Credit in a New Country
Establishing Good Credit in Canada
When you move to a new country, one of the most difficult aspects of your new life is understanding the banking and financial system in your new home.
Finance works differently in every country throughout the world. This difference includes the local currency, taxes, savings, and even how the credit systems work. In order to be successful in your new life, you need to understand how finances work in your new home.
If you’re a Canadian immigrant who needs to establish credit in Canada, the following section will help you get out on the right path. If you don’t understand the credit system, we can help. Call Consolidated Credit today at 1-888-294-3130 to speak with a trained credit counsellor. The counsellor can evaluate your current financial situation and offer recommendations to help you get on the right track.
Establishing a Credit History in Canada.
A large part of your financial life in Canada is based on your credit history. Lenders and creditors use your credit score as a way to assess your risk as a borrower. What’s more, since so many businesses besides creditors run credit checks, having no credit history can also be a disadvantage. To begin establishing a credit history, you must use some kind of credit. You have the following options:
|Type of Credit||Advantages||Disadvantages|
|Unsecured Credit Cards|
|Secured Credit Cards|
Typically, a secured credit card is the best way to build your credit history. Each payment you make builds towards a positive credit report and boosts your credit scores. Just make sure not to apply for too many secured credit cards, because each time you apply for a new line of credit, your creditor or lender will make a credit inquiry. If you make too many credit inquiries over a six month to one-year period, you may damage your credit. Be patient, work gradually, and you will build a strong credit profile.
What appears on Credit Reports in Canada?
- Personal information – including your name, social insurance number, address, date of birth, and employer
- Public records – which refers to any court order or judgments that have been brought against you in Canada
- Credit inquiries – these inquiries remain on your credit report for up to one year and are a factor in credit score calculations for up to six months
- Credit cards, accounts and loans – unsecured credit cards, secured credit cards, department store cards, gas company cards, bank loans, auto loans and leases, mortgages, student loans, credit union cards or loans, and consumer finance company accounts
The listing for each account included in your credit reports will provide the basic account information, the account status and a record of the payment history on that account. Positive and neutral information may be included in your credit reports indefinitely in Canada, whereas negative information is removed after a specific period of time. Negative payment information and most other penalties are removed after six years on both credit reports; however some penalties may be applied longer and the bureaus differ in the length of credit penalty reports.
How Credit Scores are calculated in Canada
Although both credit bureaus already have their own formula to calculate their credit scores, they are both based in the same basic system using FICO credit score calculation, which predominantly looks at five factors:
|Credit History||This factor looks at the history of repayment on your existing debts. Late payments, paying less than you owe or missing payments entirely has a significant negative impact on your credit scores||35%|
|Debt Owed||This looks at the amount of debt you have overall, as well as the amount of debt you have compared to the limits. When you reach or exceed your credit limits, it has a negative impact on this part of your credit score.||30%|
|Length of Credit History||How long you’ve used this credit is also a factor in your credit scores. As a new credit user in Canada, the factor will be low until you have established your credit history.||15%|
|New Credit Applications||This factor looks at the number of inquiries made on your credit report. Too many inquiries by a creditor or lender in a six-month period will negatively impact credit scores.||10%|
|Types of Credit in Use||This factor looks at the types of debt you carry. Creditors like consumers to have a diverse assortment of debts, like mortgages, car loans, installment loans and credit cards.||10%|
In general, the overall credit score range in Canada is between 300-900. Scores below 640 are often interpreted by the bureaus to be a bad/poor credit score, while 640 and above are considered a good credit score. It’s important to note that your credit scores will vary based on which company is doing the calculations. Anytime a company runs a credit check on you as a consumer, they will obtain your credit score from both bureaus. However, they may use only one of these numbers, they may take an average, or they may use their own formula, resulting in scores that vary from the credit bureaus’ scores.
What you can expect before you start building credit
When you first move to Canada, you are unlikely to have established a credit history in order to generate credit scores. Since you may need to get a residence before you have time to establish your credit, you should be prepared for a few things that may happen:
- Property rental – If you are renting property for your residence and the rental agent runs your credit, they may want a tenant agreement with someone who does have a credit history. However, you may be able to offer additional proof of ability to pay your rent, such as savings or income from your employment. They may even ask for a co-signor, or someone to guarantee payment of rent for a period
- Consumer services – Consumer services such as electricity/hydro, cell phone and internet services may require you to make a deposit to open your account
- Credit checks – Credit checks are run by many Canadian companies during the hiring process. In most cases, the company is looking for public records and not your credit history in itself. If a company tells you they are running a credit check, explain your situation right away.
How to avoid scams and other credit issues
It’s important to be aware of scams and debt traps you can fall into when you start to use credit in Canada. Many consumers lose time, money and points off credit scores because of scams. Being educated about scams is the greatest defense against potential problems:
|Type of Scam||Description|
|Advanced Fee Loan Scams||In this scam, a company promises to give you a loan with no need for a credit check as long as you pay a high fee for the loan. The company takes the fee but you never receive money in return. You should never have to pay an advanced fee to get a loan! While some loans have fees that are applied while you pay back a loan, these are always applied after you receive your money.|
|Guaranteed Unsecured Credit Cards||Approval for unsecured credit cards is always based on your credit scores, so if you have a bad credit score or no credit, a guaranteed unsecured credit card is likely to be a scam. In some cases, the card may sound like it’s from a major credit card issuer, when you are really getting a specialty store or catalogue card. In other cases, the fees on the card may be so high that you run through your credit line before even making a purchase.|
|Payday Loans||Short-term loans that promise cash in minutes or the next day with no credit check will almost always cause problems. You may be asked to pay interest on the money you receive equivalent to an APR of 400% or more, or finance fees equal to $30 for every $100 borrowed. With these high costs, it’s difficult for borrowers to pay back the loan, causing even more financial hardship.|
|Debt Settlement Scams||Be cautious of services that offer to settle your debt for pennies on the dollar. In many cases, they are companies that charge high fees and recommend you stop paying on the debts to build up money for a lump-sum settlement. While they get paid, you may ruin your credit by not paying your bills. Debt settlement is in the hands of your creditors; until an agreement is reached and the money is paid, your credit will suffer.|
If you are concerned about avoiding credit issues and want to find the right solution for your debt problem, call Consolidated Credit at 1-888-294-3130 for a free consultation with one of our trained Credit Counsellors who can discuss your personal financial situation and provide solutions, or contact us online for a Free Budget Analysis.