Canada is known for being a multicultural society and is home to millions of immigrants. As exciting as it is to move to a new country, acclimating yourself to the culture and building a stable financial foundation for yourself and your family, can be difficult. If you have dreams of buying a house or car, these can be hard to achieve as someone with no Canadian credit history.
This brings up the question: How do you start building credit in Canada?
Canada’s Credit System
As you become more accustomed to Canada, you’ll notice the benefits of having a high credit score. A credit score is a 3 digit number that ranges between 300 and 900. It allows lenders to understand the probability of a borrower’s ability to pay back a loan. The higher your score, the less risky you’ll seem to the lender, which typically results in lower interest rates and higher access to credit.
When you start building your credit, it is likely you'll have a credit score of 300. This is the starting score for anyone who is a new credit user. While this is widely regarded as a poor credit score, there are a few easy ways you can start building your credit and working towards getting a good, or even great credit score.
How To Get a High Credit Score?
In order to get a high credit score, you need to understand how it works. There are a number of different ways to calculate a credit score (the two Canadian credit Bureaus, Equifax and TransUnion, each has its own algorithms), but the 5 most common factors used are:
- Payment History - Typically carries the most weight, at around 35%, when it comes to calculating a credit score. Paying bills on time and reducing debt can help build a positive payment history.
- Credit Utilization - This refers to the amount of credit you use in comparison to how much you have available. It usually accounts for around 30% of your credit score. It’s recommended to keep your credit utilization ratio at 30% and under to refrain from negatively affecting credit.
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- Credit Length - Your credit length accounts for about 15% of your credit score and refers to the age of all your credit products. The older your credit accounts are, the more positively it will affect your credit.
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- Credit Mix - This accounts for around 10% of your total credit score. Having a diverse set of credit products such as a credit card, car loan, personal loan, and mortgage shows that you are responsible enough to handle different forms of debt.
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- Credit Inquiries - Credit inquiries make up around 10% of your credit score. As you apply for new credit products, you’ll be subject to a hard credit check. While a few credit inquiries won’t really hurt your credit, multiple credit inquiries within a short period of time can negatively affect your credit score.
It’s important to note that each company that provides credit scores has their own credit scoring model which may lead to you having more than one credit score.
How To Build Your Credit As A New Immigrant To Canada
While building your credit can be daunting at first, there are actually many ways a newcomer can build credit. In fact, it is much easier to build credit from scratch than to rebuild bad credit, particularly one ruined by bankruptcy.
Here are a few ways you can start building your credit:
Get a Credit Card
A credit card is one of the most common and convenient forms of credit in Canada. It is usually the first credit product Canadians use to start building their credit. Many banks like RBC, Scotiabank and CIBC have specialized credit cards that cater to new immigrants. These credit cards typically come with a low credit limit and require no credit history. However, there may be income and employment requirements. Depending on the card you choose, it may also come with an annual fee and special perks such as cash back, reward points, purchase security, travel insurance, and more.
Secured Credit Card
If you’re unable to get a regular credit card from a bank, you can opt for a secured credit card. A secured credit card works like a regular credit card except that it requires a deposit which is used as collateral. A secured credit card is a great option for those looking to build credit but are unable to get approved for a traditional unsecured credit card. However, there are few differences between secured and unsecured credit cards. If you are a new credit user, it may be wise to start by using a secured credit card. This will help you become more comfortable with using a credit card. The more comfortable you are with using a credit card, the easier it will be to build your credit history.
Regardless of which type of credit card you get, both will help you build credit as you continually use it. Just be sure to keep your credit utilization ratio below 30% and pay your bills on time and in full.
Rent with Someone Registered With Landlord Credit Bureau
In general, rent payments aren’t typically reported to the credit bureau in Canada. This means that your largest monthly expense won’t be helping you build your credit. However, by renting with a landlord that is registered with the Landlord Credit Bureau (LCB), you can have your rent payments reported to Equifax; one of the two major credit bureaus in Canada. The LCB is a platform that allows landlords to report payments, which in turn helps tenants improve their credit.
Get a Phone
If you plan on getting a cell phone, look for a phone provider who reports payments to the credit bureaus. A phone is a cheap and easy way to build your credit history and enhance your credit mix. However, be sure to opt for a post-paid phone plan as pre-paid plans don’t help build credit.
Get a Secured Savings Account
Getting a secured savings account will not only help you work toward building your payment history but will add variety to your credit mix; two important factors that can affect your credit score. When you apply for a secured savings account, you’ll be approved for a certain amount of funds that will be held in a secure trust account. In order to access the funds, you’ll make payments to the lender, which are reported to the credit bureaus, until the funds are paid off. This can be a great way to build credit while saving money for certain consumers.
Things to be Aware of When Establishing Credit as a New Immigrant to Canada
As a newcomer, there are certain things you should beware of when trying to establish your credit.
- Payday Loans - Payday loans may seem like an attractive option due to their convenience and accessibility, but they can actually be quite harmful. These loans have a short term and come with extremely high-interest rates (sometimes up to 500% APR) and fees which can trap you in a cycle of debt.
- Paying the Minimum - While paying the minimum payment may help avoid any late fees and any late payment on your credit report, it also has some negative effects. For one, your credit utilization ratio will increase as you continue to make purchases on your credit card. Moreover, as you delay paying your balance in full, the more interest it will accrue and the harder it will be to pay off.
- Upfront Fee - Beware of lenders that offer you a loan with the condition that you must pay an upfront fee. These are usually scammers preying on individuals who don’t know that advance fees on loans are illegal in Canada.
Bottom Line
As a new immigrant, you may face a lot of challenges, but building your credit doesn’t have to be. Start off slow, pay your bills, and before you know it, you should have enough credit history to access the credit products you want.
Disclaimer: The content provided on the Plastk Financial Inc. Blog is information to help Canadians become financially literate and learn about credit. Plastk is not responsible for building or ruining an individual's credit score or credit rating. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment, credit inquiries, and all other decisions should be made, as appropriate, only with guidance from a qualified professional.
