Published July 26, 2023 • 10 Min Read
Many newcomers to Canada are unfamiliar with credit, credit cards, and even the concept of credit histories. Understanding how credit works in Canada can help you pay for day-to-day expenses while building your financial future.
If you’re a newcomer to Canada, you might not have heard of a credit score before. However, a credit score or credit rating may affect your finances, employment, and even your housing in Canada.
This article can help you learn about credit histories, how credit scores work, and how to build and maintain a score to help reach your goals in your new home, Canada.
What is your credit score?
Your credit score is a three-digit number, calculated by the credit bureaus, that indicates how well you’ve managed credit in the past, and as a result, assesses the likelihood of you repaying future debt. In Canada, credit scores range from 300 to 900. The higher the number, the better the score.
Essentially, each time you get credit (or borrow money) from a bank or financial institution, or pay a bill, information on your credit utilization, repayment history, missed payments, outstanding balance. Payment timeliness get shared with the credit bureaus over time. These factors go into the building of your credit history, and your credit score is a numeric snapshot of your credit history.
As a newcomer, your credit score does not start at zero. In fact, the lowest possible credit score (300) is allocated to people with bad credit history, rather than no credit history.
Why does your credit history matter in Canada?
Banks, other financial institutions, employers, and even landlords can ask to run a “credit check” on you. This involves accessing and viewing your credit report — with your consent — to make lending (or renting or hiring) decisions.
Having a high credit score may make it easier for you to get a personal loan, a line of credit, a credit card, or a mortgage. A strong credit score may also allow you to negotiate better terms like a lower interest rate. Having a good credit score can also reassure a potential landlord that you have a good track record of making payments on time and can be in your favour when applying to rent a home. Some employers use credit checks to verify whether candidates have a good track record of managing their own money.
Your credit score is important, but for newcomers, there’s a challenge. Your credit history from another country does not typically carry over to Canada, and you must start building your Canadian credit history from scratch.
How to build a strong credit history in Canada
As a newcomer, you’ll be building your credit history in Canada from the beginning. Here are some tips to help you improve your credit score as a newcomer:
1. Get a social insurance number (SIN)
A social insurance number (SIN) is a unique identifying number you need to work in Canada or access government programs. It’s also required to open many types of bank accounts, especially credit accounts. You can apply for one online or at a Service Canada Centre.
2. Choose and use a Canadian credit card
Responsibly using a credit card is one of the fastest ways to build a credit score, but as someone without a credit history, you might have trouble getting one. Luckily, some banks offer credit cards specifically designed for newcomers who don’t have a Canadian credit history yet.
Even if you’re unable to qualify for a newcomer credit card, you may be able to get a secured credit card from a Canadian financial institution. A secured credit card requires a security deposit, and typically, the credit limit you get will be the same as the amount of your deposit with the institution. Over time, as your credit history improves, you may qualify for better credit cards with higher credit limits.
However, it isn’t enough to get a credit card, you must also use it regularly. As a newcomer, you can start using your credit card for small, ongoing purchases, such as groceries, utilities, or even coffee.
Although, most financial institutions offer newcomers low credit limits, you can get a credit limit of up to $15,000 on an RBC Cash Back Mastercard, depending on your income and assets. Moreover, you may be eligible for increases in your credit limit as your Canadian credit history improves.
3. Keep your borrowing under control
Credit bureaus are watching your “credit utilization ratio,” which is a way of saying how much debt you have compared to how much credit you have. Keep track of your overall credit limit (across all credit products) and keep your spending or usage under 35 per cent of your total credit limit. For instance, if your credit card limit is $3,000, keep your spending under $1,050 in each billing cycle.
Since some newcomers start with credit cards that have a low credit limit, it’s crucial to ensure that your spending doesn’t accidentally go over your credit limit. Most financial institutions charge a fee if you make credit card transactions over and above your approved limit.
Interest rates on credit cards can be quite high, so it’s also important that you only borrow what you can comfortably repay after each billing cycle.
