CANADIAN NEWCOMER 23
A What Score? How-to: Build Credit in Canada
Having a good credit score will positively impact your life in Canada, so I hope you can be more successful settling down in Canada by following the advice in this series. Let’s dig into the details of a credit score or credit report.
So, what is a credit score??
Credit basically means money. A credit score in Canada is an indicator of how good your financial situation is, according to lenders, to help them decide to loan you money.
Scores are ranked as a number between 300–900 depending on several factors.
A “good” credit score means you have a trustworthy financial profile in the eyes of banks or financial institutions. And a bad score means the opposite.
These places will lend you money (loans, lines of credit) and want to know they will get it back. Knowing how well you can manage credit, or how risky it would be for them to lend you money, is understood via the credit score.
Your credit score is calculated based on your credit report (a detailed file on your financial history/status in Canada). You:
- get more points if you use your credit well
- lose points if you have trouble with your credit
In other words, the credit score is active and will change over time. Let’s get into the details now on what your score is, where you can find it, and how you can improve it.
Why do you need a credit score in Canada?
The top situations where you will need to know your credit score are:
Getting a credit card: Usually the lender will decide how high to set the credit limit, or what rate of interest they charge you, based on your credit score
Renting an apartment or buying a home: Frequently you need to include your credit report into your application to help landlords judge the risk of leasing you their apartment/home, or for banks to qualify you to receive a mortgage (home loan)
Buying a Vehicle: A dealership will check your credit history to assess the risk to them when you lease a vehicle. Your score will affect the chance of you being approved, or the interest you will be charged
What do these things have in common? Someone (or a bank/lender) is going to take a chance on lending you money, or trusting you to pay your big bills in-full & on-time.
Where can you find your credit score?
Now you understand the Why, probably your next question will be “What’s my credit score now?”. Let’s find out!
Usually you can see you score via your bank, e.g. RBC or BMO give you access to dashboards like these:
So first, stop by your online banking homepage and see if it is accessible there!
If not, then go straight to the source; in Canada, 2 major credit bureaus (Equifax & TransUnion) manage credit scores. They will provide you with a copy of your report for free if you request it:
Here is what your score or report will look like:
What do the numbers mean?
Your next question after finding out your score will probably be “Ok, I know my score, but is it good or bad?”.
As mentioned above, credit scores range from 300–900. The median is 750, sometimes called the “magic number”. It means if you have 750 or higher, you are in the top half of the population in terms of your credit score.
- 300: The lowest score. Newcomers will start here
- 750: The magic number. It takes time; although possible in your 1st year, expect to spend more like 1–2 years (or more) to reach this level, depending on you situation
- 900: The highest score awarded for excellent credit history. It can take several years or decades to reach this score
Again, the higher your score, the lower the risk is to the bank/lender, and the better conditions you can receive when taking out a loan or applying for a new credit card.
How to read your score?
When compared to the rest of the Canadian population, you are ranked in percentiles.
E.g. for the RBC/TransUnion dashboard above, the score of 749 is in the 41–60% group, so your score is higher than 41–60% of the population that has a TransUnion credit file.
Newcomers with low scores (under 750) will have limited options for getting loans or credit cards , which is why the major banks offer specific packages for newcomers, bundling bank accounts with e.g. low-limit credit cards.
They know you will have difficulty doing better until your credit score reaches the mid-level, so they want to help you start your credit history in Canada (and also keep your business with them in future, of course!).
Check out these examples:
For further advice on how to choose a newcomer bank account, check this page out for more:
What affects your score?
Several aspects of your financial situation can help or hurt your score.
If you have a car loan, a mortgage (house loan) vs rent, if you are a recent arrival or have been here longer, how quickly you pay off your bills…
It’s impossible to know exactly how many points your credit score will change based on doing X/Y/Z. The formula behind the score is confidential to the credit bureaus/banks/lenders.
But the main factors that can affect your credit score include:
- how long you’ve had credit & how long each credit has been in your report
- if you carry a balance on your credit cards, or if you regularly miss payments, or if you fully pay off every month
- amount of your outstanding debts
- being close to, at or above your credit limit
- number of recent credit applications (often within the past 2 years)
- if you have any debts at a collection agency, any insolvency or bankruptcy
So now you know what is behind a credit score, how do you make yours better?
