How to build a good credit score from scratch as a newcomer in CanadaJuly 29, 20218 min read
Having a credit rating or a credit score is essential for life in Canada. A good credit score can ensure you qualify for better interest rates on mortgages and other loans down the line. To get started with building your credit history, having and using a credit card is essential.
In this article, we will outline what a credit score is, share valuable tips to help you build a good credit history as a newcomer in Canada, and provide information on how to check your credit score and order a credit report.
What is a credit score?
When you borrow money from a bank (or lender), certain information is shared with a credit bureau. Over time, additional information, such as whether you’ve paid your bills on time, whether you’ve missed payments, and how much debt you have outstanding, will get shared with the credit bureau. These factors go into calculating your credit score – a three-digit number that indicates to lenders your capacity to repay a loan – as reported on your credit rating report.
Credit scores range from –
300: The lowest score or the starting point; to
750: The magic middle number, which will likely qualify you for a standard loan; all the way up to
900: The highest score awarded for excellent credit history.
The higher your score, the lower the risk is to the bank, and vice versa. A score under 750 will likely make it more difficult to acquire loans or credit cards – you may receive a lower credit limit and get charged higher interest rates. For newcomers to Canada, however, most banks offer a credit card when you open a newcomer account with them – this usually suffices to get you started on your journey of building a good credit history in Canada.
Learn more about credit scores in Canada
See Credit in Canada: What every newcomer needs to know for information on the different types of credit in Canada. Get insights on the factors that affect your credit score, understand why building a good credit history is important, and dive into how a credit score is calculated.
Who can see and use your credit report?
Credit bureaus follow rules that define who can see your credit report and how they can use it. Those allowed to see your credit report include: banks, credit unions and other financial institutions, credit card companies, car leasing companies, retailers, mobile phone companies, insurance companies, governments, employers, and landlords. These businesses or individuals use your credit report to help them inform lending decisions about you.
Generally, you need to give permission or your consent, for a business or individual to access your credit report. In the provinces of Nova Scotia, Prince Edward Island and Saskatchewan, a business or an individual only needs to tell you (verbally) that they are checking your credit report. Other provinces require they obtain your written consent to check your credit report. Some provincial laws allow government representatives such as judges and the police to see parts of your credit report without your consent.
5 tips to build a good credit score
1. Make payments on time and pay off your balance in full each month
When lenders review your credit report and request to see your credit score, they want to know how reliable you are with paying your bills – because usually, past payment performance is considered a good predictor of future performance. To build a good credit history, it’s important to make all your payments on time. While your credit card bill will always indicate the minimum amount owed, as someone just getting started with building credit in Canada, it’s best to pay off the balance in full each billing cycle. Paying the entire balance each month also helps you avoid racking up credit card debt.
2. Use credit wisely
Always stay within your credit limit. If you have a credit card with a $2,000 CAD limit, try to not go over that limit. You should spend only what you can afford to pay back. Spending more than the authorized amount on a credit card can lower your credit score.
As a rule of thumb, try to use less than 35 per cent of your total credit in each billing cycle. This includes all your credit products such as: line of credit, credit card from Canadian banks/lenders, loans, etc. For example, if you have a credit card with a $2,000 CAD limit and a $5,000 CAD line of credit from a bank, you should limit your total spending to approximately $2,450 CAD (35 per cent of 7,000) or less, while also maintaining the 35 per cent rule (in this case, $700 CAD) specifically for your credit card.
Tip: Start small – use your credit card for groceries, monthly utility payments, phone bills, etc. Over time, this will help you build a strong credit history.
If you max out your credit limit each month, lenders perceive you to be a greater risk. This holds true even if you pay your balance in full by the due date.
3. Limit your number of credit applications and/or credit checks
As you settle in Canada, it is normal and expected that you’ll apply for credit from time to time. A lender or other organization offering credit-based products may ask to “check your credit” or “pull your report”. When they do so, they are asking to access your credit report at the credit bureau. This results in an inquiry in your credit report.
Tip: To build a good credit history faster, it is recommended that newcomers to Canada start off with a single credit card (avoid holding multiple credit cards) and keep paying the balance in full.
