As a newcomer to Canada, it took me a while to understand the concept of credit scores. And after I did, it took some time to build my credit score to the point where I could enjoy access to lower interest rates on personal loans and other credit products.
Establishing and improving your credit score takes effort, and the strategies covered below can help you get started.
What is a Credit Score?
Your credit score is a three-digit number between 300 and 900. It reflects your financial health and lenders use it to assess your creditworthiness.
Simply put, your credit score shows whether you have been responsible with paying off debt in the past.
If you have meticulously paid your bills on time, a lender or creditor is more willing to take on the risks that come with lending you money.
As per Equifax, credit scores in Canada can be categorized as:
- 660 to 724: Good credit score
- 725 to 759: Very good credit score
- 760 and up: Excellent credit score
A credit score below 560 is considered ‘poor’ credit. A borrower with poor credit will find it challenging to qualify for credit products at competitive interest rates.
Benefits of a Good Credit Score
So, what are the benefits of having a good credit score?
The main advantages include:
- Access to low-interest rates on loans
- Easier to qualify for a regular credit card
- You can get approved for higher credit limits
- It is easier to rent an apartment or get a mortgage
- Access to competitive insurance rates
- It may be easier to qualify for jobs that require a credit check
- Access to the best credit cards including those that offer rewards, such as cashback or travel rewards
How to Improve Your Credit Score
As a newcomer, you may be surprised you are starting off with no credit score or a low credit score.
This could be because you have never opened a credit account in Canada, and as such, you don’t have a credit history.
To understand how this works and how to improve your credit score, let’s look at how credit scores are calculated.
Credit bureaus (Equifax and TransUnion) use credit scoring models that consider various factors when computing your score. The factors that have the most impact include:
- Your payment history (35%)
- Your credit usage (30%)
- The age of your credit accounts (15%)
- Types of credit you have opened (10%)
- Number of new credit applications (10%)
They also consider whether you have negative information on your credit report such as a bankruptcy or unpaid collections.
Here are 9 strategies for improving your credit score:
1. Get a Regular Credit Card
As a newcomer, I initially avoided credit cards because I felt that they could damage my credit rating. But that was a mistake. When I later wanted to buy a car and did not have the cash, I did not qualify for a car loan as I had a thin credit file.
A starting point for improving your credit score is to get credit.
See if you can qualify for a regular (unsecured) credit card at your bank and then ensure you use the card responsibly.
Your bank will report your credit usage to one or both credit bureaus and this will help you build credit history.
2. Get a Secured Credit Card
If you are unable to qualify for a regular credit card, you could consider a secured credit card.
Secured credit cards are like regular (unsecured) credit cards, except that you are required to provide a cash security deposit.
The security funds are to protect the bank if you are unable to pay off your credit card balance.
Essentially, since you are new to using credit, the bank takes additional steps to ensure it does not lose money.
This security deposit also becomes your credit limit. For example, if you put down $1,000, then you can spend up to $1,000 on your credit card.
3. Make Payments on Time
Paying your bills and credit balances on time, all the time, will have the most impact on your credit score.
Avoid late payments and clear your balances within the interest-free grace period whenever possible. At the very least, you want to make the minimum payments on time.
You should also pay other bills on time. For example, utilities, phone, internet, rent, and insurance bills.
You can set up automatic payments from your chequing account, so you don’t forget.
4. Check Your Credit Report for Errors
Your credit report is a summary of your financial history showing your credit accounts and types, payment history, credit inquiries, some personal information, and public records that may impact your credit worthiness.
You should request a copy of your credit report from both Equifax and TransUnion at least once a year and scrutinize it for errors that can impact your score.
For example, payments incorrectly marked as late, unfamiliar credit accounts, wrong personal information, and negative information staying on your credit report after they should have been removed.
If you find errors on your credit report, you can dispute them by contacting the lender (if applicable) and/or the relevant credit bureau.
The contact number for the main credit bureaus in Canada are:
- Equifax: 1.800.465.7166
- TransUnion: 1.800.663.9980
By routinely checking your credit report, you may be able to detect instances of identity theft if it occurs.
Credit monitoring can also help in this regard.
5. Limit New Credit Applications
When you apply for new credit, the lender pulls your credit file, and this ‘hard inquiry’ can lower your score.
The impact of hard inquiries on your score is greater when you submit several credit applications within a short period of time.
Checking your own credit score is a “soft inquiry” and this does not affect your credit rating.
6. Lower Your Credit Usage
You should aim to use no more than 30% of your credit limit at any given time. This is also referred to as your ‘credit utilization rate’.
For example, if you have a $1,000 credit limit, then you want to keep your balance at a maximum of $300.
A lower credit utilization rate can help improve your credit score.
7. Increase Your Credit Limit
When you have used your credit card for a while and established that you can manage credit responsibly, you can ask your credit card company to increase your limit.
A higher credit limit makes it easier to lower your credit utilization.
For example, if your credit limit is now $5,000 and you carry a balance of $300, your credit utilization rate drops to just 6%.
This strategy should be aimed at lowering your credit utilization as opposed to increasing your overall spending and getting into debt. Having a higher credit limit can result in overusing credit and adding more to debt.
8. Consider a Mix of Credit Types
Having different types of credit is better for improving your credit score. You could carry a mix of installment and revolving credit accounts such as credit cards, mortgages, car loans, and a line of credit.
For a variety of credit to boost your credit score, you must routinely pay your balances on time.
9. Keep Old Credit Accounts Open
The age of your credit accounts has a 10% weighting when your credit score is calculated.
The longer a credit account has been opened, the better. Even if you no longer use an old credit card, it may make sense to keep it open as closing it could affect your credit score negatively.
Also, the credit limit on the card adds to your overall credit limit and lowers your credit usage rate.
Building Credit as a Newcomer
In general, it takes a while to build your credit score from scratch.
By following the strategies on this list, you can establish and increase your credit rating over time.
For even more tips on managing your credit as a newcomer, check out this immigrant guide to credit.
Enoch Omololu is a personal finance expert and a veterinarian. He has a passion for helping others win with their finances and his writing has been featured or quoted in The Globe and Mail, Winnipeg Free Press, Wealthsimple, Financial Post, Toronto Star, CTV News, Credit Canada, and many other personal finance publications.