How to score with credit

Building and managing your credit as a new immigrant in Canada

Credit, credit history, credit score and credit report are often new realities that immigrants have to deal with in Canada. Many of us are from countries that do not encourage debt. In fact, if you’re anything like me, you’ll struggle with using credit in Canada. While I am not a financial advisor, this article is based on the things I have learnt over the years about credit from my personal experience, research and financial literacy workshops. Things I wish I had known when I landed in Canada a little over two years ago.

The Canadian financial environment thrives on credit and you can only thrive with it if you have a good credit history. But what can you do as a new immigrant to Canada without prior credit history in Canada? This is the question I hope to answer with this article as well as helping you to avoid some of the mistakes I have made as a new immigrant.

What is credit?

Credit is an arrangement that allows you to borrow money or access goods and services with the agreement that you’ll pay back within a stipulated time, along with any charges or interests that may apply.

To determine if you qualify for credit in Canada, creditors use an objective approach to determine if you’re creditworthy – they request your credit history from either of the two major credit bureaus in Canada (Equifax and TransUnion). Your credit history shows a detailed report of your lending and repayment habits. This report also includes a score that is assigned to you based on how good or bad you manage your credit.

According to TransUnion, credit score in Canada ranges from 300 (bad) to 900 (excellent). A credit score of 650 and above is considered good enough to access loans and credit facilities from Creditors in Canada.

Herein lies the issue with new immigrants since they do not have any credit history in Canada, hence they are not eligible for most types of credit facilities.

How to build your credit history as a new immigrant

While you may not be able to access a lot of credit facilities as a newcomer to Canada, there are a few standard ways to begin building your credit in Canada as a new immigrant.

1. Get a credit card: one of the first things you should do as a new immigrant is to open a bank account. Many banks and credit unions offer credit cards to new immigrants as part of their welcome account opening package. They know you’re new to Canada and do not have a credit history so they won’t even bother trying to access your credit report. Before accepting any credit card offers though, ensure you first shop around to compare various offers. Pay specific attention to the interest rates, monthly or annual fees, reward points and cash back, etc.
2. Spend from your credit card: Building your credit history doesn’t stop at just having a credit card but spending from the credit and repaying your debts at the right time is what begins to give you a credit score. This was one of the mistakes I made when I just landed. I was so scared of owing that I literally went to hide my credit card and I did not even activate it for months. My husband kept spending his and paying back to develop his credit score but I was so naive that I was only using my debit card. By the time I realised my mistake, I had lost a lot of precious credit score building time. Don’t make the same mistake! Even when you don’t need the money, use your credit card instead of your debit card and pay back the money in full before the due date if you have zero tolerance for debt.

Always remember to pay back what you spend or at least the minimum payment due on or before the due date on your credit card statement. Forgetting to pay back when due will negatively impact your credit score.

3. Get a post-paid telephone plan: Not only do you often get a better deal and a new phone on postpaid telephone plans, you also get to have another type of credit account on your credit history – which is very good. Just as with your credit card, make sure to pay your bills before the due date. To avoid forgetting paying your telephone bills at the right time, find out if you can set up auto-debit to ensure your provider automatically deducts the payment from your linked credit/debit card every month. That’ll be one less thing to worry about remembering when you’re trying to settle.

4. Accept a store credit card when you’re offered but avoid requesting for it: Most store credit cards such as the PC Optimum Master Card give you more reward points than bank cards (depending on the type of bank card) and they often do not attract any annual maintenance fees. However, do not ask for it at this early stage as a new immigrant! If any store offers you their store card ask the following questions:

• Will my credit history be pulled if I accept this offer? If the answer is yes, don’t accept it. Every time a creditor requests your credit report from the credit bureau, it reduces your credit score. At this stage, you’re trying to build your credit score so you can access other important credits such as mortgage, student loans or auto loans. Moreso, the creditor will most likely not give you the credit card after pulling your credit report because you likely won’t meet their requirement.

• What is the interest rate and fees? This helps you determine if another store credit card has a lower interest rate, so that you can accept only the best offer.

• Where can I use it to earn point? Some store cards have limited places where you can use them. There’s no point taking a card that you can only use in a few places.

• How does the reward points or loyalty program work? This helps you determine which of the store’s loyalty programs best suit your needs.

Shop around to ensure you get the best deals for new immigrants and never apply for or accept a credit card if your credit report will be pulled. Ask questions before you accept any offer and let them know that you’re a new immigrant if they offer you a card. They often know if it will affect your credit score or not.

