Graham Christian, Content strategist
First off, if you’re reading this as a newcomer to Canada, welcome!
Rebuilding your credit history from scratch in a new country is a challenge. And if you’re new to credit in general, learning about how it works can feel overwhelming. Whichever group you fall into, there are plenty of ways to begin the process and work towards an impressive credit history in Canada. Read on as we discuss the most important things to know about credit, and highlight the steps you can take to start things off on the right foot. Those are:
- Applying for a credit card
- Applying for a cell phone
- Applying for a car loan
- Paying your bills on time
Find the best credit cards without impacting your credit score
Why building credit is important
Building credit is important because it tells money lenders (such as banks) that you’re a responsible and trustworthy borrower. Having a credit history and good credit score are essential if you want to own credit cards, buy a cell phone, or take out a car loan and a mortgage, so developing a good track record early is always a great idea.
How a credit score works in Canada
Your credit score is a three-digit number that represents your history of repayment. This number tells money lenders how good you are at paying your bills or repaying loans, and they will use it to help make a decision about whether or not to give you further credit. The more responsible you are, the higher the number will go (660 or over is considered good), and the more likely you are to be approved for credit cards or loans. Typically, your credit score is calculated based on five things:
- The length of your credit history
- Your credit card balances
- Your missed payment history
- Outstanding debts
- History of bankruptcy
What is credit history?
Your credit history is a record that lenders use to help them see how reliable you are when you borrow money. It contains information from banks, stores, and lenders about your past credit behaviour which typically stays on your file for about seven years.
The longer your credit history is (providing it’s positive), the better you will look to potential lenders. A long credit history tells them you’ve been using credit responsibly for a number of years, and this will make them feel more confident about lending you money.
Banks typically begin using your credit history after it’s been in good standing for 18 months. But that’s not the only thing they’ll be looking at: your savings history, net worth, income and ability to provide a security deposit or a down payment all play a big role in establishing your credit history as a newcomer to Canada.
4 ways to build credit as a newcomer to Canada
Apply for a credit card
The best way to start building credit in Canada is to apply for a credit card. Using a credit card regularly and paying off your full statement on time every month will steadily increase your credit score and history.
If you’re a newcomer to Canada with little to no credit history, however, being approved for most unsecured credit cards (those that provide credit up front and require monthly repayment) can be very difficult. Thankfully, there are a few great alternatives available.
Secured credit cards are a great option for those needing to build credit. Unlike other credit cards, they require an initial deposit that acts as collateral. If you miss payments, your provider simply keeps this deposit instead. Because of this safeguard on their end, banks are more likely to approve applications for secured credit cards as there is only a limited amount of risk. Unlike prepaid credit cards (which you front load with your own money), secured credit cards report to credit bureaus and can be used to grow your credit history and improve your score.
You also may want to consider applying for a student credit card. These credit cards are targeted to students who are most likely new to credit cards and have very little to no credit history. Because of this, they’re easy to be approved for. While they typically feature lower credit limits, they also have lower interest rates and low-to-no annual fees, making them a perfect card for anyone starting their credit journey.
If you’re loyal to a specific retailer, store credit cards are usually easier to be approved for and can save you money over the long term. Just make sure that your selected card reports to a Canadian credit bureau, as some don’t.
In addition, many Canadian banks offer
Apply for a cell phone
If you’re starting a new life in Canada, you’re going to need a phone. And thankfully, getting a cell phone plan is another great way to build your credit.
Most wireless providers in Canada don’t require a credit history to apply and will help you build your credit as long as you make your payments on time. Just make sure you sign up for a post-paid cell phone plan, as prepaid phones (which require money up front for use) won’t further your goal.
Apply for a car loan
Providing you’re legally able to drive in your province, applying for a car loan can assist you in growing your credit.
You can do this by:
- Financing a car through an automotive dealer. One thing to remember is that this type of financing typically comes with a higher interest rate, so make sure you’ve got the money to make regular payments before you sign anything.
