What credit score do new Canadians start with?

Moving is exciting, but settling down in a new country poses unique challenges, especially when it comes to establishing and building your credit score.

A good credit score helps you qualify for low-interest rate loans, mortgages, and credit cards, all of which ultimately saves you money.

But credit history doesn’t transfer from country to country, and what constitutes a good credit score varies from country to country as well.

For example, Canadian credit scores range from 300-900 while US credit scores range from 300-850. While both share FICO’s common credit score model, the average credit score in Canada is 650, while the US’s average score is 704. Reading more about Canadian credit bureaus may help you understand how they differ from what you may be used to.

So, without a credit history to follow you, and with potentially different variables to consider, where do you begin to build credit if you’re new to Canada?

New Canadians start out with zero credit

If you’re moving to Canada, you will not have any credit upon arrival. This means that your score won’t be low — it will be nonexistent.

As previously mentioned, there is no universal credit reporting system. Every country has a unique set of laws governing how credit is regulated. While there may be some similarities between factors that determine credit worthiness, there is no uniform method at this time.

While having zero credit may make it more challenging to secure a mortgage or car loan, there are some perks. For example, if you have a history of bad credit or even bankruptcy, this will not follow you to Canada. If you’ve made some poor decisions or mistakes in the past that have impacted your credit history, moving to a new country and starting fresh is a huge advantage. You can learn from your mistakes and build a new financial narrative.

Establishing credit when you move to a new country is a must, especially if you’re staying long-term. Even if you don’t plan on getting a mortgage, having little to no credit may not make you an appealing applicant for a landlord, which will make renting difficult. So, the best step you can take to improve your situation is understanding how credit works in Canada so you can establish a solid financial foundation.

Where Does Your Credit Score Start in Canada?

When you're a newcomer to Canada, your credit history starts from scratch - this implies that you don't begin with a set number, but rather, your credit score is non-existent. It's important to understand that having no credit score isn't synonymous with having a bad score. It merely signifies a blank slate in the Canadian credit system.

As you begin to establish credit in Canada, your initial credit score will largely depend on your financial activities. These may include opening a bank account, applying for a credit card, or obtaining a loan. Each of these actions will be reported to the Canadian credit bureaus - Equifax and TransUnion - and will gradually contribute to building your credit score.

As you start your credit journey in Canada, don't be disheartened if your initial credit score seems low. Remember, the average credit score in Canada is around 650, and it doesn't rise overnight. It takes consistent financial responsibility, timely bill payments, and sensible credit utilization to gradually improve your score.

What determines your credit score?

The first step in establishing and building credit is understanding what comprises your credit score.

Equifax and TransUnion are the two main credit bureaus in Canada. Their job is to collect, store, and share information about how you use your credit. You are then given a credit score based on the following factors:

• Your payment history

• Your debt burden

• The length of your credit history

• The types of credit you carry

• Public records indicating bankruptcy or collection issues

• Recent inquiries into your credit

Whether you’re new to credit or starting over, it’s important to understand how these factors can both positively or negatively affect your credit scores.

Your payment history

Considered the most important factor impacting your score, your payment history provides information on the number of credit accounts you have open or the types of accounts you have. It also showcases whether or not you’ve made payments when they are due, thus detailing your late, or delinquent, payments.

Once you have credit extended to you, it’s important to make sure you pay your bills on time. Lenders want to know that if they extend you credit, you are likely to pay it back in a timely fashion.

The good news is, if you have a low credit score and make a late payment, it doesn’t impact your rating as much as if you had excellent credit, and made a late payment. Credit bureaus seem to be more forgiving in this manner.

Your debt burden

Also known as credit utilization, debt burden is the percentage of the total credit you use compared to the total amount of credit you have available. Ideally, you want to use around 30% of your total available credit per month.

If a lender sees a high debt burden on your credit report, they may assume you can’t repay what you owe. This can impact your ability to get more credit extended to you and also decrease your credit score.

