There is a lot to do when starting a new life in Canada. Not only will you have to find a new job and a place to live, but you’ll also have to start preparing for a new financial life by building credit, or establishing a history of responsible credit use.
Compared to finding the right employer or apartment, building credit can be a fairly simple process. It takes time to build strong credit in Canada, but starting off the right way can make the journey shorter — and more rewarding.
Steps to start building credit in Canada
1. Open a bank account
It may not be credit-related, but opening a bank account should be the first step in starting your credit history.
“Once that takes place, the respective financial institution reports the details back to the credit bureau,” says Aman Anand, senior director, credit risk at TransUnion. “It starts off a fresh credit file for the individual because it’s coming from a reputable financial institution.”
Starting a bank account also begins your relationship with that particular financial institution. Typically, the longer you spend as a customer with a bank, the more products and services they offer you. Just be sure to sign up for a bank account that suits your needs.
2. Get a cell phone
For many people new to Canada, a cell phone will be the first utility they’ll sign up for. That could make it the first bill you’ll be paying off regularly.
Some cell phone providers in Canada don’t require a credit check before giving out an account, but they do report their customers’ payment history to the credit bureaus.
“Any data that is reported to the bureau by a financial institution, which includes utility accounts, factor into your credit score calculation,” Anand says.
Paying your cell phone bill on time is an excellent way to get your credit history off to a good start. Signing up for automatic bill payments can help ensure that you’ll never miss a payment. You should be able to sign up for automatic payments for most of the utility bills you’ll be paying.
3. Get your first credit card
Your first credit card is a great opportunity to build credit. Every month, you get the chance to pay off your balance in full and demonstrate your creditworthiness.
You also get to control how much you charge to your card, which can keep your credit card balance low. Anand suggests keeping your balance below 35% of your credit limit to prevent it from having a negative effect on your credit score. So if your credit limit is $1,000, for example, try to keep your balance below $350.
“The higher the utilization, the more it could impact your credit score,” he says.
There are many credit cards available in Canada, including some designed especially for newcomers. There’s also the option of applying for a secured credit card that reports to one of Canada’s credit bureaus.
The golden rule of being a credit card customer — and of building credit overall — is to always pay your bills on time. Missed or late payments will show up on your credit report, lower your credit score and make lenders think twice about working with you.
Settling into a new country can be expensive, so keeping your credit card use low in those first few months can be difficult. But it’s important to try to limit your credit use and pay down your balances as soon as possible.
Avoid this credit-building mistake
Anand says one mistake newcomers to Canada sometimes make is to try to build credit by applying for too many credit products in a short period of time.
“Don’t think of it in such a way that, the more credit you have, the better it is,” he says.
When you apply for some new credit products, like a credit card or car loan, the lender will perform a “hard check” of your credit report to see your borrowing history. Your credit score drops a few points every time a hard check is performed, so multiple checks can result in a significantly lower credit score at a time when it’s not too high to begin with.
Multiple credit applications might also make lenders wonder why you’re applying for so much credit — and if you’ll be able to pay it all back — so only apply for the products you require for your everyday needs.
“After that,” Anand says, “is when you should start indulging in other products as needed.”
Credit scores and credit reports
As a newcomer to Canada, you’ll need to build two different resources lenders can use to evaluate your credit: a credit report and a credit score. These two items are closely related, but they each tell a different part of your credit story. Both credit reports and credit scores are generated by Canada’s two major credit bureaus, TransUnion and Equifax.
What’s a credit report?
Your credit report is a comprehensive detailing of all the accounts and payment events that make up your credit history. It can include:
- Your personal details, including Social Insurance Number, and past/present employers.
- Your credit accounts, both opened and closed, and if they have been closed because of unpaid debts or fraud.
- The payment history for all of your credit accounts, including made and missed payments.
- Any bankruptcies, overdue accounts that had to be sent to a collections agency or court decisions against you that involve credit.
- A list of the creditors who have accessed your credit report in the past three years.
Your credit report may also include a credit rating, a code used to tell creditors what kind of credit you have used and if you’ve been making your payments on time.
What’s a credit score?
A credit score is a three-digit number that acts as a summary of your credit report. The higher it gets, the more responsible credit use it represents.
Because you’ll have no credit report to base it on, you’ll essentially start with no credit score when you first arrive in Canada, Anand says. Aman Anand, senior director, credit risk at TransUnion.
Credit scores range from 300 to 900. People with higher scores are more easily approved for credit products and are generally offered lower interest rates, charged fewer fees and, in the case of credit cards, provided better perks and bonuses.
But people with lower credit scores can still get approved for certain loans and credit cards. And if your credit score winds up being lower than you want it to be, don’t panic. There are always ways to improve it.
Why it’s important to build credit in Canada
An active credit report and good credit score are necessary if you want to get approved for most credit cards, personal loans and mortgages in Canada. The better your credit is, the less these products will generally cost you in interest charges and fees, so it’s important to not just build credit, but build good credit.
When you apply for a loan product in Canada, the lender will typically check your credit report to see if you pay your debts on time. But as a newcomer to Canada, you won’t actually have a history for them to review.
Some financial institutions may be willing to recognize your past credit history, but Canada’s two credit bureaus, or companies that track and rate consumer credit use, only collect information related to financial events in Canada. So even if you had excellent credit in your home country, you may still have to start building credit from the ground up.
You’ll be in the same situation if you had bad credit before relocating. Your credit score won’t start out negative, but it could stay low if you don’t develop and maintain better credit habits.
But once you’re settled into your new life here, you’ll have plenty of time to do just that.
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