While the newcomers may not understand the concept – good credit in Canada is really important.
Coming from India, the only thing I learned was, we need to have a job, a place to live and food to survive (roti, Kapda aur Makaan). It took me some time to realize that here in North America, you need to have good credit for literally anything.
So what is this credit history that everyone is talking about?
It basically contains your financial information that credit bureaus Equifax and Transunion collects from vendors, lenders, and financial institutions you deal with.
Why is it important as a newcomer?
I have been told many times in the USA as well as Canada, “I do not use credit cards, I pay by cash, it helps me manage my finances and ensure I do not spend on things I really don’t need.”
I will explain with my own example,
“When I arrived in Canada – I got a car loan with 8% interest for my first car in Canada. The last car I bought in 2019, I am paying 5% on it. If you try to put it in numbers, for a car valued 30K, if the loan is for 5 years – the difference is $3000 in interest!”
A good credit score will not only help in car loans but in a mortgage for a home, student loans, credit cards that give lucrative rewards, and more!
So as a newcomer, how should you go
about building your credit history?
Here is the description of how your credit score is calculated, We recommend following steps,
Open a bank account and if possible – with a credit card.
Whether you have the job or not, it is recommended that you get a SIN number from Service Canada and open a bank account. Whether you are an international student or a permanent resident – banks do have a special package designed for you which includes Checking, Savings, and credit card.
Points to understand
- The checking account is for day-to-day banking. You get the flexibility with checking accounts and can deposit and withdraw money anytime.
- The savings account in my words is a place to park your money that you are setting aside for bigger expenses. You can not only get the interest on the amount saved but can access it anytime you need.
- Everyone has their own credit score, meaning if your spouse applied for a credit card, car loan, or mortgage – the activity will relate to the spouse’s credit score only.
- We definitely recommend getting a credit card (get secured credit card if needed) – However, it goes without saying that to build the credit score, you have to use it responsibly and make payments on time.
Get mobile phone, internet, and utilities registered under your name.
It is quite common here when newcomers stay as paying guests, they do not have utilities or internet on their name. Besides, they may not even have the tenant history.
We strongly recommend getting a postpaid mobile plan with any company that reports to credit bureaus every month. Some of those companies do not even run a credit check to start the line.
Pay your credit card balances in full.
While the banks would prompt you that you need to pay just the minimum balance, it is required that you pay the balances in full to avoid the interest. The interest rate is normally around 20% on credit cards. If you cannot pay in full, the rule of thumb is, keeping the credit utilization under 30%. Depending on your relationship with the creditors, you can even ask for a credit line increase and that can help your debt to credit ratio.
Set up automatic payments.
It’s easy to say you should not be missing any payments. When you have multiple credit cards, student loans, mortgages, car loans, personal loans, and several bills – it is recommended that you set up automatic payments to ensure that you do not miss any payments. As you can see in the image above – payment history has the highest influence on your credit score.
Credit Checks (soft or hard credit inquiries)
When you check your credit score/report through any method – it is a soft check. At times, the financial institute you deal with may check your credit file but since that check is for non-lending purposes, it will be considered as a soft check and do not affect your credit scores negatively.
Whereas hard credit checks are when you apply for credit and if there are too many hard credit checks in short times, it will send a signal that you are in financial difficulty.
It is recommended that you resist credit inquiries unless it is absolutely necessary. If you already have a credit card, it is recommended that you use it for all the expenses and apply for the second one after 12 months.
Monitor and request a copy of your credit score.
While there are free websites that you can use to monitor your credit scores, you can get free credit reports directly from the two largest credit bureaus in Canada, Equifax, and Transunion. You might need to wait for a couple of weeks after sending in your details for the report. But it is recommended that you check the report and correct any discrepancies if any. We recommend going through this online explainer for more details.