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Written By
Corinna Frattini
Jan 26, 2024
•Building Credit
A lesson many newcomers learn when they arrive in Canada is that you need credit to pay for large expenses, buy a car, or purchase a home. However, it’s difficult to borrow without a credit history in Canada. Canadian lenders typically check each applicant’s credit files at one of the main credit reporting agencies (Equifax Canada and TransUnion). This file is like a financial report card that tracks how much you borrow and how quickly you pay it back, to calculate your credit rating and credit score.
Without a credit history, newcomers may need a loan co-signer with a Canadian credit rating, and considerable assets as collateral, or they must demonstrate a history of stable income in Canada to receive a loan. Fortunately, you can start to build your credit record and history shortly after you arrive in Canada.
The financial decisions you make when you arrive in Canada have a huge impact on your credit history and score. The concept of credit can sometimes lead to a debate about how it can help, or hurt you when you are building your credit rating. On one hand, credit can be a fantastic tool to help you:
On the other hand, if poorly managed, credit can haunt you for many years, and make you miss out on financial opportunities. Creditors can run a credit check on you to assess if you are a low-risk or high-risk borrower. They will also decide to grant or deny you a loan or charge you a higher interest rate.
Your credit history shows lenders that you are responsible when repaying your financial obligations. Whether that is your monthly rent, utility bills, loans, etc. If you come from a country with credit bureaus, you know how important your credit history is. Maintaining a good credit history in Canada is also important. We’ll share tips to help you build and maintain a healthy credit report. With a strong credit history, you can save money and have more financial freedom.
So what is your credit score when you come to Canada? Nothing. Think of it as a blank slate. Your financial habits will dictate the direction of your credit rating up or down.
Your credit history or credit rating starts the first time you get a credit card or loan in your name from a Canadian bank. You can begin by applying for and using a credit card responsibly.
Even if you don’t have immediate plans to buy a house or vehicle, it’s good to establish a credit history, since banks may give special consideration to recent newcomers.
Newcomers may be eligible for a ‘secured’ credit card. A secured credit card is different than a regular credit card because it requires a security deposit equal to the amount of the credit limit. Think of it as a stepping stone to getting an unsecured credit card. Such special offers may be more difficult to obtain later, especially if your income does not grow as fast as you had hoped. A credit card is also useful for larger purchases and as a secondary piece of identification.
Your credit score is important for several reasons:
2. Landlords will conduct a credit check before renting their property to you.
3. Some employers will conduct a credit check before they make a job offer. This is common in some roles at banks and other financial institutions such as insurance companies.
Your credit score can fall between the range of 300 – 900. Generally, and depending on the credit score model that your financial institute is using a good score is greater than 680. As a benchmark, to get a mortgage to buy a house in Canada, you need a credit score between 600 – 700. If your credit score is lower than 600, you will want to take steps to increase your credit score.
Once you receive a credit card, use it wisely to establish a credit score so that lenders will have confidence in your ability to repay loans.
Your credit score can fall between 300 – 900 points. You require a minimum of 650 points to qualify for a loan. It’s difficult to get a loan or receive new credit with a low score. However, if you have a low credit score, you can improve your score by carefully managing your credit use.
Join us for an eye-opening session on how to build your financial future in Canada with confidence. This free webinar is hosted in partnership with Scotiabank, a trusted leader in newcomer banking. Together, we’ll guide you through how the Canadian banking system works and share free tools and strategies to help you plan, save, and invest wisely as a newcomer.
REGISTER FOR THE WEBINARIf possible, avoid using more than 30% of your credit limit (balance-to-limit ratio). For example, if you have a credit limit of $1,000, you should try not to spend more than $300 and pay the bill in full by the due date.
Your credit score may decline if your balance-to-limit ratio exceeds 30% because it indicates to creditors that you are a higher-risk borrower.
It’s best to start with only one until you are financially comfortable enough to afford more. Avoid opening many credit accounts. Many credit card accounts can signal financial distress to lenders, especially if they all carry a balance on them.