There are two types of credit checks: hard hits and soft hits.
- Hard hits: These are credit checks that will appear in your credit report and can impact your credit score. Anyone who views your credit report will see these inquiries. Examples include an application for a credit card or mortgage, some rental applications, and some employment applications. If there are too many (hard) credit checks in your credit report, lenders may think that you’re urgently seeking credit and/or trying to live beyond your means.
- Soft hits: These are credit checks that appear in your credit report but only you can see them. These checks do not affect your credit score in any way. Examples include requesting your own credit report or businesses asking for your credit score to update their records about an existing account you have with them.
To control the number of credit checks in your report:
- Limit the number of times you apply for credit;
- When shopping around for a car or a mortgage, get your quotes from different lenders within a two-week period. Your inquiries will be combined and treated as a single inquiry for your credit score;
- Apply for credit only when you really need it.
4. Report any inaccuracies on your credit report
Once you get your report, check for:
- Errors in credit card and loan accounts, such as a payment you made on time that is shown as late – this could impact your credit score negatively;
- Mistakes in your personal information, such as a wrong mailing address or incorrect date of birth;
- Accounts listed that you never opened, which could be a sign of identity theft;
- Negative information about your accounts that is still listed after the maximum number of years it’s allowed to stay on your report.
Any inconsistencies or incidents of fraud should be reported to the respective credit bureaus without any delay and get it corrected. Monitoring your credit on a regular basis can help you spot inaccuracies before they impact your credit rating.
Note: A credit bureau can’t change accurate information related to a credit account on your report. For example, if you missed payments on a credit card, paying the debt in full or closing the account won’t remove the negative history.
5. Use different types of credit: card, loan, line of credit
The number of credit products you have (such as a credit card, line of credit, loans, etc.) affects your credit score. For newcomers to Canada, it is recommended to start off with a single credit card and gradually apply for other credit products at a later stage. As you become more established in Canada, diversifying your credit and having a mix of credit products may improve your credit score. However, make sure you can pay back any money you borrow, otherwise, you could end up hurting your score by taking on too much debt.
How to check your credit score
It takes at least a few weeks to a month for newcomers to receive their first Canadian credit card and a few additional months of credit transactions to generate a credit history.
You can check your credit score in the following ways:
1. Through credit bureaus: EQUIFAX and TransUnion are the two major credit rating organizations in Canada, and you can choose either one to get your credit report. Detailed instructions to obtain the report are available on the respective websites. Your credit score on each credit bureau may slightly differ as each organization may consider different factors while calculating your credit score. Equifax refers to your credit report as “credit file disclosure” while TransUnion refers to it as “consumer disclosure”.
Remember: Ordering your own credit report has no effect on your credit score.
2. Through select banks: If you have an account with the Royal Bank of Canada (RBC), you can view your credit score for free, anytime, through online banking.
- Consider requesting your report from one bureau/company, then wait six months before you order from the other organization. By spacing out your requests, you may be able to detect problems sooner.
- Always check to see if a website is secured before providing any of your personal information. A secured website will start with “https” instead of “http.”
How to order a credit report in Canada
You can get a physical or a virtual copy of your credit report. A physical copy may take some time to be delivered to you while a virtual copy can be obtained immediately. You usually need to pay a fee when you order your credit score online from the two credit bureaus: TransUnion and Equifax.
Tip: TransUnion allows you to order your credit report online once a month for free.
Note: A free credit report is only available as a physical copy and cannot be ordered online; separate processes exist for both Equifax and TransUnion. You must place your order by phone, mail or fax.
How long does information stay on your credit report?
Positive information in your credit report stays indefinitely, from the time the report was created. Negative information (that affects your credit score) such as late payments or defaults generally stays on your credit report for six years. However, some information may remain for a shorter or longer period of time. Learn more about the timelines for specific cases on the Financial Consumer Agency of Canada website.
Credit is essential to life in Canada and building a good credit history takes time, so, be patient. Being aware of factors that affect your credit rating can help you make better financial choices.
Neelam Advani Assistant Branch Manager
Neelam Advani is an award winning banking professional, passionate community activist, mentor and volunteer.