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What is credit, and what is my credit history?

You’ve likely heard that it’s important to have a good credit score, but maybe are a little confused about your credit and credit history. Read on to learn more.

18 October 2022Tassie Milne 4 min read
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Photo by Sonja Langford on Unsplash

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While personal finance has been added to some high-school curriculums, the majority of us never learned the importance of a credit score. Between building your credit score itself, credit reports, credit cards, and credit history – you may be a little confused about what each means. So, we’ve broken it down to the basics to hopefully help fill some of the gaps.

Credit, in general, is what you borrow from a lender, such as a bank or a credit union, under the agreement that you will pay the issuer back at a later time. But, in order to be successful in securing credit (like a credit card or loan), you may need to demonstrate to banks and lenders that you have a history of paying it back. This is where your credit score comes in.

Your credit score is a number (typically between 300-900) that’s calculated by the credit bureaus – either Equifax or Transunion in Canada. A few different factors are used to calculate your score, like your payment history, how long you’ve been using credit, how much credit you use, how often you apply for new credit, and what kinds of credit you have (your credit mix).

Your credit report goes hand-in-hand with your credit score and acts as a record of your financial history, giving banks and lenders a general understanding of how you manage your money. Your credit report includes your credit history, which is a record of how you’ve repaid debt in the past.

So, making on-time payments and watching how much you put on your credit card every month can work to improve your credit score. If you have a good credit score (considered to be above 670 in Canada), you should have an easier time applying for financial products like a mortgage, car loan, credit card, or personal loan.

Landlords may also review your credit score to decide if you are financially responsible enough to be a tenant. Other organizations, such as insurance companies, may also review your credit score to determine certain details of your contract with them, for example, insurance rates and premiums.

If you’re looking to borrow credit, here are the three main types of credit to keep in mind.

Revolving Credit

Revolving credit allows you to borrow the agreed amount up to a certain limit. A credit card or line of credit are great examples of revolving credit. Interest is charged on any balance carried over past the statement due date (usually monthly) and can be avoided if all outstanding debts are paid in full and on time.

Installment Credit

Installment credit is when you borrow a set amount of money and repay it with interest in regular payments or installments over a period of time. The account is considered closed when the loan (including the interest) is paid off completely. Examples of installment credit accounts include mortgages, auto loans, personal loans, and student loans.

Open Credit

Open Credit applies to credit accounts where the payments vary and can fluctuate from month to month, and you’re expected to pay the full amount borrowed each month. Examples of open credit include utility (gas, electricity, water) and cell phone bills.

For many people, a credit card is the easiest way to build a credit score and credit history. When you’re just starting out, it’s helpful to imagine every expense you’re putting on your credit card coming directly from your chequing account. That way, you'll only spend what you have available, and interest won’t build up. Using your credit card this way helps build your credit while also getting you comfortable with having the ability to borrow.

Something you may not be aware of is your credit utilization. This is the ratio (percentage) of the credit you use over your total available credit. Your credit utilization makes up a large portion of the calculation of your credit score, and the common guideline is your credit utilization should be 30% or less, but more than 0%, as the goal is also to build a credit history. If no credit is being used, then a history can’t be calculated. Learn more about how to improve your credit score.

In order to qualify for a credit card, you must:

  • be at least the minimum age of majority in your province or territory
  • have a social insurance number
  • have an acceptable credit score (which will depend on the card you are applying for)

Finding out which card is right for you can depend on a number of factors: if there is an annual fee, the rewards perks from using the card, the credit card issuer, and interest rates. Once you’ve decided on a card, apply online or make an appointment at the financial institution to submit your application.

In many cases, your approval can be as soon as the same day. Once you’re approved, the credit card issuer will send the card by mail to your home, which usually takes between five to ten business days.

Next Step: Start comparing credit cards with ClearScore today.

Obtaining a card with no credit history can be tricky but not impossible. If you’re a student, you can apply for a student card which usually doesn’t require a credit history. Other options are a secured credit card (you put up collateral against the balance of the card) or opening a credit card through a retail store (these can have higher approval odds but can also come with higher interest rates).

Quickly and easily check your credit score and report with ClearScore in minutes. You’ll also see what financial products are available to you and find helpful tips to build and improve your credit score.

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Written by Tassie Milne

General Manager - ClearScore Canada

Tassie heads up ClearScore Canada. She lives in Toronto with her husband and two young boys. In her free time, she can be found at the family lake house or playing ball hockey.