A credit rating, often known as a credit score, is an essential aspect of banking and everyday life in Canada. Newcomers with a solid credit score are eligible for lower interest rates on mortgages and other loans in the future. Having and using a credit card is necessary to create a credit history.
Newcomers may find it challenging to establish a credit score during their early days. However, consistent and wise financial decisions can help them build a strong credit score over time.
Here is everything that a newcomer must know about credit score before beginning their journey in Canada.
Credit score
A credit score is a three-digit figure that tells lenders about a newcomer’s ability to repay a loan or their “creditworthiness,” as reflected on their credit report. To put it another way, it’s a sort of banking report card on a person’s debt management and financial accountability.
Credit scores vary from 300 (the lowest score) to 750 (the magic middle figure), which will almost certainly qualify newcomers for a regular loan, and finally, 900 (the highest score offered for exceptional credit history).
Role
Certain information is shared with a credit bureau when a newcomer borrows money from a bank (or lender). Additional information is shared with the credit bureau over time, such as whether they’ve paid their bills on time, whether they’ve missed payments, and how much debt they owe. A newcomer’s credit score is calculated using these parameters.
The risk to the bank is lower if the score is higher, and vice versa. A credit score of less than 750 will make it more challenging to get loans or credit cards and result in a reduced credit limit and higher interest rates. Most banks, however, provide credit cards to newcomers to Canada when they create a newcomer account with them, which is usually enough to get them started on the road to establishing a positive credit history in Canada.
Benefits
Lenders and others use credit scores to decide whether newcomers are eligible for certain types of banking loans or other purchases. The ability to qualify for big credit-based purchases, such as acquiring a new home with a mortgage or a new car with a lease or an automobile loan, is influenced by credit score. In each of these cases, the credit score assists the lender in determining the likelihood of the borrower defaulting on loans or failing to make due payments.
The credit score is also used to determine eligibility for more minor things like a contract-based monthly cell phone plan or a lease for renting an apartment. A newcomer’s credit score is used to estimate the possibility of making monthly payments on time.
Determining credit score in Canada
Newcomers entering Canada will instantly begin creating a credit history as soon as they use credit in the country. Their credit history is a financial banking record of how they’ve dealt with credit (loans, debt, required payments, etc.). Credit utilisation (used credit vs available credit) and any public records on their file (bankruptcy in the past) are also considered.
The duration of credit history in Canada is another aspect that influences credit score, which is difficult for newcomers who have no credit history when they arrive in the nation. The majority of credit bureaus and financial institutions do not take credit histories from foreign countries into account.
A credit bureau examines a newcomer’s credit history and generates a credit report and credit score. Equifax and TransUnion are the two credit bureaus in Canada.
Improving credit score as a newcomer
A newcomer to Canada does not have a history of banking credit. As a result, individuals may not be eligible for large loans or mortgages immediately. There are, however, a few steps they may take to begin building their credit history and improving their credit score.
Get a credit card: In Canada, credit cards are very normal. Credit cards provide newcomers with a credit limit that they can use to borrow money from the issuer. However, they must make a minimum payment on the balance due on their credit card each month.
- Make on-time monthly credit card payments: Making on-time monthly credit card payments is critical to establishing a solid credit score in Canada. Newcomers also incur interest on any outstanding balance on their credit card, which is essential for their credit score.
- Don’t utilise credit card’s entire limit: Credit utilisation (available credit vs used credit) is one aspect of determining a credit score. Beginners should have unused credit card limit space because it shows that they haven’t overstretched themselves. The Financial Consumer Agency of Canada suggests using only 35% of available credit.
- Experiment with other sorts of credit: Once newcomers have established enough credit history to qualify, they should experiment with several types of credit to raise their credit score even further. Initially, this may entail signing up for services that require less credit history, such as a monthly phone plan with a contract. As the credit history improves, they may be able to apply for credit that requires a better credit score, such as automobile loans, lines of credit, or home mortgages.
Building a credit score might be difficult for newcomers, mainly because their lack of credit history prevents them from obtaining certain types of credit. However, once they get started, their credit score increases constantly as long as they maintain excellent and healthy financial practices.
