Canada has one of the highest immigration rates in the world. According to Statista, Canada accepts around 300,000 immigrants on an annual basis. This has propelled its multicultural society and created an inviting home for many immigrants. However, there are still many challenges immigrants face, when it comes to credit and their overall financial situation.
When you immigrate to Canada, it’s not possible to transfer over your credit from your home country, which may make it difficult to buy a home, a car, or access regular credit products. Fortunately, there are ways you can build your credit so that you can start building your life in Canada.
Before we jump into how you can build credit in Canada, it’s important to understand how the Canadian credit system works. There are two concepts you should familiarize yourself with:
Credit Score - A credit score is a 3 digit number that ranges between 300 to 900. The number you receive is based on different factors and is an indicator of your ability to pay bills and manage debt. Lenders, insurers, landlords, and other individuals or companies you have a financial relationship with use this number to determine whether they will lend, rent or provide a service to you.
Credit Report - A credit report is a document that compiles all your credit information and is a direct reflection of your credit score.
While there are many formulas on how your credit is calculated, the variables used remain the same. Here are the five main factors used to calculate your credit score.
Payment History - Your payment history accounts for 35% of your credit score. This is why paying your bills and debt payments on time and in full is crucial to building your credit. If you miss payments, you’ll not only negatively affect your credit, but you may be subject to late penalty fees and interest charges.
Credit Utilization - Your credit utilization ratio accounts for 30% of your credit score. The higher your credit utilization, the more negatively it will impact your credit. In general, it is recommended that you use no more than 30% of your available credit. For example, if you have a credit card with a credit limit of $3,000, you should not use more than $900 (30%).
Credit Length - Your credit length refers to the average age of all your credit products and accounts for 15% of your credit score. The longer your credit history the more positively it will impact your credit. As such, opening new credit products and closing older accounts can lower your credit length.
Credit Mix - Your credit mix accounts for 10% of your credit score. The greater your credit variety, the more positively it will affect your credit. The reason being, having different credit products such as a car loan, a credit card, a personal loan, or a mortgage shows that you’re capable of handling different types of debt.
Credit Inquiry - Credit inquiries account for 10% of your credit score. When you open a new credit account you’ll be subject to a hard credit check. Multiple credit inquiries in a short time are seen as risky and can hurt your credit score.
Building your credit score from the ground up can be intimidating, but with the right steps, you can establish a good credit score.
Here are some easy ways to help you get started.
When starting out, you should try to get a credit card as it’s one of the most basic and convenient credit products around. Many banks in Canada have a number of credit cards specifically designed for newcomers, so requirements will be a lot lower than regular credit cards.
However, if you’re unable to obtain a regular credit card you can opt for a secured credit card. Secured credit cards work the same except you’ll need to provide a deposit as security. Regardless of which option you qualify for, both will help you build a strong payment history.
As a new immigrant, your lack of credit will limit your home buying options, which means you‘ll have to rent a place. Unfortunately, rent payments aren’t reported to the credit bureaus which means it will not help build your credit despite a good portion of your income going toward it. However, if you rent with a landlord who is registered with the Landlord Credit Bureau (LCB) you’ll be able to have your rent payments reported to the Equifax credit bureau, which in turn will improve your credit.
A phone is not only important for job hunting but it’s a great tool for credit building. In Canada, there are some phone providers who will report your payments to the credit bureau. This is an easy way to build credit as you can choose a phone plan that doesn’t burn through your cash. Moreover, these small consistent payments to your provider will not only add to your payment history but will enhance your credit mix as well.
As mentioned above, having a good credit mix is an important factor that affects your credit. A good way to add variety to your credit mix is through a secured savings loan. A secured savings loan is a program that allows you to save money while building credit. It typically works by having the funds you’re approved for held in a secure trust account. To release the funds, you’ll make payments to the financial institution which will be reported to the credit bureaus. Once the “loan” is paid off, you’ll receive the funds from the account, minus any fees they charge.
Building credit from the ground up can be difficult, but if you follow these tips, you’ll be able to establish your credit and gain access to a variety of affordable credit products.
In general, it’s important to regularly check your credit. In Canada, you are legally allowed to obtain your credit report for free once a year. You can also utilize credit monitoring services to keep tabs on your credit score and make sure there are no inaccuracies on your credit report or signs of identity fraud.
As a new immigrant with limited options, payday loans may seem very attractive to you, but beware, they come with extremely high-interest rates and fees. Payday loans should only be used as a last resort. A better alternative would be a personal loan or asking for a favour from your friends and family.
Many new immigrants are unaware of all the lending laws and practices which makes them ideal targets for scammers. If your information is stolen by these scammers, they can use your identity to open accounts under your name which can ruin your credit. This is why it is important you do your due diligence prior to working with any lender.
Building your credit as a new immigrant can be daunting. But as the saying goes “ take pride in knowing that your struggle will play the biggest role in your purpose”. Your struggles today will bless you with a better future. Moreover, building your credit as a new immigrant is a lot easier than building it after unfortunate events such as bankruptcy or a consumer proposal. While it may take some time, you will be able to reach your credit goals.