitting the documentation along with your dispute. For example, if you’re disputing the payment of an account, having documentation that verifies the payment is helpful,” says David Blumberg, public relations director of TransUnion.
Before the credit reporting agencies will make changes to your credit report, they need to verify your claim.
If the lender agrees that your credit report is inaccurate, the credit reporting agencies will update your credit report, but if the lender says the information is accurate, there won’t be a change made to your credit report.
If you contact the lender involved in the dispute directly about the inaccuracy on your credit report (this is done in addition to filing a dispute), this can help the dispute process move more quickly. Explain to the lender the information you believe is inaccurate and ask them to update their files accordingly.
If you’re not happy with the outcome of the dispute investigation, you can escalate your case by asking to speak with the lender in question.
If you’re still not happy with the outcome, you can request for the credit reporting agencies to include a consumer statement for free.
In up to 100 words (200 words if you’re in Saskatchewan), you can explain an item on your credit report you may disagree with. Your consumer statement may be considered by lenders when considering your application for credit.
If you’re still not satisfied, you can file a written complaint to your province’s or territory’s consumer affairs office.
Disputes are typically handled by the credit reporting agencies in a timely manner.
“On average, TransUnion typically responds to a dispute within 30 days. During that time, the dispute is reviewed, verified with the relevant data furnisher and, if applicable, the necessary corrections are made,” Blumberg says.
When reviewing your credit reports, it’s a good idea to request copies from both credit reporting agencies, as Equifax and TransUnion may have different information on file about you.
“Information commonly disputed includes information related to items being paid, no knowledge of the debt and updating accounts to show they were part of a debt repayment program, such as bankruptcy,” Blumberg says.
Here’s a recap of common credit report errors to watch out for:
By regularly reviewing your credit report and taking the necessary steps to correct errors, you can ensure your credit report is accurate before applying to borrow money for a mortgage or loan.
However, don’t let the fancy terminology fool you. Credit card utilization can be surprisingly simple to grasp — and it could be the key to a healthier relationship between you and your finances.
Credit card utilization is a rate that indicates how much of your available credit you’re using.
To calculate it, divide your total credit card balances (how much you owe) by your total credit card limit (how much you could spend).
So, if you have a $2,000 credit limit, and you have currently have $800 worth of purchases on your credit card, your CCU rate is 40 percent. This is above the 35 percent or below that the Financial Consumer Agency of Canada recommends.
The credit bureaus typically factor CCU into their scoring models to calculate your credit scores.
If your credit card utilization is too high, lenders and the credit bureaus may consider you a greater lending risk — and less likely to repay your debts.
According to TransUnion Canada, if you’re using more than 35 to 50 percent of your available credit, it may negatively affect your credit scores.
As Heather Battison, vice president of TransUnion Canada explains, “Credit utilization is a key part of your credit scores because it shows lenders your ability to responsibly manage and pay down debt.”
The reverse is also true. “If you’re using the majority of your available credit, this can negatively impact your scores because you could appear risky to lenders who may question your ability to pay back your loans,” Battison says.
However, Trevor Gillis, associate vice president of account management for TD Credit Cards adds, “every customer situation is unique, and CCU is just one factor used to understand a customer’s financial circumstances.”
So how do you hit the right balance?
You want to strive to keep your credit utilization rate below 35 percent.
However, this doesn’t mean not using your cards at all. It’s just as important to build a positive history of credit card use as it is to be responsible with having that credit available.
Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada explains: “How can lenders assess your creditworthiness if you have no history whatsoever?”
If you’re worried about using credit cards but you still want to build a positive payment history, consider putting a small, monthly subscription on your cards and setting up autopay so the balance is paid off each month.
Staying within a good CCU range could involve making multiple card payments throughout the month in order to manage your balance better — this can also help ensure you never miss a payment.
Whenever you can, make full payments for the amount due each month, even if you split the full amount among multiple payments.
But what if you have trouble keeping your CCU below the prescribed 35 percent?
From a lender’s perspective, regular on-time payments can be key if you have high credit utilization, Gillis says.
“For a financial institution to decide whether a customer with a high CCU could be approved for another loan, it would also consider whether the customer paid their balance in full every month or only made the minimum payment, and whether the payments were made on time,” he says.
When it comes to utilization, it’s better to work on payment strategies than to eliminate credit as a method of debt prevention. Cancelling cards or reducing limits can actually increase your credit utilization and, subsequently, lower your credit scores.
Instead, if possible, you may want to focus on increasing your credit limit in order to lower your utilization (if your current spending remains constant).
There are a few ways to go about increasing your limit:
• You can schedule an appointment with your banking representative or contact your credit card’s customer support to inquire about increasing the limit on your existing cards. Granting the increase is entirely at your bank’s discretion but you may have a better chance if you’ve been with your bank for a long time and have a positive payment history.
• You may want to research new or alternative card options that align with your current spending (for example, a credit card that you can earn airline miles if you travel frequently). However, remember that applying for a new credit card will result in a hard inquiry, which can ding your scores.
