Let’s start with the basics – credit report, credit score, and credit history. And we shall see how vital it is to ensure that you have a good credit score.
Simply speaking, a credit score is a three-digit number (usually between 300 and 900) based on the financial information in your credit report. It shows how well you manage credit, how fiscally responsible you are, and how risky it would be to lend you money.
Credit Reports and Credit History
Your credit score is calculated using a formula based on your credit report. A credit report is created when you borrow money or apply for credit for the first time. Your lenders share your accounts’ information with the credit bureaus, and your credit report starts taking shape.
Your credit history is the total of your credit report.
Why is a Good Credit Score So Important?
A higher credit score can help you borrow money, rent a home and get a car loan. It can positively influence you getting a job or promotion and provide you with insurance or a mortgage. A good credit report opens up more opportunities in nearly every financial decision you make in your life and help you save money.
Who looks at your credit scores?
Banks, businesses or individuals use your credit report to help them make decisions about you. These include credit card companies, car leasing companies, mobile phone companies, insurance companies, government, employers, and landlords.
Getting approved for credit products such as a credit card, car loan, or mortgage can be more challenging if you have a poor credit score. It can affect your ability to rent a house or apartment or get hired for a job.
What is a Minimum Score?
The consumer average credit score in Canada is between 300 and 900, with 900 being the absolute top score. Theoretically, the absolute minimum score is 300, though it is usually higher than that.
Equifax and TransUnion are Canada’s two credit reporting agencies, and each has a rating system for credit rating. Credit bureaus look at your credit score, your credit report, and other factors such as employment status, expenses to income ratio, outstanding debt levels, etc., to determine your creditworthiness.
Different lenders have varying criteria for extending the credit limit, and we shall take a closer look at how a good credit score can help you score a rental property.
Landlords and Tenants
Real Estate as an Investment
Many Canadians buy homes, commercial buildings, and other rental properties to diversify their investments. Historically,real estate investmentsare an excellent way to create a regular income-generating source
According to the Global Property Guide, you can earn a gross rental return of around 3%-5% in the Canadian Real Estate market.
The image below shows the results of the Rental Market Survey, conducted by the Canadian Mortgage and Corporation (CMHC). The total number of rental apartments across the significant CMAs in Canada and the average rent is tabulated as of October 2021.
Vacancy Rates (%), Average Rents ($), Number of Rental Condominium Apartments, and Percentage of Condominium Apartments in Rental. Source: Rental Market Survey, 2022 (CMHC)
A Landlordis the owner of a rental unit who permits occupancy to a tenant for a fixed monthly rent. In return, it is expected that a habitable unit is provided; that is, the property must be fit for a person to live in, free from defects or hazards, and fully compliant with safety, health, housing, and maintenance standards.
A tenant is a person who pays rent to the landlord in return for the right to occupy a property.
A tenant must pay the rent on time and honor the lease or tenancy agreement. They must also keep the unit clean and repair any damage they cause. In addition, a trustworthy tenant is also expected to obey the laws and by-laws of the city they reside in.
The Lease or Rental Agreement
A lease agreement is a contract between a tenant and a landlord that gives the tenant the right to live in the property for a fixed period, usually covering a lease term of 6 to 12 months.
The Tango Between Landlords and Tenants
The Ideal Tenant
Landlords prefer a prospective tenant with good credit references and a smooth experience with previous landlords. Property managers and landlords generally accept individuals who are likely to make timely rent payments and treat the property well. And a good credit score is an excellent advantage to the tenant in Canada’s competitive rental market.
Therefore, a prospective landlord will insist on ID, references, and financial information such as your income, credit score, and credit reports, along with your rental application.
Protection for the Tenant
Canadian landlords must comply with the Personal Information Protection and Electronic Documents Act (PIPEDA). This Act defines the ground rules for how landlords must handle their tenants’ personal information.
TheI Want to Rentpage on the Canada Mortgage and Housing Corporation (CMHC) website can give you authentic information on landlord and tenant exchanges like signing a lease, getting a record check, and making payments.
Laws and Regulations
Landlord and tenant regulations vary across Canada as each province and territory has different government departments or ministries that oversee these laws. However, the rights and responsibilities of residential landlords and tenants are balanced and protected by stringent regulations to help avoid potential problems.
Credit checks are vital to landlords and property management companies; they are pretty fail-proof methods of ascertaining whether a prospective tenant has a decent income and is in a stable financial situation so that they can pay rent on time.
Potential landlords check a prospective tenant’s credit accounts because they provide crucial information about past debts with previous landlords. A credit check can also help the landlord decide on security deposits. However, they can only perform credit checks with the tenant’s explicit written consent.
When a prospective landlord or property manager checks your credit profile, it appears as a hard credit inquiry on your credit report and can temporarily impact the average credit score.
