What is credit history?
Let's first start with what is credit? Credit is the term used to describe a financial transaction where a person receives goods, money or a service for little or no money up front. In exchange, the person agrees to pay-whether in full or installments-a dollar amount by an agreed upon date, or dates. Typically, there is a fee for the service. For example, with credit cards this could be in the form of interest or annual fees.
Getting back to "what is credit history", it is how you've handled having past credit (whether it is a loan, cell phone account, credit card or a mortgage for example); together all of these types of credit, and how you handled them, make up your credit history. This includes whether you made payments on time, how long it took you to repay the borrowed amount as well as how much was borrowed and how often. All of this information-as reported by the company, bank or credit card issuer that gave you credit-is collected by a credit-reporting agency. It's collected so that future lenders have a better understanding of how they can expect you to handle credit should they decide to extend it to you and makes up the basis of your credit history, credit report and credit score.
For a lender, what is a good credit history?
How a person's credit history is interpreted is at the discretion of the lender, so categorizing it into general terms is tricky. There are no hard and fast rules; however, from a lender's perspective, individuals with a good or excellent Canadian credit history will always pay their bills on time, have a history of using credit accounts and loans responsibly, have never filed for bankruptcy, and have never had outstanding balances sent to a collection agency.
No credit history? How to build a credit history in Canada
If you have no credit history to speak of (whether it's because you're new to Canada or have simply never needed it until now) there are steps you can take to build a credit history in Canada. These steps can also help if you are trying to improve or repair your credit history.
- Apply for a secured credit card: A secured credit card requires that funds be deposited with the issuer. The credit limit of a secured credit card is usually the same as the amount deposited (e.g.: if you deposit $1,000, this will be the credit card's limit).
- Pay all of your bills on time (phone, cable, utilities, parking tickets, etc.) and in full.
- Be selective. Too many applications for credit may raise a red flag for potential lenders.
How does personal bankruptcy in Canada impact my credit history?
Declaring personal bankruptcy will affect the credit history you may have built up. According to Canada's Office of the Superintendent of Bankruptcy, "A person who declares bankruptcy is assigned the lowest possible credit rating score". As a result, you'll have to work to improve your credit history once the bankruptcy has been discharged.
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