Maintaining your credit utilization at 35 percent or below is one key factor that contributes to your overall credit health, in addition to making full, on-time payments and keeping new credit account applications to a minimum.
Unfortunately, these fitness fads overlook a key part of our overall well-being — our credit health. (In fact, expensive health memberships and gadgets may actually damage our credit if not budgeted for properly!)
Credit can affect your daily life, and weak credit can fail you when you’re trying to reach the finish line of a mortgage application or loan request.
Luckily, healthy credit exercises can be built into everyday money habits. In fact, you can start right now. Right from your couch. How’s that for a handy workout?
Think of making consistent payments as daily training for that big marathon. You may not know exactly when you’ll decide to run 42 kilometers in a row, but being prepared with regular training can make it possible.
In the same way, you may not yet know exactly when you’ll want to apply for a mortgage, but keeping your credit in shape now will help you close the deal when it counts.
Each time you make a payment more than 30 days late, a delinquency may be marked on your credit report. These marks can seriously affect your credit scores.
Set yourself up to always pay on time, recommends Trevor Van Nest, Certified Financial Planner™ and owner of Niagara Region Money Coaches. “The best tip I have for improving your credit health is to never miss a payment on your credit card by setting it up on direct debit/pay-in-full mode automatically.”
He adds that most banks and credit card companies have a pre-authorized debit (PAD) option that you can set up so that your card is paid in full automatically from your chequing account each month on the due date.
It’s important to know that, should you not have enough funds to cover the bill, your account may go into overdraft, which depending on the type of overdraft service you have, can be an expensive error.
For example, if you signed up for TD Bank’s chequing account overdraft service and overdraw your account by more than $5, you’ll be hit with a $35 penalty.
There are many different overdraft protection offerings available at financial institutions in Canada, so research your options in advance.
Regular payments can benefit your credit health, as your payment history is the most important factor contributing to your credit scores.
Carrying a balance on your credit card month over month could be detrimental to your credit health. And how much you use of your credit limit can also impact your financial health.
Credit card utilization is a ratio calculated by dividing your total balances across all cards by your total credit limits. According to the Financial Consumer Agency of Canada (FCAC), you should try to keep your utilization to below 35 percent of your limit to improve your credit health.
Responsibly using a manageable amount of your total credit limit tells lenders and bureaus such as Equifax and TransUnion that you may have an easier time paying back debts in the future.
Plus, it’s good for your bottom line. The only thing better than a low-interest credit card is not paying interest in the first place.
Your credit report isn’t always perfect.
Part of keeping in good financial shape is ensuring that your financial records are accurate. Heather Battison, vice president of TransUnion Canada, recommends regularly checking your report to make sure the information is accurate and up-to-date: “Inaccurate information can negatively impact your credit scores, which is why it’s important to report any inaccuracies to the credit bureaus as soon as possible.”
The FCAC provides detailed instructions on how to report and correct errors properly.
The good news is that “regular” doesn’t mean every day. TransUnion points out that an annual review is a good start for credit maintenance. You may also want to consider using a credit monitoring service year-round that can flag potentially fraudulent marks or other issues that could affect your lending options.
Credit Karma allows you to access your TransUnion credit report and score for free at any time, which can make it easier for you to stay on top of your credit health.
Lenders use your history to understand how well you can handle credit.
According to MyMoneyCoach.ca and FICOⓇ, length of credit history can account for up to 15 percent of your scores. Building a consistent history of good credit is a day in, day out effort so avoid closing credit accounts just because.
According to the FCAC, the maximum amount of time that credit information — positive or negative — stays on your report is six or seven years. How long the information stays on your report may depend on the credit bureau, where you live and the type of information.
Because of this, you should aim to have a lengthy and consistent record of good credit use.
Thinking of applying for more credit? You may want to do so with an understanding of hard inquiries versus soft inquiries.
When you view your credit score on Credit Karma or when creditors “pre-approve” you for a card or loan, this is considered a soft inquiry that doesn’t affect your scores.
A hard inquiry is when a lender, bank or credit issuer submits a credit check in order to decide whether or not to issue you credit.
Each hard inquiry could drop your scores. The impact may lessen after a short time depending on your credit behavior in other areas, but the inquiry will remain on your credit report for a couple of years.
Just like with building lasting physical health, none of these credit-building exercises are quick late-night-TV fixes that will turn your credit health around overnight.
However, when it comes to your credit, no step toward improvement is too small. Just keep moving toward your money goals, and you may reap the benefits of a happy and healthy financial life.
Unfortunately, I didn’t take his other piece of advice: Pay off your card in full each month.
Instead, I quickly fell into the minimum payment trap, which meant I often carried large balances and only paid off what I could afford.
It was a dangerous cycle to be in, and by the time I broke it, I had paid thousands of dollars in interest.
It took two years to pay off every cent of that debt, and since then, I have learned a lot about how to use credit cards responsibly and still build up my credit scores. It’s a common myth that you have to carry a balance in order to boost your scores.
