Credit scores don’t follow you when you move to North America, so one of the first things you need to start thinking about is how to build credit score in Canada as a new immigrant. If you’re like me and from a country where cash is still king, and most people try to avoid debt like the plague, it can be a bit of a struggle to be told that you need to borrow money to be considered a reasonable financial risk. I don’t know if it will ever make sense to me, but I understand it to be inescapable and understanding how it works is vital to the financial establishment of a newcomer. As a middle-class millennial mom, my goals include financial health, and that means, as a friend of mine will say, ‘my name affi good a road’. That is, have a good credit score.
As a result, I’ve been curbing my spending habits for years, getting comfortable with using credit cards. Even so, how I used my credit card in Jamaica is a bit different than how I used it in Canada, so I can build (good) credit fast. In less than a year, I’ve diligently worked my credit up to the mid-700s. The goal is above 800 and to maintain that score over time. As with all things, to use the system to our benefit, we need to understand how it works. So let’s review the system.
My usual disclaimer for posts like this one. I am not a financial advisor. This is not meant to be financial advice, but rather a recount of what I have learned and my personal research and experiences. If you need advice, speak with a financial services provider.
What are credit scores anyway?
Credit is an arrangement that an institution will allow you the ability to purchase something with a line of credit – with the understanding that you will pay for it later. Credit is usually offered for a fee, an agreed-upon percentage of the amount borrowed. This is the interest rate. Credit is tracked by assigning a three-number score to an individual, indicative of the individual’s creditworthiness. It tracks the likelihood that the person will repay the money they’ve borrowed. The higher the score, the lower financial institutions consider the individual as a risk. Consequently, individuals with higher credit scores are more likely to be approved for loans (including mortgages), offered better (lower) interest rates on these loans, offered higher credit limits and so on. In Canada, credit scores range between 300 and 900.
In general, a good credit score in Canada is 650 and above, with the average Canadian having a credit score of 700. So, if you can maintain a credit score above 700 while you work on building your credit history length, you’ll be in great shape after about two years. That is how you build credit score in Canada. Keep reading for step-by-step tactics.
These scores are assigned by credit rating agencies (CRAs) using the information reports they receive from institutions about the individual’s history of making payments. In Canada, the main CRAs are TransUnion and Equifax. According to both agencies, scores carry the following weight.
- Excellent – 781-850
- Very Good – 720-780
- Good/Fair Credit – 658-719
- Poor – 601-657
- Very Poor – 300-600
You may find that the scale differs slightly between TransUnion and Equifax as a result of varying algorithms the companies use and based on some organizations reporting to one credit agency and not the other. It’s nothing to worry about.
As a new immigrant, your credit history does not exist, therefore your will need to start establishing, building and maintaining your credit as soon as you hit the ground. Note though that as you build, each financial step you take (or don’t) can impact your score positively or negatively. Activities that can negatively impact your score include new applications for:
- New lines of credit
- Higher credit on existing lines
- Applications for loans
Straight off the bat, as a new immigrant, these activities are unavoidable, but if you keep them to a minimum and only employ them when absolutely necessary, they can work in your favour. Some other activities that can negatively impact your score are:
- Late/non-payment of bills fines, loans, etc.
- High debt-to-credit or debt-to-income ratio
- Frequent credit checks
- Identity theft or fraud
7 Steps to Establishing Good Credit as a Canadian Immigrant
Now that we’ve determined the activities we want to avoid and/or keep to a minimum, let’s look at those we want to do.
1. Open a revolving line of credit
A revolving line of credit is a credit account you can borrow from and repay for as long as it remains open. The fastest and easiest way to build credit score in Canada as a new immigrant is to obtain a credit card as soon as you land (or are able to). If you can, you can also get a line of credit. But for the credit card, do so immediately. When I landed, I was obsessed with handling the credit situation straight out of the gate. Still, it took me three months to get a credit card. That three months of history long to get there could have strengthened my position. Notwithstanding, I am in a great place and it did not take long to get there.
Your credit limit will depend on a few factors, including your status when you land in Canada. That is whether you land as a permanent resident or a temporary resident. If you land as a permanent resident, banks can base your limit on the amount of money you can deposit when you open your bank account. If you land as a temporary resident, it can be based on your temporary status and the length of validity of that status. For example, if you land as an international student, some banks have accounts tailored to offer benefits and will offer a credit limit of $500 or $1000. As a former international student myself, I can tell you that isn’t great, but I resolved to use that limit to my advantage, and I have successfully, by doing the following.
2. Get a bill (or two)
One of the easiest ways to ensure you use your credit cards effectively each month is to have a bill. A phone bill is the easiest to acquire and one of the least expensive. You can get one the same day you land. Find an affordable plan that works for you and pay your bill monthly through your credit card. If you can, set up automatic payments for your bill.