Your credit history is one of the things landlords want to see before giving out their home to you. Your credit history will tell the landlord how reliably you pay debt. A good score and credit report in Canada will show the landlord you are reliable and will likely pay your rent on time. This is important to landlords as it guides their decision about who to rent their home or avoid.
While this arrangement is great for landlords, it can be problematic for newcomers looking to rent a home. If you are a newcomer to Canada, you likely will not have a credit history. It takes a minimum of six months to build a credit history. Because of this, it can often be hard to convince a landlord that you will be a reliable tenant. However, there are some tips that you can follow to rent a home without a credit history.
The first thing you can do is show proof to your future landlord that you have a good amount of savings in your bank account. This will tell the landlord that you have enough money to pay the rent and will pay it on time.
If you don’t have large savings, your top priority is to secure a source of income. Once you have done that, you can show proof of income to your landlord. This will also satisfy landlords because it means that you have enough stable income to pay the rent each month.
In the meantime, pay any bills you have on time to show lenders that you are financially responsible. Over time, you will build a strong credit report in Canada that can open doors to your financial goals.
Get a credit card or two, and use them, but use them sensibly. Pay off your balance monthly and avoid exceeding your limit to show potential lenders you are reliable.
Paying in full each month will reduce the amount of interest you pay. And with the average credit card interest rate at approximately 20%, any balance on your credit card can be expensive. But, if you don’t pay the balance in full each month, pay attention to how much you pay in interest.
If you can’t pay the full balance on your credit card, at least pay the minimum balance and make regular payments, to pay debts as quickly as possible. But, avoid missing payments. Missing payments can damage your credit score and make it difficult to get a future loan such as a car loan, or mortgage.
Using your credit card for cash advances is even more expensive. Typically, the interest rate is higher and you pay interest from the date of the cash advance. There is no grace period like there is for a regular credit card purchase.
On top of paying your monthly bills and loan installments on time, be careful when you sign up for services such as cable, telephone, internet, gym memberships, and other monthly subscriptions. Check the cancellation fees and deadlines when you sign up for services. Otherwise, these fees can be high.
Ask questions about your contract if there is anything that you do not clearly understand.
Remember to cancel or transfer your services and utilities when you move to a new address. Sometimes final bills end up in collections out of sheer neglect, and from collections, they land on your credit report for the next six years. This will negatively affect your credit report in Canada. Keep track of changes and record the date, the names of the agents you speak to, and your case number. Keep any receipts to prove that you cancelled the service.
Don’t be complacent with your payments if you hit a rough patch such as a job loss. Call your creditors and negotiate monthly payments. They will likely be willing to help you because sending outstanding accounts to collections will cost them money. Cancel or suspend services you can do without, rather than have the bills rack up.
It’s wise to live within your financial means. As the saying goes, “It’s not how much you earn, it’s how much you spend.”
Most banks including Scotiabank offer account holders this facility. Alternatively, use free services like Borrowell to monitor your credit. If you notice outstanding payments you have paid off on your report you should inform the reporting agency in writing so that this may be removed.
Credit reporting agencies such as Equifax and TransUnion record your credit history. Your credit report in Canada will contain information on your:
Collections items stay on your credit report for six years, and legal items stay for ten years. So it’s essential to practice good financial habits that don’t jeopardize your credit rating. Your credit history speaks volumes to lenders about what kind of risks they take when they agree to lend you money. It takes a long time to build a credit history. Yet, it’s easy to sabotage and takes even longer to rebuild.
So, can you live without credit? Yes. But, should you try to do without it? No. Because without credit, it will be difficult to improve your living standards, at the very least, not as quickly as you would like. And, when it comes to making major purchases such as buying your first home, a strong credit report in Canada is essential. When you manage how you use credit, you’ll remain in good financial standing and be able to secure credit to achieve your important dreams.
WRITTEN BY
Corinna Frattini
Senior Editor, Prepare for Canada
Corinna Frattini is the Senior Editor and Content Director for Prepare for Canada. She contributes articles to help newcomers achieve their goals in key areas related to living, working, and settling in Canada. With an extensive background in human resources and leadership development, her articles focus on what Canadian employers seek and how newcomers can continue their careers in Canada.
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