Instead, a lot of it comes down to when you pay your credit card bills (and how much you pay).
Before jumping into when and how much to pay, you should first understand how your credit card statement works.
Whenever you make a purchase with a credit card, the cost is added to your total balance owing.
Once a month, your credit card company should issue you a statement that outlines a handful of things:
The balance on your statement may be different from the total balance you owe today. That’s because you probably spent more money between the day that statement was issued and the day you received it.
For example, if your mailed statement was printed on the 1st of the month but you didn’t receive it until the 7th, it wouldn’t include any of the purchases you made between the 1st and the 7th.
This means that you could log into your account online and see a larger balance than the one on your statement. Don’t let that trip you up, or make you feel like you need to pay the total balance you owe today.
The way to avoid paying interest is to always pay off the full balance on your statement by the due date.
An added bonus? Doing this over time can help you build positive payment history and improve your credit health.
But that’s not all you need to consider. According to Heather Battison, vice president of TransUnion Canada, “In addition to paying your bills on time and in full each month, it’s important to maintain a low credit utilization ratio — the amount of credit you’re using compared to your available credit limit.”
This is because credit utilization is one of the most important factors used to calculate your credit scores. If you carry a balance and have a high utilization rate, this can indicate to your lender that you’re spending more than you can afford.
According to the Financial Consumer Agency of Canada, you should try to keep your utilization below 35 percent of your total credit limit.
Your payment history is the most important factor when it comes to building good credit scores.
I use two credit cards and I know their due dates are on the 15th and 20th of each month, so I have a recurring reminder in my calendar that reminds me to pay them both online one week before the 15th.
By doing this, I know the payments will go through on time, and I don’t run the risk of going over the grace period (21 days starting the day before your statement is printed) and being charged interest.
When you should pay them will depend on which method you prefer to make your payments (for example, online, at the bank or by mail).
What’s important is that it’s your responsibility to understand the payment terms of your credit card accounts, and a late payment could have a negative impact on your credit scores — and stay on your report for up to six years or seven years.
At the end of the day, you could only make the minimum payments on your credit cards and maintain — or build — good credit health. But speaking from experience, I can tell you there’s nothing fun about paying interest and feeling like you’re stuck in a cycle of debt.
The best way to improve your credit health is to pay off the full balance on your credit card statement by the due date. This will help you build your scores, maintain your credit history and avoid interest charges.
As a student, I only wanted a basic, no-frills card with a $500 limit, for the sole purpose of building my credit history. What I didn’t realize, at the time, was that my credit history was created on the same day I submitted that application.
If you’ve ever applied for or used credit (for example, credit cards, car loans, personal loans, mortgages) you have a credit history. It’s one piece of the puzzle that makes up your full credit report, and specifically shows your ability to repay debts.
Your credit history is the summary of how many times you’ve applied for and used credit in the past, as well as specific details about each account, including:
Some cell phone and internet companies may also report your payment history to the credit reporting agencies, which means you could find information about those accounts in your credit history as well.
And if you’ve ever had any accounts get sent to collections or filed for bankruptcy, that will also be included.
While you might think that all bank products and accounts are attached to your credit history, it’s important to remember that only credit accounts are included. That means the activity on your chequing accounts and savings accounts aren’t reported to the credit reporting agencies, unless the account was closed “for cause” (you owed money on it or you’d opened it fraudulently).
Your credit history is combined with some of your personal information (your name, date of birth, address, phone number, employment information, social insurance number) and compiled by the credit reporting agencies, TransUnion and Equifax, into what’s known as a credit report.
The information in your credit report is then used to calculate your credit scores. If you maintain healthy credit scores, you may be eligible for “better interest rates and terms for mortgages, auto loans, credit cards and personal loans,” says Heather Battison, vice president for TransUnion.
The information included in your credit history is sensitive in nature and should be accurate.
Errors can not only lower your credit scores but also make it look like you’re not a responsible borrower, which could give future creditors reason to charge you higher interest rates or decline applications altogether.
For this reason, it’s important to check your credit report regularly, to make sure there are no mistakes that could be damaging your credit history as a whole.
It’s also important to check your credit history regularly because it can show you if someone has made an attempt to steal your identity and open new credit accounts under your name. Specifically, you would look at the inquiries and payment history to try to figure this out.
“If you don’t recognize an inquiry on your credit report, it’s important to double check that the activity was unauthorized,” Battison says.
Once you’re sure the inquiry is unauthorized, you should place a credit file alert on your account on your reports. Both TransUnion and Equifax offer this service, which requires the creditor to check in with you first before granting credit. However, it doesn’t prevent creditors from viewing your credit report data.
Once you’ve placed the credit file alert, you should file an official dispute.
You can submit disputes over the phone or in writing with TransUnion or Equifax directly. Each credit reporting agency has its own dispute process and if you see an error on one report (for example, Equifax), you’ll want to check your credit history with the other reporting agency as well in case you need to file a dispute with both bureaus.
