When coming to any new country, newcomers are met with a whole new set of rules, products and ways of doing things. In Canada, most newcomers will be taken by surprise when asked about credit and credit scores and the important role they play in Canadian life – even for something as basic as renting accommodation. One newcomer recounted her story of being asked for a year’s rent in advance because she didn’t have a credit score. Her response was, like most newcomers, “What’s a credit score?”. Before we talk about scores. Let’s look at credit in Canada.
What is credit in Canada?
Credit is the privilege of borrowing money from a financial institution (or lender) based on the understanding that you (the borrower or debtor) will repay the money at an agreed upon date and rate of interest. You may also utilize credit to make a purchase now with the agreement that you will pay later.
Types of credit in Canada
1. Credit Card (Revolving Credit)
A financial institution allows you to access money to complete a purchase up to a predetermined credit limit. Each time you purchase something on credit you get closer to your limit. When you pay off your balance owing (or part thereof), that amount is added back to your available credit. Interest rates vary from card to card.
2. Charge Card
This card comes with no interest but you are required to pay your monthly balance owing in full each month. If full payment is not made, interest will be charged.
3. Line of Credit (secured or unsecured)
A line of credit (LOC) is a preset amount of money that a financial institution has agreed to lend you that you can draw from when you need it – up to the maximum amount. You pay interest only on the amount you use.
4. Installment Loan
Repaid over a specific period of time, this loan requires a set number of scheduled payments.
5. Residential Mortgage
A mortgage is a home loan that can include payment terms of up to 25 years. A mortgage is typically renewed every few years, at which time the terms usually change.
What is a Credit Score?
In Canada, a credit score is essentially a numeric rating that banks (lenders) use to qualify you for a loan. The scores range from 300 (just getting started), 650 (the magic middle number) which will likely qualify you for a standard loan, all the way up to 900 points (the highests score). The higher your score, the lower the risk to the bank. A score under 650 will likely make it more difficult to acquire first time credit. The lower your score on the scale, the higher a risk you are: You will pay higher interest rates while having lower credit limit.
Credit Scores: Part of life in Canada
We have discussed the obvious association between credit scores and one’s ability to acquire a loan, but in Canada credit scores appear more often than you might expect.
- New Job: Potential employers may check your credit file. Your credit behaviour or score may influence their decision on whether to hire you or not.
- Renting a Vehicle: A vehicle rental company can check your credit history to assess the risk may be to them when they loan you that car or van.
- Renting an apartment: The landlord may factor in your credit rating and score when assessing tenants’ worthiness and their risk.
- Insurance companies, utility companies and others also assess your credit behaviour and credit scores. That’s why it’s important to set up your bank account and get the ball rolling toward your credit score.
How to Start Building a Good Credit History
Note: This will take time, so start now, be patient and think in the long term.
1. Open a bank account
This will be necessary for most of the following tips – and you can do it from home.
2. Apply for a credit card from a major bank
Using and repaying regularly will demonstrate reliability and good payment practice.
3. Apply for a small loan – Using Your Savings Account as Collateral
Paying back the loan on time according to your credit agreement will show you are low risk.
4. Pay your bills on time
This speaks for itself.
5. Establish a steady work record
It’s what every newcomer aims to do. It also shows you have a steady income to cover payments.
At Arrive, we are dedicated to helping newcomers achieve career, life and financial success in Canada. Over the following weeks and months we will be focussing on the financial side of the journey, sharing financial tips and information in our weekly blogs, providing handy online tools like a Canadian Expenses Calculator, and hosting highly-informative webinars and workshops. First up, Finances in Canada 101: What You Need to Succeed, a discussion around Personal Finances in Canada.
Working with RBC, we can help you get your financial life in Canada started – right now.
Learn about your banking options in Canada and be prepared. Open an RBC Chequing Account through Arrive and get $50 cash back.
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Arrive is powered by RBC Ventures Inc, a subsidiary of Royal Bank of Canada. In collaboration with RBC, Arrive is dedicated to helping newcomers achieve their life, career, and financial goals in Canada. An important part of establishing your financial life in Canada is finding the right partner to invest in your financial success. RBC is the largest bank in Canada* and here to be your partner in all of your financial needs. RBC supports Arrive, and with a 150-year commitment to newcomer success in Canada, RBC goes the extra mile in support and funding to ensure that the Arrive newcomer platform is FREE to all. Working with RBC, Arrive can help you get your financial life in Canada started – right now. Learn about your banking options in Canada and be prepared. Click here to live chat with an advisor.
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This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) 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 its affiliates.