Many newcomers are surprised by how important credit is in Canada’s financial system. Unlike countries where people generally only take credit when needed and being in debt is often considered bad, the Canadian economy is credit-driven and credit is used even for regular everyday purchases.
In Canada, your credit history and credit score are representative of your financial reputation and success. When you first arrive in Canada, building your credit score should be one of your financial priorities. In this article, we cover how credit scores work, what’s considered a good credit score, and how newcomers can build a strong credit history in Canada.
In this article:
How do credit scores work in Canada?
A credit score is a three-digit number that represents your creditworthiness and financial reputation. Your credit score helps lenders decide whether or not to extend credit to you, based on the risk of whether or not you’ll be able to repay your debts in a timely manner.
When you take credit in Canada, data on your credit use and repayment history is captured in a credit report by credit agencies such as TransUnion and Equifax. Your credit score is an objective summary of your detailed credit report–– although your score can sometimes vary between agencies.
The higher your credit score, the lower the risk you present to lenders when they extend you credit. This means you’ll be more likely to qualify for loans, mortgages, higher credit limits, and lower interest rates on credit with a better credit score.
What credit score do newcomers in Canada start with?
When you first arrive in Canada, you start with no credit score. This is not the same as a poor or zero credit score. Instead, it means that your credit score doesn’t exist yet. This will change once you get credit from a financial institution and start using and repaying it.
Is my credit history from my home country transferable to Canada?
As a newcomer, your credit history from your home country doesn’t carry over to Canada and you need to start building your Canadian credit score from scratch.
Some countries, like the U.S., have the same credit agencies that operate in Canada. However, these agencies don’t share financial data across borders and your credit history will not be transferred when you move from one country to another.
What is a good credit score in Canada?
|Tip: Credit agencies calculate your credit score independently, so your credit score may not be the same with TransUnion and Equifax. Be sure to keep track of both scores and flag any discrepancies.
In Canada, credit scores range between 300 and 900, with a higher score being better. According to TransUnion, credit score ranges are categorized as follows:
- 300 to 692: Poor
- 693 to 742: Fair
- 743 to 789: Good
- 790 to 832: Very good
- 833 to 900: Excellent
Canadian credit agencies have slightly different benchmarks for what is a good score. So, even with the same numerical score, your credit score may fall under a different category depending on which agency’s report you look at.
Generally speaking, with a credit score of 750 and above, you’ll be more likely to qualify for credit, but if your score is under 700, lenders may not want to risk giving you a loan or mortgage. However, this may not always be the case, especially if you’re a newcomer to Canada.
Each lender decides what credit score range it considers good or risky. Moreover, your credit score is only one of the factors that lenders use to evaluate credit risks. Most financial institutions understand it takes time for newcomers to build a good credit score and that the absence of a credit score doesn’t mean that you have a poor credit history.
Some banks offer credit cards to newcomers who haven’t yet started building their credit history in Canada. However, you’ll likely only qualify for other credit products, such as loans, mortgages, or lines of credit, once you have a good credit score.
How can I get a credit score as a newcomer?
You start building your credit score as a newcomer when you first apply for and use credit. When you start using your credit card and paying off your debt on time, credit agencies will use your purchase and payment data to build your credit history.
If you use credit wisely, your initial credit score will usually be towards the lower end of the fair category. As credit agencies get more information on your credit use and the length of your credit history increases, your credit score will start improving.
Some Canadian banks, like the Royal Bank of Canada (RBC), offer special newcomer credit cards to new permanent residents, international students, and temporary foreign workers in Canada. You may be eligible for a newcomer credit card as soon as you arrive in Canada, even if you don’t have a credit score yet.
Advantages of newcomer credit cards in Canada
Getting a newcomer credit card is a great way to start building your credit score in Canada. Some benefits of newcomer credit cards include:
- Newcomers without a credit score or credit history can apply.
- No security deposit is required, unlike in the case of secured credit cards.
- Allows you to start building your credit history by regularly using and repaying credit.
- Make purchases on credit and repay later.
- Your initial credit limit can be increased as your credit score improves. Some RBC newcomer credit cards offer a credit limit of up to $15,000 CAD, depending on your financial situation.
Before you start using your credit card, it’s important to understand how credit cards work, as well as your payment cycle, credit limit, and the interest rates that apply if you’re unable to pay off your credit card debt fully and on time.
|Important: In Canada, credit cards have very high interest rates. Late or missed payments can adversely impact your credit score and result in massive, unsustainable debt.
