Pursuit of the Canadian Dream (eBook)

Chapter 1:
CREDIT

The Credit System

The credit system for individuals is based on how people get and use credit. This information is published on two agencies’ platforms and they are called the “Credit Bureau,” and what you get from them is something called a “credit history.”

There are two parties involved in a borrowing system: the “lender’ who has the money and the “borrower” who needs the money. In a nutshell, the lender needs to confirm that the borrower will pay back the money borrowed at the agreed terms, and because they can’t just take your word for it, they subscribe to the credit agencies’ information. The credit agencies report a history of how the borrower has paid other lenders in the past. There are two credit bureaus or agencies in Canada (Equifax and TransUnion). If you want to do a financial transaction involving large sums of money or borrow in any capacity, the lender will consult these agencies to verify your credit history and to confirm your identity. In less developed countries, access to credit is based on your relationship with the bank manager and loan officers.

Some cultures don’t believe in credit and don’t use credit cards, mortgages, lines of credit, or overdraft protection. Some countries don’t have the different kinds of investments like GICs (Guaranteed Investment Certificate), Mutual Funds, ETFs (Exchange Traded Funds), Index Funds, et cetera. These financial instruments might exist in other nations but are called by different names, like a car loan is called a car note or a GIC (Guaranteed investment certificate) is called a fixed deposit. When someone requests your credit history from the bureau, the term is called, “pulling or checking your credit.” It means they are checking out your credit history with the two bureaus we have in Canada. Creditors will need your name, address, birth date, and social insurance number. These bureaus report your Canadian credit, and they are not linked up with any other credit bureau anywhere else in the world, even if they have the same name. Both mostly have information on all your credit applications, approvals, denials, and history of credit use. As long as you live here, most types of borrowing transactions would have required a credit pull. The Canadian banks have recently begun to request for people’s credit history at the time they open a bank account.

Some people come from cultures or religious beliefs where it has been ingrained in them that credit is bad, so they stay away from credit use. They pay cash for transactions, and therefore, regardless of how long they have been here, they still have no history. Is it possible to do this permanently? Yes, you can; it is not much of a challenge when you own a business or substantial assets that you bring to Canada and can use cash to buy a home, but if you don’t have that kind of money, you will definitely need credit at some point or the other. The average price of a three-bedroom townhouse in Toronto today is $1.24 million; in Vancouver, it is $1.29 million. So, if you have that kind of money, then you can stay off the grid. However, for all the regular folk, at some point, you’ll need to buy real estate as part of your Canadian dream. Part of the approval process for a mortgage involves pulling your credit history. Also, you will need to do several things in this internet age that you cannot do without a credit card; booking airline tickets, making payments at certain places, and even getting a cell phone or utility requires a credit history request. The system here is a credit system, designed to allow you to do things conveniently, but without knowing the rules, you could quickly get into trouble. Most parents teach their children not to touch a live electric wire or run into the street, but so many of them don’t teach their kids about finances. Kids don’t learn about finances in school and the rules that govern our financial system is different from that in other countries.

Credit Bureau

The credit bureau is the central agency or a place where your credit is reported. They rate your credit usage on ratings from R1 to R9. An R1 rating means that you have made all payments on time and as agreed, R2 means you made a payment later than thirty days and less than sixty, and R3 upwards of sixty days to R9, which means you did poorly and did not pay on time or as agreed. The credit bureau uses these ratings and a complex algorithm that factors your amount of outstanding credit, the credit limits on your debts, the length of time for which you’ve had a credit bureau registration, and the number of credit facilities you have plus your income, to determine a credit score for you. This is the score that creditors look at in order to give you credit.

A score of 700+ is high and below 600 is poor or bad. Many creditors have a threshold score they are looking for to grant you credit. For example, a bank might require you to have a score of 700 to give you an unsecured loan at 4%; another bank will provide you with an unsecured loan for 8.5% because your score is 650. Likewise, a motor finance company might give someone credit to buy a car at an interest rate of 5% with a score of 720, and the same car company might sell the same car at a rate of 9% to someone with a score of 660. If you owe money to a cell phone company, a landlord, students loan, or any other loan, they can report the amount owed on your credit bureau if you refuse to pay. Therefore, when you have a dispute with a cell phone company or any creditor, it is wise to pay up first and then argue later than to allow them to tarnish your credit history. Once they book the report on your bureau, it is as though you have an issue with a company, and they announce to the world that you did not pay your loan or bill as agreed. Even if you resolve the issue, you cannot wipe out the memory from those who’ve heard it until time passes. In Canada, it is seven years. In the credit bureau, it takes seven years for any poor record to fall off after you’ve made the payment, and if you do not resolve it, it stays in your credit history permanently. When credit or loan companies see it, they might either not grant you credit or require you to first settle that matter before they consider you for the credit you want.

When someone wanted a new mortgage at a bank I worked at a few years ago, a similar situation occurred. The client’s income was at a sufficient level; however, the credit report showed a cell phone bill that was outstanding or delinquent on their credit bureau. This bill was a result of a dispute with the phone company. So, we withheld funds from the borrower until the bill was paid. At times, in similar situations, the bank will mandate that part of the borrowed funds be used to pay the bill when advancing the loan.

Another factor that leads to lower credit scores is when you are credit shopping. Going from one institution to the next seeking all kinds of credit lowers your score drastically. Therefore, it is vital to keep your credit bureau clean, make all payments on time, and sign up for a service with the bureau that will alert you when anyone is checking your credit history. Be aware that no one has the right to check your credit history without your authorization.

Developing a Credit History

There are several ways you can develop a credit history; the fastest way is to get a cell phone. While it is not a credit card, cell phone companies pull a credit history before giving you a cell phone, and they can report late or delinquent payments to the bureau. If it applies to you, you may also take advantage of the new immigrant program at most banks to get a credit card within the first few months of arriving in Canada. When you are a young person, the banks will offer you a student Visa or MasterCard when you get into college. If you are none of the above, you can go to a department store like Canadian Tire or a furniture store like The Brick and buy an item and request that you want it on the store’s credit card as long as you can pay a substantial part of the money required. Most stores will give you a credit card, which will help you create your credit history. It is called a credit history because it is the history of your credit usage. It is important how you use credit, not the amount of credit you have. For example, if you make your required monthly payment on or before the due date, you will develop a good credit history. Some people get a credit card, use it, and pay out the entire balance monthly. While that is good, when you have...