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3. Pay your bills, make purchases from your new card
Pay as many of your bills as you can using your credit card. You can use your credit card for other bills for insurance, utilities and rent; however, not all landlords report rental payments. Sometimes, rent can include utilities, so you may not always have utility payments while renting.
4. Pay Your bills and debts on time
The cornerstone of your mission to build credit score in Canada as a new immigrant is to pay your bills on time. In all things, your bills and your finances make it your business to know your dates. When you open a line of credit, imprint your billing cycle and your payment due dates (they are typically the same each month). Make an Excel sheet or write them down if you have to and look at the men regularly. Set up automatic payments where you can and make sure the payment account is always furnished with enough funds. Also, take into account the time your payment will take to reach your biller. For example, a payment can be due on the 20th, but if you pay on the 20th, it may not reach the utility company until the 22nd or the 23rd. So try to pay two to three days in advance. Besides affecting your credit score, late fees are also a mess no one needs. Not me anyway.
5. Do Not make minimum payments
Take note of your billing cycle when you get a new credit card. It will be different for everyone. The date marks the date of each month when your statements close. For example, if your statement date is the 10th, your billing cycle starts on the 11th of the first month (let’s say that’s May) to the 11th of the following month (June). Once the cycle closes, another one begins, but the statement for the closed cycle will give a due date. Make sure to pay the amount on your statement. DO NOT MAKE THE MINIMUM PAYMENT.
The insanely high-interest rates will rack up on what you owe. This is how banks make their money from credit cards. Annual fees and interest rates. Leaving a balance is how you get caught in a hamster wheel of debt, which is not what you want. Not only that, the goal is to show that you are trustworthy and that you repay your debts, and not just to establish credit as a Canadian immigrant, but to establish good credit as a Canadian immigrant. PAY THE BILL IN FULL. Always.
6. Maintain a maximum utilization rate of 30%
For some reason, that is particularly strange to me; credit utilization ratio is a thing. It is the percentage of credit available to you vs how much of it you use up. It’s called your debt-credit ratio. Let’s talk about determining your credit limit. Your credit limit is the total of your combined lines of credit. For example, if you have two credit cards with a $2000 limit each and no other lines of credit, your available credit limit is $4000. If you have a $5000 credit card limit and a $20,000 line of credit at the bank, your limit is $25,000 etc.
In Canada, a utilization rate of 30 per cent or below is ideal. So if your limit is $1000 on a card, maintain utilization of under $300, etc. You do that by making sure your statement never closes with a balance over $300. Sometimes, this can be tricky, especially if you land as a temporary resident and you are offered a lower limit to start out.
7. Never go over your credit limit
If you stick with step number 5, you should never worry about this one. All the same, life happens and sometimes it may be unavoidable. In that case, your need to do damage control. In this case, try to avoid going over your credit limit at all costs.
My personal strategy to build credit score in Canada as a new immigrant
- Do not spend the money if you don’t have it in the bank.
- If you can’t buy it in cash, don’t buy it with your credit card. By following this rule, you never owe more than you have and can always cover the cost of your bill in full. This way, you avoid hefty interest rates on outstanding balances and overdraft fees.
- If your usage ratio is over 30% in a month, make two payments: one before and one after the billing period closes.
- For example, if you’re credit balance is $700, your limit is $1000 and your billing period closes on the 10th of the month-pay a minimum of $400 by the 9th of the month, then pay the balance between the 11th and whatever the statement due date is. Do not pay the whole bill. You don’t want the amount on your monthly statement to be $0.
- Here’s why – Most institutions that report on your credit activity do so once a month. If you have no balance, it is registered as no debt when the bank reports your activity. No debt/activity, no history. No history, no growth of credit score. Your goal is to show you can responsibly manage debt. Not to avoid it. Personally, since the ideal ratio is 30% in Canada, I aim for under 20% utilization.
- If you must perform activities that will lower your credit score, such as applying for a loan or a higher credit limit, do it within the month.
- As I mentioned before, most institutions only report once a month. Typically, all ‘hits’ on your credit will be lumped as one if they are within the same cycle, thereby reducing the ‘damage.’
Whew! That was a mouthful, eh? Anyway, these are my thoughts and what I have learned so far about navigating the new terrain of how to build credit score in Canada as a new immigrant. As I mentioned, cumulatively they have been working for me and in nine months, I was able to build my credit score from non-existent to over 700. Thus far, I’ve been able to circumvent a hit and hope will try to delay it for as long as I can to minimize the effects. Did you have to establish credit from scratch?
Share in the comments your tips and experience on how to build credit score in Canada as a new immigrant.
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