Both credit reporting agencies also offer fraud alert services that can help you detect fraudulent activity on your reports in the future.
The information in your credit history is extremely important. In fact, it could be considered one of the most important tools in your financial wallet.
To help maintain a clean history, only open the accounts you need, make all your payments on time, and check your credit scores and report regularly to ensure there are no mistakes.
What happens if you can’t keep up with your debts? Failure to pay your bill by the due date over time can result in negative actions against your account, including mounting interest charges, penalties (such as an increased interest rate), damage to your credit scores, and, ultimately, your card being cancelled.
Having a debt go to collections isn’t necessarily an indication of your failure as a person, or a defining moment that you’ll carry with you for the rest of your life.
Unexpected debts due to unforeseen illness, unemployment, veterinary bills or car trouble can come up at any time.
Once your monthly bill’s due date has come and gone without any payment, your account becomes delinquent.
Delinquent accounts that aren’t repaid may move into a new phase of debt recovery known as collections, and become collection accounts.
In the first three to six months of missed payments, your credit card issuer will likely try to collect the debt directly. They may have a dedicated internal department who will contact you about repaying the debt.
If you’ve fallen behind on payments for six months or more, your debt account may then be assigned to a debt collector, whose sole job is to get you to pay back the amount you owe.
There are different types of debt collectors:
In Canada, once a creditor passes on your debt to a collection agency, they must notify you in writing. Once the account has been officially passed to the agency, you’ll only be working with that agency to pay back the debt. The rules restricting what creditors can do vary by province, but in general, you can then expect outreach from the agency such as:
Collection agency practices vary by province, so review the rules for your place of residence. In general, a collection agency is bound by regulations that protect consumers from overly-aggressive collection tactics.
“The worst thing you can do is stick your head in the sand and ignore the collection calls,” says Jeffrey Schwarz, executive director of Consolidated Credit Counseling Services of Canada.
The main thing to remember is that the agency is simply trying to recover the money you owe to its client. Communication is the most important step you can take to help them help you find the best way to repay your debt.
Debts sent to collection agencies will remain on your credit report for about six years.
The Financial Consumer Agency of Canada (FCAC) says that Equifax will count that record from the date the debt is sent to an agency, while TransUnion counts it from the date the debt became delinquent (i.e. when you missed your payment due date).
This could make a significant difference, as many creditors attempt to collect debts in-house for up to six months before assigning the debt to an agency.
Collection accounts can really hurt your credit and will impact your scores as soon as it’s registered on your credit report by the creditor and/or collection agency.
If a collector is calling, here are some steps you may want to take:
This can help you determine which account it is. Get information about the amount owing, the total time it has been delinquent and the agency name and contact information. Be confident that you do have rights in this situation.
For example, they may not contact you during certain hours on Sundays or holidays. In addition, unreasonable, undue, or excessive pressure or harassment techniques aren’t allowed.
If you have concerns about how the agency is treating you, here are some tips for how to officially report the situation.
Determine how you’d like the relationship to take shape moving forward. For example, you can legally request for a collection agency to contact you in writing only. Consumer Protection BC notes that once the agency receives this letter, they’re not allowed to contact you by phone.
This can help you figure out whether the debt is indeed yours. Fraud and identity theft are real risks that could assign debts to your report that aren’t actually yours.
If you think there has been an error, follow guidelines from the Financial Consumer Agency of Canada for reporting the problem.
Using a service such as Credit Karma is a great way to perform these checks, since the inquiry is considered “soft” and won’t further penalize your credit scores.
However, some debts in collection may not be on your credit report. Always ask a debt collector for written proof of your debt so you can verify that it’s yours.
The creditor has hired the agency to collect the money from you, so direct contact with the creditor may not be possible.
The ideal is to pay off your debt in full, but if that isn’t possible, you may be able to work out a repayment plan, such as manageable monthly payments, so that the collector doesn’t take you to court or sell your debt to another collections agency.
Remember that the creditor’s goal is simply to get their money back. They may be willing to alter the terms and conditions of the lending agreement to help you return the amount you owe.
Canada-wide debt assistance organizations such as Consolidated Credit Counseling Services of Canada or local not-for-profit credit counselling agencies can negotiate debt settlements on your behalf as well as help you establish a plan to rebalance and improve your finances.
There are both advantages and disadvantages to dealing with debt through an official debt management program; you can review them here as per the Office of Consumer Affairs.
This can help you track how your scores change as the account updates and/or is removed.
Fearing who might be waiting on the other end of a phone call is no way to live. If you’re having a difficult time paying a bill, try communicating with the creditor or company early and often.
You don’t need to stay silent in the face of financial hardship. Instead, strengthen your case by familiarizing yourself with your rights.
This is because your payment history is typically the most important factor used to calculate your credit scores, so it’s important to minimize late payments — or, if possible, completely eliminate them — in order to maintain healthy credit.
Lenders use standard codes when sending your payment information to the credit reporting agencies. At the end of each code is a number between one and nine that relates to whether your payment was made on time.
