You’ve submitted your proof of income, i.e., employment letter, confirming your job and pay, but the landlord is going to want to check your credit report – so how does that work?
The law on tenancy in all provinces of Canada allows landlords to assess tenants based on their income, landlord reference, and credit report. Regarding the credit report, if the credit rating of the applicant is not good enough, the landlord may decline to approve an application or may require a qualified guarantor or co-signer for the lease agreement. The landlord will also assess any guarantor on their proof of income and credit rating.
Assessing someone’s ability to pay or meet financial obligations through a review of credit history, rating and score is not exclusive to landlords. Almost all businesses that provide credit, e.g., car dealerships, mobile phone providers, credit card companies, etc. consider a prospective client’s credit record. Some employers also check credit reports of prospective employees, especially for finance-related or executive positions, to determine if the candidate is financially stable and responsible.
The reality is that society is now highly dependent on credit for purchases and other financial instruments such as mortgages and investments. While a cash-based society is possible and was generally the case 75 or 100 years ago, the lack of easily available credit reduces the purchasing power of all but the very wealthy. Many sellers of goods and services also prefer that the buyers pay using credit as they can earn transaction fees and interest payments. Therefore, the credit report is an essential tool for all financial decision-makers to quickly evaluate someone’s financial reliability.
What exactly is a credit score?
A credit score is a number from 300 to 850 that shows a consumer’s creditworthiness. The higher the score, the better a borrower looks to creditors.
How are credit scores and ratings determined?
A credit score is based on credit history: number of open accounts, total levels of debt, repayment history, and other factors. Credit bureaus such as Equifax, Experian and TransUnion collect, analyze, and release information about consumers to credit providers and landlords. The information is consolidated and translated using the FICO Scoring, the most used scoring system. Credit bureaus generate a credit score based on five main factors:
- Payment history
- Total amount owed
- Length of credit history
- Types of credit
- New credit
The credit scores have equivalent qualitative ratings. The numerical scores and the corresponding qualitative ratings can be illustrated as follows:
- Excellent: 800–850
- Very Good: 740–799
- Good or very low risk: 670–739
- Fair or low risk: 580–669
- Poor or High Risk: 300–579
Building and maintaining a good credit score is critical for consumers in general, but particularly for the purchase of “big ticket” items such as cars, furniture, and mortgages. A good credit score is also used for more than just getting a credit card or a loan. Credit scores demonstrate a person’s history of paying bills and debts to other entities that require a commitment to pay for a good or service in the future, i.e., rental accommodation, utility bills or mobile phones.
A good credit score makes life easier, including for renting an apartment.
How do you build and keep a good credit rating?
There are simple ways to start building credit.
1. Apply for and use a credit card
When applying for a credit card for the first time with the intent of building a credit score, get a student credit card or a secured credit card. Student credit cards are marketed to students and these cards tend to have lower credit limits and may even start off with lower introductory interest rates. A student credit card is a good starter in credit building and teaching financial responsibility.
A secured credit card requires the applicant to make a cash deposit to a bank or financial institution to establish a line of credit and then use the card to make purchases up to that limit. When the cardholder pays the bill each month, the bank will report the payment activity to the three credit bureaus, Equifax, TransUnion, and Experian, which will each establish a credit report in the cardholder’s name.
2. Become an authorized user on a credit card
You can get a card issued on an account that belongs to someone else i.e., parent, sibling, or partner who is the primary cardholder. An authorized user is basically an extension of the primary cardholder but isn't responsible for paying the bill and doesn't have to undergo a credit check. The credit card's payment and utilization history will be tracked, so it's important to choose someone who is financially responsible. Otherwise, a primary cardholder who does not pay on time or does not have a good credit rating will impact the secondary holder unfavourably.
3. Consider a credit-builder loan
A credit-builder loan is different from a traditional loan. With a traditional loan, the borrower might receive the money upfront and pay it back over time. But with a credit-builder loan, the borrower makes fixed payments to a lender and then gets access to the loan amount at the end of the loan’s term. A credit-builder loan gives the borrower an opportunity to show that he/she can handle consistently making on-time payments. And since the payment history is such an important factor in calculating credit scores, it helps the borrower get a good credit rating. Credit-builder loans may be offered by community banks, local credit unions, online lenders, and financial technology companies. Good credit scores aren’t required to open a credit-builder loan. But the lender may require a fee upfront. This is a good option if you do not want to get a student or secured credit card or cannot become an authorized user on someone else’s credit card.
The key to starting, maintaining, and sustaining a good credit record is to follow simple tips/rules:
- While there is no magic number to how many credit cards one should have, many advise having only 1-3 cards initially.
- Always pay bills on time.
- Keep low balances on credit cards. Do not maximize credit limit.
- Keep balances on loan, if any, low. Pay loans on time.
- Keep financial records and always watch out for fraud or scams that may compromise credit history.
With a good credit rating or score, there will be no concern that any landlord will deny an application to rent or require a guarantor based on credit report. This means that the only stressors would be packing, moving, and unpacking, which is par for the course.
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