Canada admitted 471,771 permanent immigrants in 2023, according to Statistics Canada. As exciting as moving to a new country may be, there are certainly challenges to be faced, including financial challenges. Not only are newcomers to Canada tasked with getting a job and finding housing, but there’s also the issue of building good credit.
Newcomers can’t take their credit from their homeland with them. Instead, they need to build it from scratch.
In this article, we’ll provide tips on how to build a strong credit score for new immigrants to Canada, and what factors have the most impact on credit health.
Key Points
- Newcomers to Canada cannot take their credit scores from their home countries and instead must build their credit from scratch.
- It can take about six months to build good credit with responsible financial habits and the right tools.
- Some of the best ways for new immigrants to build credit include taking out a secured credit card, having rent payments reported to credit bureaus, and using a credit-building tool.
Understanding Canada’s Credit System To Establish Credit As New Immigrants
Before you can build good credit, it’s important to understand how Canada’s credit system works.
Why Is Good Credit Important?
If you need to take out a credit card, loan or credit product in the future, you’ll need decent credit to get approved. A good credit score will also afford you with lower interest rates, making your loan more affordable.
What Are Credit Scores?
Your credit score helps lenders and creditors determine your creditworthiness and ability to get approved for a loan or credit product. In Canada, credit scores range from 3000 to 900 and are calculated using the information in your credit reports. The higher your score, the better, as this makes you a less risky borrower in the eyes of lenders.
Here’s a general look at credit score ranges and how they are classified, according to Equifax:
- Excellent: 760+
- Very Good: 725 -759
- Good: 660 – 724
- Fair: 560 – 659
- Poor: 300 – 559
| Note: In Canada, you can have multiple credit scores. The score you see with Equifax may be different than what you see with TransUnion. This is because there are multiple credit scoring models. Moreover, the information available on your credit report with Transunion and Equifax may vary as not all lenders report to both credit bureaus. |
What Affects Your Credit Scores?
There are multiple ways credit scores are calculated, however, there are five factors that are commonly used in credit scoring models.
Payment History
Your history of paying bills matters to your credit health. In fact, this is usually the most important factor and contributes roughly 35% of your credit score. Paying your bills on time every month can have a positive impact on your credit score while missing payments can do the opposite.
Debt-To-Credit Ratio
Also known as your ‘credit utilization ratio’, your debt-to-credit ratio contributes about 30% of your credit score. This ratio refers to the amount of debt you have relative to your available credit. While having a lot of debt isn’t always necessarily a bad thing, it can be problematic if you’re spending close to your credit limit on accounts like credit cards and lines of credit.
Keeping your credit utilization ratio low — typically less than 30% — is generally recommended to keep your credit score strong.
Credit Age And History
How long you’ve been building your credit history accounts for around 15% of your credit score. The longer your credit history and the older the average age of your credit accounts, the better your credit score. As a new immigrant, this factor will be the hardest to overcome, as your credit starts over once you immigrate to Canada.
Even if you have a good credit history in your home country, it does not affect your Canadian credit history. Unfortunately, you’ll need to restart and begin building your credit once you arrive in Canada.
New Credit Inquiries
New credit inquiries occur when your credit file is checked and accounts for roughly 10% of your credit score calculation. There are two types of credit inquiries: hard inquiries and soft inquiries.
A hard credit check usually happens when you apply for a loan or credit card and can have a negative impact on your credit score. A soft credit check, on the other hand, happens if you pull your own report or when you apply for loan pre-approval. Soft checks do not impact your credit.
Public Records
Bankruptcies, debts in collections, lawsuits, and other derogatory remarks can also affect your credit. These account for about 10% of your credit score calculation. Negative remarks such as these may have a severe negative impact on your credit.
How To Start Building Your Credit When You’re New To Canada
Starting a credit score in Canada takes time, effort, and the use of the right tools available. Here are some tips to start building healthy credit as a newcomer:
Have Your Rent Payments Reported To The Credit Bureaus
As a new immigrant, you’re more likely to rent than get a mortgage due to your lack of credit. However, rent payments are not typically reported to the credit bureaus, which means you’re not able to use these payments to your advantage to build credit.