If you make an on-time payment within 30 days of billing, this is considered ideal and you’ll typically receive a “one” rating.
This rating can help maintain and improve your credit health. If the number is two or higher, it’s considered a late payment and could negatively impact your credit health. A rating of two means your payment was made 31 to 59 days late.
“There are many factors that affect your credit scores, and payment history is a key component,” says David Blumberg, public relations director of TransUnion. “Paying bills on time each month can have a positive impact on your scores, while late payments can negatively impact your scores and stay on your report for up to six years.”
“Also, a more recent late payment may be more detrimental to credit scores than one from several years prior,” Blumberg says.
If you’ve made a late payment, whether on your credit card, mortgage or other type of loan, it typically doesn’t take long for it to appear on your credit report. According to Blumberg, creditors generally report late payments in the month following the late or missed payment.
It usually appears on your credit report shortly after.
Don’t forget: If you miss a payment and you manage to make the payment before it’s reported to the bureaus, you may still be hit with additional penalties, such as a higher interest rate.
The later the payment is, the more your scores could fall.
For example, if you make your payment 60 days past the due date, it may have a more severe effect on your credit than if your payment were only a couple of days late.
Regardless, any late payment, no matter how late, can have a severe impact on your scores. So why is this the case? When a creditor or potential lender looks at your credit history, they’re using it to decide whether or not to extend you credit.
“Late payments can affect your report and scores because they demonstrate your inability to repay a current or previous loan, and what your ability to repay a future loan may be,” Blumberg says.
In Canada, a late payment can stay on your credit report for up to six years.
However, the date when the credit reporting agencies start counting the six years for the negative information on your credit report differs.
With Equifax, the clock starts ticking at the date of your last activity (such as when you made your last payment).
With TransUnion, it starts from when you were first delinquent on your credit account (for example, when you made a late payment) without returning to good standing.
Missing a payment is never fun and may hurt your credit scores, but there are ways to get on top of your payments.
“I set up a recurring calendar reminder twice a month to prompt me to log into all my accounts, review them and pay off any balances. I do this primarily for my credit cards and have auto bill payments set up for the rest of my recurring monthly bills,” says Stephen Weyman, personal finance blogger at HowToSaveMoney.ca.
Weyman says that logging in every 15 days makes it less likely that you’ll make a late credit card payment because you generally have a minimum of a 21 day grace period to make a payment.
By taking steps to minimize late payments, you can help keep your good credit scores intact. This could be especially beneficial next time you borrow money, such as applying for a credit card or mortgage.
They may be used to determine some of the most important financial factors in your life, such as whether or not you’ll be able to lease a vehicle, qualify for a mortgage or even land that cool new job.
And considering 71 percent of Canadian families carry debt in some form (think mortgages, car loans, lines of credit, personal loans or student debt), good credit health should be a part of your current and future plans.
High, low, positive, negative – there’s more to your scores than you might think. And depending on where your numbers fall, your lending and credit options will vary. So what is a good credit score? What about a great one? Let’s take a look at the numbers.
Canadian credit scores are officially calculated by two major credit bureaus: Equifax and TransUnion.
They use the information in your credit file to calculate your scores. Factors that are used to calculate your scores include your payment history, how much debt you have and how long you’ve been using credit.
Pro Tip: You can view sample credit scores summaries from each bureau (see Equifax here and TransUnion here) to get a sense of what to expect.
In Canada, your credit scores generally range from 300 to 900. The higher the score, the better. High scores may indicate that you’re less likely to default on your repayments if you take out a loan.
Below you’ll see a general breakdown of credit score ranges and what each range means in terms of your general ability to qualify for lending or credit requests, such as a loan or mortgage.
Note that the ranges can vary slightly depending on the provider, but these are the credit score ranges you’ll see on Credit Karma. The best way to know where your scores stand is to check your credit report:
● 800 to 900: Congratulations! You have excellent credit. Keep reaching for the stars.
● 720 to 799: You have very good credit! You should expect to have a variety of credit choices to choose from, so continue your healthy financial habits.
● 650 to 719: This is considered good to lenders. You may not qualify for the lowest interest rates available, but keep your credit history strong to help build your credit health.
● 600 to 649: This is fair credit. History of debt repayment will be important to demonstrate your solid sense of financial responsibility.
● 300 to 599: Your credit needs some work. Keep reading for some improvement suggestions below.
To borrow from Leo Tolstoy, all great credit scores are alike, but all bad credit scores are bad in their own way. That is, ideal credit scores are built on a similar set of healthy financial habits, but your scores can be damaged by any number of factors. There are many different issues that can hurt your credit, such as:
● Late or missed payments.
● Too many (or too few) open credit accounts.
● High credit card balances.
● High balances on loans.
● Too many credit applications.
The first step toward improving your credit health is avoiding getting trapped in the highs and lows of managing your credit.
Heather Battison, vice president of TransUnion Canada explains how consistency is key: “The most important factor for building and maintaining your scores is to pay your bills on time and in full each month. This activity demonstrates your ability to responsibly manage credit and can positively impact your credit scores.”
