The credit score is crucial for an international student in Canada. Lenders want to assure how you have handled credit in the past and how well you can manage the credit in the future. This is important in Canada as insurance companies, landlords, and sometimes employers may also look at your credit report before they issue an insurance policy or rent out an apartment or give you a job.
Five things an international student should know about the credit score!
One-third of a credit score is calculated by the payment history, which is 35% of the overall credit score. Late payments affect the credit score; however, some of the late payments will not drop your score drastically. Payment history is one of the important factors that lenders check if the borrower can be approved for financing. Late payments stay on the record for seven years, and if there are multiple late payments, it affects your credit score severely. However, this can be recovered by paying the debt back as quickly as possible and you will be able to increase your credit score.
Credit utilization influences 30% of the credit score. What is credit utilization? If your credit limit is $1000 and your balance is $500, then credit utilization is calculated on your credit card as 50%. Your utilization rate is 50%. It is good to maintain a lower credit utilization percentage. Making payments regularly is one way to maintain the same. It doesn’t mean that you are at risk if you have a lot of debt on the credit card. This is one of the factors that lenders consider while financing, as the missing payments for a borrower who owes a lot of money, might be high.
Length of credit history:
Length of credit history affects 15% of the credit score. The length of your credit card history means how long you have used the credit. It is the record of your debts, payment history, and any public records. The longer the credit account is open, a lender should approve your financing as it shows the borrower’s experience of managing and clearing the debts. If you close the credit accounts, it will stay on the credit report from 7 to 10 years. Also, if your credit score may be lower if you have relatively new credit accounts. So it is good keeping the old account open even if you do not use it as long there is no fee even if the account is open, but you do not use it.
New credit makes up about 10% of the credit score. It is a small percentage but also is an important credit score factor. New credit means if you transfer from an older account to a new account. Credit counsellors think multiple new accounts can cause problems and they advise borrowers not to apply for too many new credit cards. However, as the new credit accounts 10 per cent of a borrower’s credit score, a careful application process can limit the scoring damage. Also, the length of credit history will get affected if there is a lot of new financing in a short period of time which drops your score.
Credit mix means the different types of credit accounts that you have – credit cards, loans, mortgages etc. It is one of the factors which is considered in calculating your credit scores. Credit mix has 10% weightage of your overall credit score. If you manage all the credit accounts responsibly, you will have a positive effect on your overall credit card score. In Canada, there are three types of credit accounts which are revolving, instalment and open. With revolving credit, you can borrow freely but have a cap which is called a credit limit. Instalment credit means a loan for a set amount fixed payment schedule such as student loans, mortgages etc., personal loans etc. If you balance between instalment and revolving credit, you can raise your credit score.