A good credit score helps you qualify for loans and lower interest rates on auto loan, mortgage, student loan or to qualify for lower rate credit cards and more. There are many factors that can affect your credit score. Here are some of the key factors:

1. Payment history: TransUnion and Eqifax say your payment history make up for 35% of your credit score. This means that when you pay at least the minimum balance of the credit owed at the right time and/or pay for your recurring credit and bills at the right time, you get a thumbs up and your score increases. Can you guess what happens when you miss a payment, or worse, when you consistently miss payments? Yes, your credit score will take a downward spiral. It’s unthinkable what will happen to your credit score if your debt is transferred to a collection agency or if you file for bankruptcy.
2. Credit usage: your credit usage is the difference between the total credit available to you and the credit you use. Typically, the best practice is to use no more than 30% of the total credit available to you. This is especially important if you’re building your credit for the purpose of acquiring big loans.

For example, assuming you have 3 credit cards: If card A has a credit limit of $1,500, card B a limit of $2,500 and card C a limit of $1000, this gives you a total credit limit of $5,000. Applying the 30% rule will mean that you won’t OWE more than $1500 across all your credit cards.

To owe in this instance means that you don’t carry over debt of more than 30% of your total credit limit beyond the payment due date. It doesn’t mean you can’t spend more than 30%.

3. Length of credit history: According to Eqifax, “Credit accounts with a longer history showing responsible credit behaviour will reflect positively on credit scores. Newer accounts will lower your average account age, which may negatively impact credit scores.” While new immigrants can’t do anything about this, they should start building their credit history as soon as they can.

4. Mix of credit accounts: credit scoring models generally factor in the mix of different types of credit you have, such as credit cards, installment loans, phone bills, and store accounts. If you have too many different credit accounts (too many credit cards) or don’t have a mix of different types, it could negatively impact credit scores. For a start, a credit card and postpaid phone bill credit account are good for a new immigrant.

5. Hard pull of your credit report: Anytime your credit file is accessed for any reason, the request for information is logged on the file as an inquiry. Hard pulls are inquiries which are related to active credit seeking (such as applying for a new loan or credit card). Hard pull requires your consent because they affect your credit score calculation. Your credit score does not take into account requests a creditor has made for your credit file or credit score in order to make a pre-approved credit offer, or to review your account with them, nor does it take into account your own request for a copy of your credit history. These are some examples of “soft inquiries” or “soft pulls” of your credit.

If you ever want to apply for loans that require hard pull of your credit report, do it all within the same period. That way, all the inquiries are treated as one enquiry. For instance: when you’re ready for a mortgage, you can apply with multiple creditors at about the same time and accept the creditor that gives you a better rate. The inquiries that all the creditors make on your credit report will be viewed as one inquiry as long as they are done within the same time frame.

Tips to manage your credit as a new immigrant

• Start building your credit history immediately: open at least one credit account as soon as you can to start building your credit history. Take advantage of new immigrants welcome deals.
• Pay your bills on time: pay up at least your minimum balance on or before the due date, even if you cannot pay up your debt in full.
• Apply the 30% rule: if you cannot pay up all the debt on your credit, keep your debt to a maximum of 30% of your total available credit. This is especially important prior to applying for high capital loans such as auto loans or mortgage.
• Avoid applying for too many credit cards: this will initiate a hard pull of your credit report which can negatively impact your credit score.
• Check for inaccuracies in your statements : regularly check your statements from your creditor(s) to be sure that there are no inaccuracies. This will also help you to find out on time if your identity has been stolen and is being used to hamper your finances.
• Request your credit report annually: you can get a free report of your credit history once annually from the credit bureaus. Pick a convenient time of the year, either the beginning or yearend or even your immigration anniversary to annually request your credit report from Equifax and TransUnion. It is best to get your report from both so you can compare what they have on file and report any errors.
• Accept offer of credit limit increase: sometimes, your creditor (financial institution) can pre-approve you to get an increase in your credit limit. If you get this offer, accept it but make sure to ask if they’ll pull your credit history if you accept it (often times, a pre-approved increase does not require a hard pull of your credit record and will not affect your score). This will also give you more room to increase your 30% amount without having more credit accounts.
• Deactivate any credit cards/accounts you don’t want to use anymore: this is especially important for accounts that attract annual fees. If you don’t deactivate the card, you’ll still be expected to pay the fees whether you use the card or not and you may sometimes forget to pay this fee on the due date, which can become a debt that can even be sent to a collection agency if the creditor is unable to reach you.

Building a credit history takes time and having a good credit score is important for immigrants to thrive in Canada. Starting on time to build your credit history and ensuring that you follow best practices will help you to not only successfully manage your credit but also score great with credit.

Do you have any other tips or questions about credit in Canada? Please drop them in the comment section below, I would love to hear and learn from you.

Cheers to growth!

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Recommended for further reading

This post by @immigrantmuse is insightful for new immigrants who want to learn how to build and manage their credit history in Canada. Read and share to those who may find it useful! https://wp.me/paOaKd-54

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