It’s also key to remember that your payment history isn’t just about paying your credit card bill. “It also includes things like your cellphone bill,” says Trevor Gillis, associate vice president of account management at TD Credit Cards.
Gillis says building good credit scores is “based on using your credit card responsibly, which means making at least the required monthly minimum payment (if you can’t pay off the balance in full), making your payments by the payment due date and keeping your credit card utilization low.”
Beware of third-party companies that claim they can quickly boost your scores. According to the Office of Consumer Affairs, only your creditors are able to alter the information on your credit file. When it comes to building good credit, there are no shortcuts.
Here’s the good-to-great news: Improving your credit health isn’t only achievable, but also the steps involved can help you establish an overall healthy financial life. Read our tips for everyday ways you can improve your credit health.
Help keep your credit scores as healthy as possible by reviewing your credit reports regularly to ensure they’re accurate. Making the decision to apply for a loan or credit card is a big deal – don’t let surprise scores get in the way of it.
There are ways to check your credit scores directly from TransUnion and Equifax. However, you’ll either be waiting for snail mail delivery (with the added risk of loss or theft in transit), or paying a fee for one-time online access (or a recurring cost for continued access).
Credit Karma gives you free online access to your credit score and report from TransUnion any time. Score!
There are many things that can lower your credit scores. Some things, like missing a payment, shouldn’t come as a shock, but others, like closing an account, may come as a surprise.
Here are some common reasons why your credit scores may drop and the credit factors that contribute to them.
Your payment history is typically the most important credit factor used to calculate your credit score. It tells lenders how likely you are to repay debts in the future.
If you’ve missed payments or made late ones, lenders may be hesitant to extend credit to you — or may offer you credit, but at a higher interest rate. The longer you make your payment after your due date, the more it could affect your credit scores.
And if your payment is past due and sent to a collection agency or you declare bankruptcy, it can also adversely affect your credit scores and stay on your credit report for six or seven years.
Your credit utilization is typically the second most important credit factor when it comes to how it affects your scores. It may also be called “use of available credit.”
To determine your credit utilization, add up the balances on your various credit products, such as credit cards, lines of credit and car loans, and divide the total by your total credit limits.
Lenders are most concerned about how much credit at your disposal you’re actually using, not your credit limits on their own. Even if you keep making payments on time, you’re seen by lenders as a higher risk of default if your credit utilization is high.
If you’ve recently opened or closed a credit account, this can negatively impact your credit scores. Generally speaking, the longer your credit account is open and in good standing, the more it may help to improve your credit health.
This means that if you close an old credit account, such as the first credit card you signed up for in university, and your other credit accounts are relatively new, your scores could drop.
For example, if you’re doing a balance transfer from an old credit card to a new credit card to take advantage of a low introductory interest rate and you close your old account, that may cause your credit scores to drop.
If your credit scores are not as high as you’d like them to be, there may be things you can do to help improve your credit health.
If possible, aim to always make your credit payments in full by the due date.
If your cash flow is tight, try to at least pay the minimum payment (you can find this on the statement from your lender) to keep your credit account in good standing.
If you’re unable to make the minimum payment, let your lender know immediately to see if a special arrangement can be made, such as spreading your payment over a longer period of time or negotiating a lower interest rate.
“To make sure you never miss a payment, I recommend setting calendar reminders to log in and make payments to your credit accounts twice per month. This could help ensure that you’ll never be late for a payment and give you ample opportunity to review your statements and recent transactions for inaccuracies and fraudulent charges,” says Stephen Weyman, personal finance blogger at HowToSaveMoney.ca.
The Financial Consumer Agency of Canada recommends keeping your credit utilization at less than 35 percent of your total available credit. Generally, having high credit utilization may hurt your score as your lender may view you as more likely to default.
For example, if you have two credit cards with a $6,000 total limit, try to keep your combined balances below $2,100 (35 percent of your $6,000 total available limit).
While it may be tempting to close older credit accounts that you no longer use, consider keeping them open. For example, it might be worth keeping your first credit card, even if you seldom use it, provided there’s no annual fee.
If your credit card has an annual fee and you’re not using it, consider closing or downgrading it to a non-annual fee version (if available as an option).
Be sure to use your credit card every so often to avoid an inactive fee or your issuer closing your account. An inactive fee is a fee charged by credit card providers if you don’t use your credit card for a time period (typically at least a year).
A drop in your credit scores may be a concern, but it can depend on the reason for the drop, or your particular credit standing at the time of the drop.
For example, your scores may drop slightly if you apply for a new line of credit because a lender has made a hard inquiry into your report. If you have excellent credit, the effect of a hard inquiry may be less than if you have good or fair credit.
On the other hand, paying your credit card late could cause a much bigger drop in your scores. Likewise, you don’t want too many hard credit inquiries (credit inquiries that are included on your credit report and may impact your credit scores).