- Asking your bank about getting a car loan. If you have a good relationship with them, you may be able to negotiate a better interest rate than you would through a dealer or finance company.
- Financing a car through an independent finance company that specializes in car loans
Pay your bills on time
Of course, none of the above methods of building your credit will work very well if you don’t pay your bills. A long history of on-time, full payments will have the most positive impact on your credit score and history, so make sure to use your credit responsibly and keep on top of your statements so that you don’t fall behind.
Looking for a secured credit card?
5 credit tips for newcomers to Canada
Use credit wisely
If you’re new to owning a credit card, it can be an exciting step, but it’s important to learn how to use your new card responsibly.
Always be aware of your credit limit and how much of it you’ve used per month. One element that plays a part in deciding your credit score is your credit utilization ratio. This is a percentage that represents how much of your available credit you’ve spent. Experts agree that you shouldn’t spend more than 30% of your total credit per month. That means that if you have $3000 of available credit, your monthly balance should never exceed $900.
To avoid overspending, ask yourself in the moment: “is this something I could afford without a credit card?” If the answer is no, it’s a good idea to walk away and resolve to set up a savings plan if it’s something you truly desire.
Keep a budget
Budgets are an important part of financial planning. In fact, a Government of Canada survey found that people who keep budgets are much more likely to effectively manage their debt and day-to-day expenses.
Using a budget, you can compare your expenses to your income and assign a certain amount of money to each category. This way, you can ensure that you’ll always have enough money left over for bills, building a good credit history with every full, on-time payment you make.
Don’t apply for credit too often
While applications for a credit card, car loan, or cell phone plan are all great ways to build your credit, be careful about applying for too many of these products at once. Each time, the provider may ask to check your credit, which means they want to contact a Canadian credit bureau to view your credit report. This is referred to as a credit check, and there are two types:
- A hard credit check, which normally happens when you apply for a credit card, personal loan, mortgage, or cell phone. These appear on your credit report for anyone to view and can sometimes knock a few points off your credit score each time they happen. If you have too many in a short period of time, it can have a damaging impact on your credit score. Lenders may also be wary of giving you credit, thinking your spending is out of control.
- A soft credit check, which happens when you request your own credit report or a business you have an existing relationship with want to update their records. These are only viewable by you, and don’t negatively impact your credit score.
To avoid too many hard credit checks, limit the amount of times you apply for credit and only apply when you absolutely need to.
Monitor your credit
As your credit grows, it’s important to keep an eye on it each month. You can do this by accessing your current credit score through a soft credit check.
In addition, make sure to request a free online credit report once per year from a Canadian credit bureau such as TransUnion or Equifax. Scan the report for any errors or fraudulent activity you may notice and report anything you find strange or incorrect to your credit bureau.
Diversify your credit
In Canada, having a diverse credit portfolio (credit cards, car loan, personal loan, etc) can increase your credit score by showing lenders that you understand credit and can handle it responsibly. That being said, if you’re still very new to having credit, experts advise starting with one credit card and paying it off regularly month by month. Once you’ve become more established and maintained good credit for at least a year, you can begin looking into getting different types of credit.
Just remember not to take on more than you can handle and pay your bills regularly, or your score could ultimately suffer.
Avoid payday loans
It may be tempting at times to succumb to the temptation of payday loans. Their advertising can be very alluring, and these companies make a habit of preying on Canadian immigrants who are still finding their footing in a new country. Payday loan organizations typically don’t require borrowers to have any credit history, but the sky-high interest rates on their loans often trap newcomers in a challenging cycle of debt.
If you’re in need of emergency money and have an unsecured credit card, you can take out a cash advance. These also come with higher interest rates, but it still won’t be as high as a payday loan company, and it’s easier to negotiate with a trusted financial institution than a third-party loan company.
The bottom line
Starting over in a new country can be tough for a number of reasons, but making your credit a priority can start you off in the right direction and set you up for success in the years ahead.
Follow our tips above, and be sure to share any of your own in your comment section below.