Advice & Tips Ask an Expert May/June 2022

Q: How important is your personal credit report when you look to finance your franchise?

A: Most lenders will require a credit check before making a decision on whether to extend credit for your franchise. How you’ve managed your personal credit is a good indication of how you’ll handle your franchise credit. It’s important to understand how the choices you’ve made towards handling your personal credit may impact your future access to credit.

Your credit report is a review of your financial history. It lists your credit history with banks, retailers, finance companies, and even cell phone companies. The report will show up to an 18-month history of your payments on the outstanding debt you have. If you missed a payment or if you were late on a payment, it’s reflected in your credit report. The report will also show closed credit you’ve had.

The credit report will also provide your full legal name, any alias you may have, your address, birthdate, social insurance number, and your current and previous employer. If you’ve had a bankruptcy or a judgement placed against you, those will also be reflected on your credit report. Judgements may include speeding tickets, taxes that are past due, or family support payments. Lenders who’ve pulled your credit report will also show on your credit report.

What’s not included in your credit report is how much income you claim on your personal tax return or balances in your bank’s accounts (chequing, savings, or investments). Your ethnicity, medical history, or criminal reports (if applicable) aren’t included in a credit report.

If you’re new to Canada or have never applied for any credit, there are some simple ways you can establish credit. First, if you’ve been living at the same address for a number of months and/or have a consistent pay cheque, you can look to a big box retailer to a store credit card. Those are usually the easiest to qualify for. Secondly, you can approach a bank or credit union and apply for a secured loan or credit card. A secured loan or credit card is where you provide the bank or credit union cash to hold as collateral. The third option is to have a co-signer or co-applicant on the credit request.  Both you and the co-signer or co-applicant are responsible for the credit. After having the credit for a period of time, you can approach your lending to see if you’ve established enough history to qualify on your own.

When you establish credit, a good rule of thumb is not to utilize 100 per cent of the limit. It’s best to try and keep your utilization at 35 per cent. For example, if you a $1,000 credit line, don’t use more than $350 at a given time. Doing this will help improve your credit report. 

Another aspect to consider when applying for credit is if you have several credit cards, department store credit cards, or lines of credit with established limits with zero balances. Your lender will see that you have the potential to go into additional debt that they believe could impact your chances of being approved. A good rule of thumb is not to have more than two credit cards. Remember anyone that you’ve co-signed for or been a co-applicant for will also impact your credit.

You can review your personal credit report by checking out either TransUnion or Equifax. These companies are the two primary credit reporting companies that lenders use in Canada. The report will show you your FICO (Fair, Isaac, and Company) score, which is a numerical score rating your credit. The score goes as high as 900, and the higher your score, the better your credit is and potentially the better rate you can quality for.

It’s always good practice to review your credit report annually so you can see who’s pulled your credit reports as well as to potentially stop identity theft you may not be aware of if a credit card or loan has been established under your name. Some banks and credit unions have the ability through their online banking platforms to allow you to review your credit report monthly. Doing this doesn’t impact your credit history but is a good practice before you apply for additional lending. 

You’ve worked hard to either start or grow your franchise. Don’t let a poor personal credit report get in the way of your franchise growth.

Graeme Green
Director of Franchising Western Canada
RBC
graeme.green@rbc.com

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