For instance, applying for five credit cards in a month may adversely impact your credit scores. But generally, you don’t need to fear shopping around for auto loans or mortgages — multiple inquiries within a short period of time could count as only one inquiry from a scoring perspective.
Also, many landlords and some employers perform credit checks. Again, these may cause your credit score to temporarily fall.
There are several reasons why your credit scores may fall. Figure out why your credit scores are lower and take the necessary steps to correct the behaviour that triggered it.
When I was growing up, my dad was constantly giving me financial advice. The minute I told him I got my first job, at age 15, he turned around and said, “make sure you save at least 10 percent of your income.”
Your credit scores may not seem important. At first glance, it’s just a three-digit number (usually between 300 and 900 — with 900 being perfect, depending on the scoring model).
But, whether you like it or not, it can be one of the most powerful numbers in your financial life. Your credit scores represent your credit history and your ability to pay bills on time.
There are a number of situations in which your credit scores may be reviewed. Here are a few times you’ll be happy to have excellent scores.
Whether you’re applying for a credit card, car loan or mortgage, your credit scores can have a significant impact on how lenders feel about giving you access to more credit — and how much to give you.
Your scores can also influence the interest rate lenders and credit card issuers apply to your account.
Typically, if all other factors are equal, the higher your credit scores are, the lower your interest rate should be.
For example, if you take out a mortgage with fair credit, your interest rate is likely to be higher than someone taking out the same mortgage but with excellent credit. And even a 1 percent difference in your interest rate could cost you thousands of dollars in interest per year.
To calculate how much interest you might pay on a loan or a credit card balance, you can use an online calculator.
While you might think your next landlord will only check references, some rental companies will also request access to your credit report.
According to the Canada Mortgage and Housing Corporation, most landlords will perform a credit check before agreeing to rent to you. This is to help the landlord determine if you can afford the rent and will make payments on time.
In this instance, the landlord would potentially look at both your scores and the payment history aspect of your report, to make sure you can afford the rent and have a history of paying on time.
Your credit scores could come into play when you’re looking for better interest rates than what your current lender is offering you.
For example, if you want to refinance your mortgage, your credit scores have the ability to determine the interest rate a lender will give you.
If your credit scores have significantly improved from when you first took out your mortgage, you may qualify for a better interest rate. However, you should note that qualifying for a better rate also relies on many other factors, including your gross debt service (GDS) ratio and your total debt service (TDS) ratio.
Your gross debt service (GDS) ratio is a calculation of the total of your monthly housing costs (mortgage payment, interest on your mortgage payment, taxes and heating expenses) as a percentage of your gross monthly income. Your GDS shouldn’t be any higher than 32 percent to be considered for a mortgage.
Your total debt service (TDS) ratio is a calculation of your total monthly debt load (your housing costs, plus your auto loan, credit card payments, etc.) as a percentage of your gross monthly income. Your TDS shouldn’t be any higher than 40 percent to be considered for a mortgage.
It’s important to monitor and maintain your credit — especially considering how it can factor into some of your biggest life decisions, as well as your day-to-day finances.
Services such as Credit Karma make it easy to not only check your credit scores, but also get insight into why your credit scores change and tips on how to improve them. Now that Credit Karma is in Canada, you can check your score for free.
The score you see on Credit Karma may not be the exact score a lender uses when you apply for credit, but it can give you a better idea of where you stand.
Here are some other key differences between hard inquiries and soft inquiries, along with some examples of when they may occur.
A hard inquiry is typically recorded on your credit report whenever a lender reviews your credit when you apply for a credit card, loan or mortgage.
However, if you apply to rent an apartment or apply for a job and there’s a subsequent credit check, these may be counted as hard inquiries, depending on who’s checking your credit.
Before giving a company permission to review your credit, ask how the inquiry will be recorded.
Hard inquiries can negatively impact your credit scores and they can remain on your report for three to six years.
Applying for a lot of credit in a short time span can indicate to lenders that you’re in financial trouble or desperately seeking credit. Try to limit the number of hard inquiries by only applying for credit when you’re serious about it.
A soft inquiry typically occurs when you or a third party reviews your credit for non-lending purposes. This could occur when you review your own credit, a company offers you a new product or service, or a company where you have an existing account needs to verify your credit. According to TransUnion Canada, the following situations may also trigger soft credit inquiries:
Your credit card provider might verify your credit when deciding to offer you a credit limit increase or promotion.
It’s key to note that soft inquiries DON’T impact your credit scores. This means that requesting your credit score or report from Credit Karma counts as a soft inquiry and doesn’t affect your credit scores.
According to Arthur Lam, consumer and verification verticals leader for Equifax Canada says, “A soft inquiry is visible only to the individual and the entity that made the request.”
Hard inquiries can stay on your credit report for three to six years, depending on the credit bureau recording the hard inquiry.
On the other hand, soft inquiries only appear to you and the entity that made the request.
Hard inquiries can lead to your credit scores dropping by several points, and there could be an even bigger effect on your credit scores if you have few credit accounts or your credit history is short (for example, if you’re a student or a new immigrant to Canada).
