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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, but it’s an important rating that can affect your finances, employment, and even your housing.
This guide can help you learn about credit histories, how credit scores work, and how to build and maintain a score to help you to reach your goals.
What is your credit score, and why does it matter?
Your credit score is a three-digit number calculated by the credit bureaus that indicates how well you’ve managed credit in the past. The higher the number, the better the score.
Banks, other financial institutions, employers, and even landlords can ask to run a credit check before they lend to you, employ you, or rent to you. Having a high credit score will also make it easier for you to get a personal loan, a line of credit, a credit card, or a mortgage, and those with strong scores can often negotiate better terms like a lower interest rate.
Clearly, your credit score is important, but for newcomers, there’s a challenge. Canadian credit scores often don’t include credit history from another country.
How to build a strong credit history in Canada
As a newcomer, you’ll be building a credit history from the beginning.
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. You can apply for one online if you don’t already have a SIN.
2. Open a Canadian bank account
There are many reasons to have a Canadian bank account, including safe, fast, and easy access to your money. Depending on which services you have with your bank, they may also report to the credit bureaus, which is helpful as you’re trying to build a credit score.
3. Choose and use a 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, there are cards specifically designed for newcomers.
Once you have a card, you use it responsibly by making purchases and paying off the debt on time and in full, if you can. 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 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.
4. Get a pre-paid cellphone plan
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 bill in full and on time, you’re building your good credit history. However, due to the fact that newcomers to Canada do not have established credit scores, that are required in order to run a credit check, starting out with a pre-paid cellphone plan is a great way to build your credit worthiness. Baby steps!
5. 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. Keeping your debt under 30 per cent of your credit limit is a good guideline.
6. 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 another service like RBC online banking. Make sure you check for errors and report any issues to the credit bureau.
7. Be proactive
If your score dips, it will improve over time as long as 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.
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.