Alternatives to newcomer credit cards for building your credit history
If you don’t qualify for a newcomer credit card when you first arrive, don’t worry. There are other ways to start building your credit score, such as:
Applying for a secured credit card
A secured credit card is issued against a deposit you make with your financial institution and can be a good alternative to newcomer credit cards if you’re just starting to build your credit history in Canada.
Your deposit serves as a security amount that the lender can use if you’re unable to pay your credit card bills. In some cases, the financial institution may also require proof of your income or savings to approve your application.
Getting a co-signer for your credit application
If you have friends or relatives who’ve lived in Canada for some time and have established credit histories, you can ask if they would be willing to co-sign your credit application. In this case, they would serve as a guarantor and will be responsible for repaying your credit if you’re unable to do so.
Speak to a financial advisor for guidance and information on the best approach to build your credit history, based on your unique situation.
How long does it take to get a good credit score as a newcomer?
There’s no set time frame for how long it takes to get a good credit score as a newcomer. How quickly your credit score improves will depend on your credit use and payment behaviour. The more frequently you use credit, such as making purchases on your credit card, the more data credit agencies will have on your financial position.
Generally, if you use credit appropriately without over-utilizing your credit limit, and repay your debt on time, you may be able to improve your credit score to the “good” range within one or two years of your arrival in Canada. However, if you don’t use your credit card often or don’t pay your bills on time and in full, it may take you much longer to get a fair or good credit score.
Factors that impact your credit score in Canada
Length of your credit history
The length of your credit history is an important factor in determining your credit score. It shows how long your credit accounts have been open and how often you’ve used credit. Newcomers who’ve just started their lives in Canada have a brand new credit history. However, as time passes, credit agencies and financial institutions will develop a better understanding of your creditworthiness.
The more often you use your credit accounts, the more information lenders will have to evaluate your payment and spending behaviour.
When you apply for credit or someone runs a credit check on you, a credit inquiry is made on your account. Your credit score may be negatively impacted by how often and how recently you’ve applied for credit. In some cases, credit inquiries may also be made by landlords before you rent accommodation.
It’s important to note that checking your own credit score does not adversely affect your credit score as it is considered a “soft hit.” Credit checks done by financial institutions, lenders, or other third parties before they issue you a loan, extend credit, or increase your credit limit count as “hard hits” and result in a decrease in your credit score.
|Tip: When shopping around for a loan or mortgage, it’s best to contact prospective lenders around the same time. Similar credit inquiries made within a week count as a single inquiry.
Credit utilization ratio
Your credit utilization ratio, also known as your debt-to-credit ratio, is a comparison of how much credit you have available and the portion of it you use. For instance, if you have a credit card with a credit limit of $3,000 CAD, that’s the amount of credit that’s available to you. If you spend around $1,000 CAD on your credit card each month, your credit utilization ratio is ($1,000 / $3,000) x 100 = 33.33 per cent.
A high credit utilization ratio can negatively impact your credit score. As a rule of thumb, it’s best to avoid using more than 35 per cent of your credit limit. If you have more than one credit product, such as multiple credit cards or a line of credit, your credit utilization ratio is calculated on the cumulative credit available to you.
|Tip: If you consistently use more than 35 per cent of your credit limit, you may be able to lower your credit utilization ratio by asking your bank if they can increase your credit limit.
Your debt repayment record, or your history of repaying your bills, loans and credit card balances, also has a significant impact on your credit score.
Paying your debt off in full and on time will improve your credit score over time. On the other hand, missed or delayed payments can be damaging to your credit history. Negative factors, such as late payments, can stay on your credit report for up to six years and have long-term financial consequences.
Credit account balance
The overall amount you owe on your credit accounts, including credit cards, loans, and mortgages, also impacts your credit score. Over time, some of this negative impact may be offset if you have a good payment history and start lowering your credit account balance.
|Tip: As a newcomer, you should only apply for as much credit as you require and can easily repay.
Using different types of credit, or a diverse credit mix, can have a positive impact on your credit score, provided you use credit responsibly. However, it typically takes newcomers some time to build a good credit score and qualify for other types of credit.
As a newcomer, building your credit score from scratch in Canada can seem like a daunting task, but it doesn’t have to be. Some Canadian financial institutions offer specialized newcomer credit cards that allow you to start building your credit history as soon as you arrive; talk to a newcomer financial advisor to understand what makes the most sense for your situation. Meanwhile, it’s wise to learn how credit scores work and the factors that impact your credit history, so you can make good financial decisions.