As a new immigrant in Canada, the phrase “Credit Score” might be very new to you. This is because this type of system probably does not exist in the country you relocated from. However, it is important to know how a credit score is very essential to your new life here in Canada. In this post, you will learn the meaning of a credit score, how it is calculated, how it is used and how to improve yours. Ready, let’s dive in and learn about credit score for newcomers in Canada.
What is a Credit Score?
A credit score is a three-digit number ranging from 300 to 900 that measures how creditworthy you are. When you borrow money from a lender, usually a bank, some information is shared with a credit bureau or institution. Over a period of time, other information like whether or not you paid some of your bills on time, the amount of debt you owe will also get shared with this bureau. All these contribute to generating a credit score for you.
Let’s explain further. For many immigrants, the financial system you are familiar with is different. For example, if you decide to purchase a TV in your home country, you might decide to pay immediately with cash or a debit card. However, in a credit system, you might be required to pay with a credit card. The credit card is “pre-funded” already. Then over a period of time, usually within a month, you will be required to pay back this money.
How consistently or not that you decide to pay back this credit is measured and then calculated as your credit score. You might say that you don’t want to use the credit system & prefer to pay for everything in cash or debit, but this will be disadvantageous to you as it might be a challenge to calculate your credit score.
With a credit score, lenders are able to gauge how well you have handled credit in the past & how well you will manage it in the future.
In the following parts of this article, you will understand why a credit score is important and how it affects important decisions you make including renting a house in Canada
How is a credit score used?
Below are some of the ways a credit score is used in Canada:
- Before Issuing a Credit Card: Because your credit card is “pre-funded” with a credit amount, a bank will look at your credit score and determine your ability to pay back the credit in a credit card. If your credit score is low, they might reduce the amount of funds in the credit card. This fund in credit cards is usually called a “limit”. For example, if the fund that comes in your credit card is $2000 every month, it would be said that your monthly credit card limit is $2000
- Before you rent a house: A landlord usually considers your credit score before renting out to you. This way, the landlord can gauge whether or not you will pay your rent on time or not.
- Before you buy a car: Just like the landlord, the auto dealership will also want to know whether or not you will be able to pay for your car before selling it to you.
- Other institutions that use your credit score include:
- Mobile phone companies
- Insurance companies
Also, when you have a poor credit rating or low score, the following tends to happen:
- You might be asked to pay a higher interest rate than the regular rate
- You might need to get a co-signer to be approved for credit
How is credit score calculated in Canada?
Various factors determine how your credit score is calculated, however, different agencies also have different criteria. They include:
- How often do you miss your payment dates
- Your number of recent credit applications
- Being close to or above your credit limit
- The length of your credit history
What is a good credit score?
When it comes to a credit score, there’s no one-size-fits-all approach. Everyone’s credit and financial situation are different. However, there are some general score ranges that show how good or not a score is.
According to Equifax,
Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good, and 800 and up are considered excellent. Higher credit scores mean you have demonstrated responsible credit behaviour in the past, which may make potential lenders and creditors more confident when evaluating a request for credit.
How does an immigrant get a credit score or build a credit history?
Start with a Secured Credit Card- Walk into any of your bank’s branches and apply for a credit card. To get one, the bank will as you for proof of a permanent address, social identification Number (SIN) and other requirements based on the bank.
With this credit card, you can then start to build your own credit history. Here are a few tips:
- Always pay your bills on time: When lenders are reviewing your credit worthiness, they are checking to see how you fared in paying past payments like phone bills, utility payments, etc. For them, this serves as as an indicator of how you pay future debts. To already start a build a good credit history, pay your bills on time. Also pay your bill in full whenever you can. This will reduce the amount of interest you will have to pay as well.
- Keep credit card balances low: Try to stay within your credit limit. Take for example, if the credit limit on your credit card is $3000 CAD, try to stay within this limit. Spend only what you can afford to pay back. As a rule of thumb, lenders prefer a credit utilization ratio of 35% or less. For you, this means that in every billing cycle, try to keep your credit card balance below 35% or less.
- Reduce your number of credit applications: When applying for some kinds of credit such as buying car or getting a mortgage, these lenders may require to check your credit, which is an inquiry into your credit report. If there too many of these tpes of checks in your report, lenders might think that your are urgently seeking credit or trying to live above your means. Too many checks can also drag your credit score down. To limit the number of the checks, apply for credit only when you really need it.
How to check your credit score
In Canada, there are two credit bureaus namely Equifax and Transunion. However, you can also check your credit score via select banks. Your credit score across these platforms might differ since each considers various sets of factors when calculating your score. You can visit their websites to get information on how to obtain your credit score from them.
What credit score does everyone including newcomers start with?
According to FinancialPost.com, you start off with no score at all. You might think that you will start at 300 which is the lowest score, however, 300 is for those with ruined credit scores caused by bankruptcies and other factors.