Fortunately, there are services available that can help you use your rent as a means to build credit, such as the Landlord Credit Bureau (LCB), City Lending Centers (CLC), and Chexy.
| LCB | Landlords and property managers who register with the LCB can offer their tenants the ability to have their payments reported to the Equifax credit bureau. As long as you make your rent payments on time, you can build a good credit score over time. |
| CLC | CLC’s Rent Reporting program allows you to use your rent payments to build credit history. Landlords must participate in the program and verify your rent payments, which will then be communicated to the credit bureaus and recorded on your credit report. |
| Chexy | With Chexy, you can pay your rent with your credit card. This allows you to build good credit when you make timely credit card payments, while giving you the extra benefit of collecting cash back rewards (where applicable). In this way, Chexy serves as a middleman between you and your landlord. |
Apply For A Secured Credit Card
One of the best ways to build good credit is to take out a credit product and make timely bill payments. However, it may be difficult to get approved for an unsecured credit card as a newcomer with little or no credit history.
In this case, it may be best to apply for a secured credit card. These types of cards are much easier to get approved for and require you to use your own money as a security deposit. This is a great way to help you manage your money as well.
Get A Cell Phone
Some cell phone carriers in Canada report payments to the credit bureaus. So, buying a new phone contract may be an easy way to start building a credit history in Canada.
Make sure you apply for a post-paid plan rather than a pre-paid plan, as pre-paid payment plans are not reported to the credit bureaus. Although pre-paid plans might be more budget-friendly, post-paid plans can help you build your credit.
Use A Credit Building Tool
Another great way to establish and improve your credit as a newcomer is to use a credit building tool, like the one offered by KOHO. This tool allows you to take out a line of credit with guaranteed approval.
For a small fee, KOHO will report your on-time payments to Equifax. The cost of this service depends on your plan membership:
- Everything account: $5/month
- Extra account: $7/month
- Essential account: $10/month
How Can You Check Your Credit As A New Immigrant?
Once you start using products to build credit, you may be curious about your progress. In Canada, you can check your credit scores for free, with platforms like CompareHub, to help you keep track of your progress. Seen as a “soft credit check” by the credit bureaus, checking your credit won’t affect your scores.
| Why Can’t I See My Score? If you don’t see a credit score, it’s because you likely don’t have one. As a newcomer, you probably haven’t had enough time to establish credit in Canada. Without a credit history, the credit bureaus in Canada can’t assess your credit profile and assign you a credit score |
What To Watch Out For When Building Credit
In your journey to establish credit as a new Canadian, there are a few obstacles you need to keep in mind to ensure you don’t jeopardize your credit progress.
Missing Payments
Your payment history commonly holds the most weight when it comes to building credit. This is why it’s imperative that you make all bill payments on time every billing cycle. Missing payments can have a negative impact on your credit scores.
Payday Loans
Payday loans might seem like an easy way to secure financing if you’re new to a country, especially if you’re in need of fast cash. These loan types are readily available and easy to get approved for, and the financial institutions offering them are less likely to focus on your credit history than banks.
However, be wary of payday loans. They often come with extremely high interest and very short terms, making them difficult to repay on time and in full. If you don’t pay your payday loan back on time, your lender may eventually choose to sell your debt to collections, which can show up on your credit reports as a negative remark.
Maxing Out Your Credit Cards
Using a credit card on a regular basis is a healthy credit-building habit. But, the key is to always pay off your full balance every month to avoid accumulating debt you cannot afford to pay off.
Another important thing to consider is not using your full available credit limit. The balance you carry compared to your available credit — referred to as your credit utilization ratio — affects the calculation of your credit scores. The higher this ratio, the worse off your credit may be.
The key is to keep your credit card expenditures to no more than 30% of your credit limit to build good credit. If you have a small credit limit and find yourself using the full amount every month, consider paying off your credit card twice a month.
Credit Scams
While there are plenty of lenders and creditors who want to help out all Canadians, it’s important to recognize that there are people who will try to scam and trap you. Educating yourself against these scammers is your best form of defence. Here are a few of the most common types of credit scams.
Advanced Fee Loan Scams
If a loan company promises you a great loan with a great interest rate with the condition that you pay a large upfront fee (often referred to as loan insurance) you are more than likely being scammed. Try to remember that if a deal seems too good to be true, it probably is. No loan company should ask you to give them money before you receive your loan.
Guaranteed Unsecured Credit Cards
No one can guarantee your approval before you’ve even filled out an application. Some scammers like to advertise that they can guarantee an unsecured credit card, but this is a red flag. Unsecured credit cards are typically harder for people with no credit history to get, so if someone is guaranteeing your approval, they’re probably trying to scam you.
Final Thoughts
Immigrating to a new country comes with many difficulties. However, establishing credit doesn’t have to be one of them. Getting a head start and following some of the tips outlined above can help you establish credit as an immigrant and obtain loans from financial institutions in a few months.