4. Repay your debt on time and in full
Once you have a credit card, use it responsibly by making purchases and paying off the debt on time and in full, if you can. Most financial institutions allow a 21-day grace period at the end of your billing cycle during which you can pay your credit card bill without being charged any interest or late fees. You can pay your credit card bill through your banking app or online banking portal. Some banks allow you to preauthorize your credit card bill payment, so the amount gets automatically deducted from your chequing account on the last day of your grace period. However, you must make sure you have enough funds in your account to pay your statement balance.
If you can’t pay the full amount of a credit card bill, you should always pay the minimum payment by the due date. You can find that amount at the top of your bill.
While paying the minimum protects your credit score, some credit cards have high interest rates, so you don’t want to carry debt on them. If you cannot pay off your card, consider reducing your spending or transferring your credit balance to a low-interest credit card.
Paying your utility bills (water, electricity, etc.) may not improve your credit score, however paying them late will certainly hurt your credit score, so always pay your utilities on time and in full.
5. Get a postpaid cellphone plan, if possible
When you think about your credit score, you probably think about credit cards and loans — which are excellent for building a credit history. But did you know that cellphone companies also report to the credit bureaus? When you pay your postpaid phone bill in full and on time, you’re building your good credit history.
Unfortunately, many phone providers will insist on a credit check before issuing postpaid plans, and since newcomers to Canada do not have established credit scores, they may not always be eligible for postpaid cellphone plans upon arrival in Canada. However, this may not always be the case, especially if you already have a Canadian credit card.
It’s a good idea to contact a few cellphone companies or walk into a phone store to explore the postpaid deals available to you.
6. Limit your number of credit checks
Every time you apply for credit, whether it’s a new credit product or an increase in credit limit on an existing credit card, the bank or lender will run a credit check on you or “pull your credit report.” Credit checks by lenders evaluating whether to extend credit to you count as a “hard hit” and can lower your credit score by a few points. Too many inquiries over a short period can lead to a significant decrease in your credit score, as it may be perceived as you trying to live above your means or being desperate for credit.
However, not all credit checks count as an inquiry on your credit report. For instance, checking your own credit report or score, or having your report pulled by a non-lending stakeholder (such as an employer or landlord), is considered a “soft hit” and does not negatively impact your credit score.
You can limit the number of credit checks on your report by only applying for credit when needed. It is also a good practice to request quotes from all potential lenders within a two-week period so all those credit checks count as a single inquiry.
7. Monitor your score
Credit scores change, so you need to stay up to date. Review your report directly through the credit bureaus, Equifax or TransUnion, or see if you have free access to your score through your financial institution’s online banking portal.
Make sure you check for errors in your credit card or loan accounts or your personal information. Credit reports from Equifax and TransUnion may differ slightly, so make sure you check both reports regularly. Inconsistencies on your credit report can be a sign of fraud, so be sure to report any issues to the credit bureaus without delay.
8. Diversify your credit portfolio
Although a credit card might be sufficient to meet your initial financial needs in Canada, your requirements will likely change and grow over time. Having a mix of credit products, such as a credit card, loan, line of credit, or mortgage, may positively impact your credit history as you become more financially established in Canada. However, as a newcomer, you should avoid taking on too much debt and should only borrow money you can repay.
9. Give it time
The length of your credit history is one of the most important factors to impact your credit score. As a newcomer, your credit accounts are brand new, and the credit agencies don’t have a lot of information about your credit usage and repayment patterns. However, this will change over time, as you begin to take and repay credit wisely using your credit card or other credit products.
10. Be proactive
Missed payments stay on your credit report for several years, so make sure you keep track of due dates and make your payments on time. If your credit score dips, it will improve again over time if you stick to good money habits. Stay punctual about paying off your monthly bills and try to pay them in full. Pay down existing debt to reduce your credit utilization ratio, and limit the amount of credit applications you make, such as for a new credit card or a loan.
Visit the RBC Newcomers’ Hub for more information about banking in Canada. If you’re looking for more information on building your credit score from scratch, speak to an RBC Newcomer Advisor for guidance and tips.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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