Credit in a New Country:

A Guide to Credit in Canada

Establishing good credit is often frustrating for those who are new to this country and don’t understand how the system works. Establishing credit is a critical component for financial survival. For instance, if you do not have a credit history you will not be able to have your electric/hydro or telephone turned on in your home in many provinces unless you pay a hefty deposit.

If you are not careful, you may fall for credit scams that can cost consumers a lot of money. This publication is designed to help you understand how credit works, how to get credit, and avoid expensive traps.

An Overview

Credit allows you to:

• Buy now, and pay for the item later
• Make large purchases and pay for them over time
• Build a good credit rating if you pay your bills on time

There are two main types of credit:

Instalment loans let you borrow a fixed amount and pay it back in fixed monthly payments. A good example is a car loan, where you will borrow enough to buy the car and then pay it back over two to five years.

Revolving accounts or "lines of credit" give you a certain amount you can borrow against (your "credit limit"). You can usually then pay the balance off in full or make smaller minimum payments. A good example of a revolving account is a credit card.

Warning! The minimum required payments on most credit cards is so small that even a balance of $500 -- $1000 can take years to pay off if you only make the minimum payment each month.

Some loans are secured which means you pledge collateral the lender can "repossess," or take back, if you don’t pay the loan as agreed. Most car loans and home loans are secured loans.

Other loans, especially credit cards, are unsecured, which means there is no collateral for the loan. Unsecured loans can be harder to get because there is nothing to back up the loan, other than your promise to pay.

One of the reasons credit is so widely available in Canada is because we have a strong credit reporting system. Credit reporting agencies (also known as “credit bureaus”) are companies that collect information about how consumers pay their bills, and sell that information as credit reports to businesses that may use them for credit and insurance purposes.

Credit reports contain four basic categories of information, including personal information (name, current and previous addresses, Social Insurance Number), account information (credit accounts you’ve held, the most you’ve borrowed, the current balance and whether you’ve paid on time), public record information (bankruptcy, court judgments or tax liens) and inquiries (the names of companies that have looked at your credit rating in the past two years).