How can new immigrants to Canada increase their credit score?
When immigrating to Canada, your lack of a Canadian credit history can be a large barrier to many financial products like credit cards or mortgages. Even if you have enough cash for your daily spending, you should start building your credit as soon as possible. Eventually, you’ll benefit from credit cards rewards or the flexibility from loans. That’s why you should start building your credit score now, so that when you want these financial products, you’re already eligible.
What is a credit score in Canada?
In Canada, your score is a three-digit number that ranges from 300 to 900, but any credit score above 800 is generally treated as the best. A credit score is a number used to represent the information on your credit report. This report includes any information in your financial history that can help lenders determine your credit risk or how likely you are to default on your payments.
Several factors that can affect your score including:
- Your payment history
- The amount of credit you use
- The length of your credit history
- Public records
- The number of recent credit inquiries
In Canada, your public score will usually come directly or indirectly from one of the two major credit bureaus, TransUnion or Equifax Canada.
How can you boost your credit score?
As an immigrant, you have to start building your credit score from scratch, which takes time and consistency. However, improving your credit is not difficult as long as you follow these key strategies:
- Always pay on time!
The worst thing you could do for your credit is miss credit payments. Your credit payment history accounts for nearly 35% of your credit score. Every time you make your payments on time, your credit score very slightly improves. However, as soon as you miss a payment, your credit score takes a huge hit, even more so if your payment is over 60 days late.
- Use less than 30% of your credit
While it may sound counterintuitive, your credit score improves more when you use a small portion of your available credit. This means that through all your credit cards, you should only spend 30% of your credit limit. To calculate your total credit usage, divide your total credit balance by your total credit limit. To stay below 30%, you can either keep up with your payments and spend responsibly or you can increase your credit limit.
- Manage your credit history
You can use free credit score tools to regularly check your credit history and keep track of your credit score. It’s easier to manage your credit when you know exactly what’s affecting it. Your comprehensive credit history can tell you what you’re doing well, what you’re improving, and everything about the financial transactions that have an impact on your credit score. Actively managing your credit history can provide some great benefits and will help you stay on top of your spending habits.
- Avoid “hard credit inquiries”
When you apply for a line of credit or a loan, your lender will perform what’s called a “hard inquiry” on your account that tells them everything about your credit. Every time they do this, your credit score is temporarily decreased. When applying for credit, you should make sure that you only go to a couple of lenders at most. If you need to see your credit score, you can use the free credit score tools used to manage your credit history.
Tips for getting started
Now you know how to keep track of and maintain your credit, but how do you start building credit without any credit to begin with?
There are many credit card options for immigrants. The easiest one is getting a secured credit card. You can use your cash as collateral and get a credit card with nearly no requirements. You can also become an authorized user on someone else’s card. By simply attaching your name to a close friend or family member’s credit card, you can use their approved credit account to build your credit.
If you had a credit card in your home country, you should try asking your credit card company if they can give you a Canadian credit card. While this method is more difficult, you may be able to transfer your rewards to Canada as well.
As a student, you may be able to get a student credit card with hardly any requirements. If you are a student, this should be your go-to option if you can’t get a traditional credit card. Student credit cards can provide some great benefits. Essentially, you would be building credit from scratch the same way everyone does.
Take it slow
Improving your score can sometimes feel ambiguous and confusing. The important thing is to understand how credit works and how the different factors affect it. Once you understand that and get started with a credit card, your credit will steadily rise. If you’re patient and responsible, it will build on its own and you’ll be on track for an 800+ credit score in no time!
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