That being said, one hard inquiry isn’t likely to make a big impact on your credit scores.
Before giving permission to a third party to do a credit check, it’s a good idea to ask whether it’ll be recorded as a soft inquiry or hard inquiry. When signing a contract, read it thoroughly; sometimes you can provide consent to check your credit without even realizing it.
It’s also a good idea to get a free copy of your credit report at least once a year and review it to ensure it’s accurate. You can request a copy of your credit report from Equifax and TransUnion by mail or fax by completing a form and providing two pieces of identification.
You can also review your TransUnion credit report for free at Credit Karma.
“If there’s something on your [credit] file you don’t recognize or believe you didn’t authorize, your first step should be contacting the inquirer. This is why the inquiry posted includes the name of the entity and a contact number,” Lam says.
It may be a mistake, or you may have signed a contract where the permission for a hard inquiry was hidden in legal language.
If you aren’t having any luck with the third party, contact the credit bureau that recorded the hard inquiry to dispute it.
You can correct errors and dispute inaccuracies on your credit report with Equifax by completing and submitting a Consumer Credit Report Update Form.
Likewise, you can dispute hard inquiries with TransUnion by downloading and completing an Investigation Request Form.
You can also call both of their toll-free phone numbers to discuss in further detail.
When you apply for more credit, the financial institution will likely check your credit scores, and use it to decide if they’re comfortable lending to you, how much they’ll lend you, and at what interest rate.
Your credit scores may also matter when you apply for an apartment or job, or when you apply for insurance in some provinces.
While your credit scores can look slightly different, depending on which credit bureau it’s pulled from (Equifax or TransUnion), the same five factors are primarily used to determine the final number.
Here’s an explanation of each factor and how you can stay on top of them.
“The most important factor in building and maintaining your scores is to pay your bills on time because it shows lenders your ability to responsibly manage credit,” says Heather Battison, vice president, TransUnion.
On top of detailing whether or not you’ve paid your bills on time, your payment history may also show bankruptcies and any debts that have been sent to collections or written off. These negative marks could significantly damage your credit scores.
If you think you can’t pay a bill on time, the Financial Consumer Agency of Canada (FCAC) suggests contacting your lender immediately to see if you can make a special arrangement to repay your debt.Learn more about how late payments affect your credit scores
The different types of credit accounts you have is another piece of the puzzle that makes up your credit score calculation.
According to the FCAC, it’s preferable for you to have access to more than one type of credit. This is because both lenders and credit bureaus want to see that you’ve handled multiple types of credit well.
Common types of credit accounts include:
According to the FCAC, a mix of credit accounts may help you achieve higher credit scores — however, it’s strongly recommended that you only open credit accounts that you need and make full, on-time payments.
One of the most important numbers that goes into your credit scores is the percentage of available credit you are currently using — known as your credit utilization.
To calculate this for yourself, add up the balances of all your credit card accounts and divide it by your total available credit.
For example, if you are currently using $2,000 of your $10,000 limit, you would divide $2,000 by $10,000, multiply that figure by 100 and find you’re using 20 percent of your available credit.
In Canada, your goal is to keep this number under 35 percent. Going above this could hurt your credit scores and ability to borrow more money.
“If your credit utilization is low, it’s an indication that you’re a responsible spender and can appropriately manage your debt,” Battison says. “Conversely, if your credit utilization is high, you can appear risky to lenders who may question your ability to pay back your loans.”
The length of time you’ve had your credit accounts open could also impact your credit scores.
The rule of thumb is that the longer you’ve had an account open for (and actually use it), the more this may help your credit health.
To that end, closing old accounts can damage your credit scores, as it will shorten the length of your credit history.
Closing an account can also hurt your scores if doing so means you’ll be using more than 35 percent of what’s available of your leftover credit, or if it means you have fewer types of credit (credit cards, loans, line of credit, etc.) available to you.
It’s a smart idea to keep your oldest credit account open and use it occasionally, so long as it’s not costing you more than you’re getting out of it.
Your credit scores can be affected by the number of times you try to open new credit accounts.
Remember: Whenever you try to open a new account, the lender will check your credit report — and that’s reported as a “hard hit” inquiry, which could affect your overall score.
A hard hit inquiry (sometimes referred to as a hard inquiry) is a credit check that’s recorded in your credit report, which will be seen by anyone who checks it in the future.
Examples of hard hits are credit card and loan applications, as well as some rental and employment applications.
Conversely, whenever you check your own credit scores, that is known as a “soft hit” inquiry. Soft hits aren’t recorded in your credit report, and therefore won’t affect your credit scores.
If you’ve applied for credit multiple times in a short window of time, it can damage your credit scores. For that reason, it’s important to only apply for credit when it’s absolutely necessary.
However, there is one exception to this – if you’re shopping around for the best rates for a car loan or mortgage, if these multiple hard hits are recorded within a two-week period, they’re treated as a single inquiry on your credit scores.