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Updated on May 22, 2024
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So it’s about time we figure out how we can make them work for us, newcomers.
Luckily, building your credit score from scratch is less intimidating than it sounds. Morteza Hessari, Financial Advisor at Scotiabank helps us understand how.
A credit score in Canada is a three-digit number, ranging from 300 to 900, that represents your creditworthiness and reliability of debt repayment. Created by credit bureaus like TransUnion and Equifax, this score is crucial for financial actions like renting homes, securing loans, or obtaining favourable interest rates. The higher your score, the more likely you are to be trusted by banks and lenders, and get better rates.
Read more: Renting vs Buying a home as a newcomer in Canada
Your record of paying bills on time is crucial. Late or missed payments negatively impact your score.
This is the amount of credit you use compared to what you have available. Lower utilization typically leads to a higher score.
Longer credit histories provide more data and can lead to higher scores. It shows reliability over time.
Having a mix of credit types (like loans and credit cards) can positively affect your score. It shows you can handle various credit responsibilities.
Applying for several new credit accounts in a short period can lower your score. Each application typically involves a hard inquiry that can slightly reduce your score.
Keep in mind: your credit history from your home country doesn’t transfer with you to Canada.
So considering this, being new to Canada, you won’t have any credit history upon arrival.
Then what is the best way to start building credit from scratch? You may ask.
First thing: apply for a Canadian credit card and regularly make payments on time. This is the easiest way to establish a credit history and build a fair level-based credit score that will allow you to apply for credit.
When choosing the right credit card, consider your spending habits and financial goals. Ask yourself if the card will be used mainly for daily expenses, like groceries and gas, or if you plan on carrying a balance. If it is for everyday spending, look for cards offering rewards like points for travel, cashback, or discounts on various products and services. These rewards can significantly boost your savings and provide value on every purchase.
On the other hand, if you might carry a balance, prioritize finding a card with a low-interest rate to minimize costs.
Scotiabank offers programs that make it easier for new immigrants to get credit cards, even if you don’t have any Canadian credit history yet. These cards are tailored to fit different needs and lifestyles, whether you’re looking for rewards, low fees, or other benefits.
Remember, the right card for you is the one that fits well with your lifestyle and helps you achieve your financial objectives.
We’ve said it before and we’ll say it again: it is crucial to ensure you pay at least the minimum due on your credit card before the due date every month. This is the most influential factor in building a good credit score.
Familiarize yourself with your monthly statement, which includes your balance, minimum payment due, and due date. Knowing these details is key to managing your credit card effectively.
Keep your credit utilization—how much of your available credit you’re using—low, preferably below 35%. This means if your credit limit is $1,000, try to use $350 or less. Lower utilization shows lenders you’re not overly dependent on credit.
Be aware of the interest rates, fees, and other terms of your credit card. This helps you avoid unexpected charges and understand how your actions can affect your credit score.
Keep an eye on your credit score through Canada’s main credit bureaus, TransUnion and Equifax. Most bank institutions also enable credit score checking directly from their platforms. Monitoring helps you understand how your financial behavior impacts your score and allows you to correct any inaccuracies. And no, contrary to some popular belief, frequent checks of your credit score (or ‘credit views’) WILL NOT negatively impact your credit.
There is an important difference between credit views, which is to verify your score, and credit inquiry, which is to apply for new credit.
Apply for new credit cautiously. Too many hard inquiries in a short period can signal risk to lenders and slightly lower your score.
Finally, to make sure you keep your financial health in good standing and your credit score on the rise, here are some common mistakes you should stay away from:
Late payments can significantly harm your credit score. Always ensure you pay at least the minimum due on time.
Consistently making only the minimum payment means you’re paying more in interest and it will take longer to clear your balance.
High credit card balances can lead to high credit utilization, negatively impacting your credit score. Try to keep your balances low.
Regularly review your credit card transactions to spot and report any unauthorized activity and to keep track of your spending.
Be aware of your card’s interest rate, fees, and other terms. This knowledge helps avoid surprises and plan better financial strategies.
Ensure your credit card aligns with your spending habits and financial goals. Consider factors like rewards, fees, and interest rates.
It’s easy to spend more with a credit card than you would with cash. Stick to a budget to avoid debt accumulation.
Each new application can slightly lower your credit score. Apply only when necessary and beneficial.
Cash advances usually come with high fees and interest rates, making them an expensive way to borrow money.
Transferring balances might seem like a solution but can lead to a cycle of debt if not managed wisely.
Read More: 8 financial mistakes to avoid when immigrating to Canada
Even though this concept of a credit score might seem to make the start of your Canadian journey a little more adventurous than originally planned, you now understand that it’s not as hard as it seems to start building trust with banks. Start by picking a credit card that fits your needs, always pay your bills on time, and avoid some simple mistakes. In about 3 to 6 months, like our friends at Scotiabank say, you’ll be on your way to a good financial standing. Building a credit score is a step-by-step journey, and you’re already on the right path!
Next step: How to build and strengthen your credit history in Canada
The best way to start building credit from scratch in Canada is by applying for a Canadian credit card and making regular, timely payments on it. This helps establish a credit history and lays the foundation for a good credit score. It’s important to choose a credit card that matches your financial needs and lifestyle and to use it responsibly.
No, your credit history from your home country does not influence your credit score in Canada. As a newcomer, you start with a clean slate in terms of credit history in Canada. However, some Canadian financial institutions may consider your foreign credit history for certain applications if you provide them with your credit report from your home country.
No, frequently checking your own credit score or history, known as a ‘credit view,’ does not affect it negatively. These are considered soft inquiries and do not impact your credit score. It’s actually good practice to regularly monitor your credit score to understand your financial standing and to ensure there are no inaccuracies.
Typically, it takes about 3 to 6 months to establish a base-level credit score in Canada after opening your first credit card, provided that you make timely payments. Building a strong credit score, however, is an ongoing process that requires consistent financial responsibility over time.
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