Keep a Low profile- don’t apply for lots of credit cards or loans
Start small. As you settle into your Canadian life, you will have reasons to apply for credit. When you do, the bank/lender will always check your credit report with one of the credit bureaus.
The more often it is checked, the lower your credit score can become
There are two types of credit checks: hard hits and soft hits.
- Hard hits: These are credit checks that will appear in your credit report and can lower your credit score. Anyone who views your credit report will see these inquiries. Examples include an application for a credit card or mortgage or car loan.
If there are too many (hard) credit checks in your credit report, banks may think that you desperately need credit and consider you as a risk
- Soft hits: These are credit checks that appear in your credit report but are private only to you. They do not affect your score in any way. An example is requesting your own credit report
To control the number of credit checks in your report:
- Limit the number of times you apply for credit
- When shopping around for a car or a mortgage, get your quotes within a two-week period. Your inquiries will be combined and treated as a single inquiry for your credit score
Stay within your limits- don’t spend too much or too frequently
Always stay within your credit limit. If you have a credit card with a $2,000 CAD limit, try to not go over that limit. You should spend only what you can afford to pay back. Spending more than the limit on your credit cards can lower your credit score.
If you want to build a responsible credit history, use your cards to pay small bills and use it regularly, e.g. use your credit card for grocery shopping, monthly utility payments, your phone bills credit history.
Check your report regularly- immediately handle any errors
Once you get your report, check for:
- Mistakes in your personal information, such as a wrong social insurance number, postal address or date of birth
- Any errors in credit card and loan usage or accounts, or any accounts which are listed that you never opened (potential identity theft)
Report any issues to the credit bureau ASAP to have it corrected.
Monitor your credit regularly with your bank, or take advantage of free services like Borrowell which can help you find any issues before they have a big impact on your credit rating.
Diversify (After time has passed)
The number of credit products you have (such as a credit card, line of credit, loans, etc.) affects your credit score. For newcomers to Canada, it is recommended to start off with a single credit card and gradually apply for other credit products at a later stage.
As you become more established in Canada, diversifying your credit and having a mix of credit products may improve your credit score. However, remember that as you apply hard hits or soft hits will potentially lower your score.
Also- if you do take out new loans, absolutely be sure you can pay back any money you borrow, or you can lower your score by carrying too much debt or being late with payments.
Summing Up
To all the newcomers looking to become more financially stable in Canada, welcome! Congratulations on reaching this stage of your journey!
Building a better credit score can seem like a long uphill journey, but hopefully the advice provided here will help things be less stressful!
Good luck on your financial journey!
If you are struggling with any aspect of Canadian Newcomer life, reach out to me via LinkedIn and let me know what you would like to know.
Resources:
- Official Canadian Government Site for credit score & credit report basics
- Borrowell Guide to Credit Score for Beginners
- Equifax “What is a Good Credit Score?” video
Previous Articles in the Series:
- Pre- & Post-Arrival Services
- Your LinkedIn Profile
- How to Structure Your Job Search
- Prepare for Your Job interview
- The Interview (In-person and Video)
- Connection Request on LinkedIn
- Networking
- Building Strong Relationships
- Resume and Cover Letter Tips
- LinkedIn Power Details
- Follow and Unfollow
- Informational Interviews
- Mentoring & Associations
- Bridging Programs
- Dealing with Rejection
- Starting a Job During COVID
- First months on the Job During COVID
- Planning your Job Search, Plan A, B, C to Z
- Canadian Experience
- Finding Temporary Accommodation
- Leasing a Home
- Healthcare in Canada
Future Topics, Coming Soon!
- Your request here!
If you have requests for any more topics, or want to add information of your own, please don’t hesitate to reach out! Good luck with your journey as a newcomer and job-seeker here in Canada!
Who Am I?
Hello, I am Garry. Nice to meet you. Here is my LinkedIn profile. After 15yrs living in Japan, I moved to Canada in late 2019. Since I got here, I have learned a lot from friends, great mentors and advisors, pre- and post-arrival services, and good old-fashioned internet research! I would like to share that advice with you and help you on your journey here in Canada.
Also earlier in 2020 I talked about some of these things in a LinkedIn article, and in a webinar with NewCanadians I discussed with some smart people about the newcomer’s job search and the impacts of COVID-19. I was also featured in a podcast of Immigrants of Toronto in early 2021. Please check them out!