Factors that Affect Your Credit Score
Since credit bureaus and lenders don’t readily share their formulas for calculating credit scores, it is not easy to know precisely how your credit score will affect your actions or vice versa.
Having said that, the most common factors that affect your exact score will include the following.
This is by far the most critical factor and includes information on whether you make late payments on time or late, how often you make late payments, how late they were, how much you owe, etc.
Also called the credit utilization ratio, this factor considers how close your spending is to the total available credit limit. This especially applies to credit cards and other lines of credit.
Length of Credit History
Your credit history includes how old your credit accounts are. Each rating system will evaluate this differently, but the number of years your oldest and newest accounts have been open influences the credit score.
Bankruptcies, collection issues, liens, lawsuits, etc., are all part of Public records, and if they appear on your credit report, you may have a low credit score.
While a lender decides whether to extend credit to you, they ask for a credit check (also called credit inquiries or hard checks) noted in your credit report. These can temporarily impact your credit score.
A Ready Reckoner for Credit Scores
A quick look at the table below gives you a fair idea of what is considered a bad credit score and the credit score you need to maintain for optimal credit rating.
What Does it Mean?
The customer does not pay bills on time, may have existing debt, and is generally considered to have a low credit score.
The customer poses a higher risk to lending institutions and may be considered a poor credit bet.
The customer is deemed to have a good credit score and be financially responsible.
This is considered a very good credit score, and the customer can get better interest rates.
A credit score in the high 700s and 800s is considered near perfect. The customer will have no issues getting approved for a loan.
What Can You Do to Improve Your Credit Score?
If you look at your credit scores from Equifax and TransUnion, you may see a difference. This is normal because they use different scoring algorithms and calculations.
Your payment history is the key to higher credit scores, and it is always advisable to ensure that you follow a few tips to help maintain a good credit score.
Pay Bills on Time, Every Time
It is always a sound financial practice to make your payments on time every month. These include all credit accounts such as credit cards, other lines of credit, cell phone accounts, retail department store accounts, car loans, student loans, finance company accounts, home equity loans and mortgage loans.
If you cannot pay the entire amount, ensure that the minimum payment is made. You may contact the lender if you think you cannot pay a bill and work out an alternative plan. Do not skip any payments, even if the bill is under dispute.
Stay Well Within Credit Limits
Do not exceed your credit card limit and ensure that credit utilization is balanced well; keep the card balance well below the limits as far as possible.
Avoid Applying for Multiple Credit Accounts
When you apply for several credit accounts in a short period, such as a new loan or credit card, the inquiries reflect on your credit information. Several credit checks may be seen as a sign of “trying to live beyond your means” and lead to a bad credit score.
Dispute Errors on Your Credit Report
You should check your credit report regularly and check it to ensure your personal information is correct. Contact the lender or creditor if you find inaccurate or incomplete information. You can also file a dispute with the credit bureau that provided the report.
A Few Points to Simplify Your Apartment Search
There are a few ways to show prospective landlords that you can be a trustworthy tenant despite a bad credit score.
Landlords prefer a tenant who can pay rent on time and treats the property well, with no previous landlord disputes. If the tenant has no credit card debt and can pay rent upfront for several months, the landlord may settle for proof of income or receipts of rent paid to previous landlords.
In addition, if you can share how you are working towards a better credit score and a more stable financial situation, you may persuade the landlord to accept your rental application.
You may encounter “No Credit Check Apartments” listings during your apartment search. You may be tempted but remember that these property managers expect that their prospective tenants are desperate. The apartment rental may not be a smooth experience.
What is the Lowest Credit Score for Renting an Apartment in Canada?
Your credit score plays a big part in whether your rental application is accepted. Many landlords check personal references, too, along with requesting a credit check.
In addition, a higher credit score is vital in a competitive housing market. An apartment in an upmarket area will attract a higher rent price with a corresponding increase in living expenses. The landlord may set 700 as their minimal credit score in such cases.
In most Canadian cities, prospective tenants withcredit scores of 660 or higherwill have an easier time with their apartment rental applications.
A credit score is intended to help lenders decide whether to risk a loan. The risk might involve giving someone a loan, offering a credit card, or approving their apartment rental application. Lenders must have a fiscally logical answer to whether they will pay their rent or make the payments.
Equifax and TransUnion collect information only about your financial accounts in Canada. Though positive information is recorded in your credit report indefinitely, negative information is retained for about six years. However, some credit records may remain for a shorter or longer period. This allows you to take the necessary steps to improve your credit score.
While a good credit score is essential for a financially stable life in Canada, it is only one of several avenues of information to determine your creditworthiness. Everyone’s finances and credit are different, and there’s no specific “magic number” to ensure better loan rates and terms.
So, even though 660 is popularly held as the minimum credit score for renting an apartment, Canada offers other financial avenues for tenants. Contact an excellentreal estate brokerageto help you get a rental apartment with minimal hassle.