If you find you are using more than 30% of your total available credit, you can request a higher credit limit from your credit card issuer. This can help reduce your calculated debt burden and increase your score.

The length of your history

This portion of your credit report provides details on the oldest and most recent accounts you’ve opened.

Lenders want to see how long your credit accounts have been in existence, that you’ve consistently used credit over time, and that you’ve paid back what you’ve borrowed. When a lender sees a short history or sporadic use of credit, they may assume you are at a greater risk for defaulting on paying their balances.

All in all, creditors want to know that you have a history, or track record, of managing your debt and paying it back.

The types of credit you carry

Loans, lines of credit, and credit cards are all different types of credit and lenders like to see this type of diversity in your credit history.

In combination with making your payments on time, credit diversity demonstrates to lenders that you are able to manage your debts responsibly.

Public records

If you have a prior history of bankruptcy, dealing with collections agencies, or liens against your home, it will reflect on your credit score.

None of these issues will appear on your new Canadian credit report, however. Great news if you’ve had some struggles in the past!

Recent inquiries

There are two types of inquiries that can be made into your credit: a soft check and a hard check.

When you check your credit score or your credit history is reviewed for non-lending purposes, a soft check has occurred. This type of inquiry does not negatively impact your credit score.

A hard check occurs each and every time you apply for a credit card or loan. Too many hard checks into your credit can have a negative impact on your score so be careful not to open too many credit cards at one time as you establish your Canadian credit. If you are applying for card after card, it may appear as if you are having financial trouble, and this is not a good sign to lenders.

With all factors considered, your credit score is designed to predict the likelihood that you will satisfy your bill payments on time. As a newcomer to Canada, you won’t have anything to show on your credit report. That’s where building credit from scratch can seem overwhelming, but it doesn’t have to be.

4 tips for building credit from scratch

To build credit from scratch, you’ll need to find some way to get access to credit and use it. You may not have as many options as you had before, but there are a few easy ways to get some credit quickly.

1. Get a secured credit card

A secured credit card requires you to pay an upfront deposit, or down payment. This money serves as collateral in case you are unable to make payments on the card in the future. Using a secured card ensures your transactions are reported to the credit bureaus, which, in turn, creates credit history for you.

2. Subscribe to a credit building service

For only $10 a month, you can subscribe to KOHO Credit Building. As long as you keep $10 per month in your account to cover the cost of the monthly subscription, KOHO will report your progress (and payments) to a major credit bureau. The result? You can build your credit history in six months!

3. Get a cell phone

Simple, right? Opening up a new cell phone account is a surefire way to create some credit history. Make sure you subscribe to a post-paid plan, and not a prepaid plan. Payments to a post-paid plan are a form of consumer credit and are reported to credit bureaus.

4. Get a car loan

If you live in the suburbs, you’ll certainly need transportation! Because you don’t have a credit score, your financial institution may not accommodate your loan request, but car dealerships have an array of programs to choose from. Getting a loan and making monthly payments on time will certainly increase your credit rating.

Other tips to enhance your financial fitness

While credit is important, your overall financial fitness includes many other factors.

When you arrive in any new country, make sure you open a bank account for your day-to-day transactions. If possible, have both a checking and savings account available. Do your homework, though — banking rules, regulations, and fee schedules vary from country to country.

If you plan on keeping accounts in your home country open, let your banking institution know that you’re moving abroad so they can update your contact information. Make sure you are also aware of any fees associated with accessing your account or transferring your money once you move.

It’s also a good idea to get to know your new paycheque and do some research on tax systems in your new country. There may be some deductions you’ve never seen before and this can impact your take-home pay.

The bottom line

Regardless of where you’re from, if you’re new to Canada, you need to start from square one when it comes to building your credit. It’s important to start slowly, so don’t overdo it and apply for too many credit cards or loans at once.

As you build momentum, remember to check your credit periodically. You can do this for free! Understanding the basics of your credit report will also help you take control of your financial narrative.