Understanding the credit system helps you manage your money and make big purchases like a house or a car. This guide will show you how it works, how to build good credit, and how to avoid scams.

Why is credit important?

Credit is more than just a number. It’s a testament to your financial responsibility. It shows banks and businesses that you can borrow money and pay it back on time.

With good credit, you can secure lower interest rate loans making big purchases like a home or a car more affordable. It also helps you get better credit cards that reward you with cash back when you spend money on them.

Good credit also provides a safety net in emergencies when you need to borrow money quickly, giving you peace of mind and financial stability.

What is “credit” in Canada?

In Canada, “credit” means borrowing money from banks or credit companies. It involves a promise to pay back the money on a specific schedule. Your “credit score” shows how well you handle your money. It tells lenders (banks, credit cards, loan providers) whether you pay your bills on time. This score helps them decide if they should lend you money or give you a credit card.

How does credit work in Canada?

Canada’s two main credit agencies, Equifax and TransUnion, regulate your credit by gathering your financial behaviours into a credit report. This report reflects your credit score, which ranges from 300 to 900 and indicates your credit health.

There are two main types of credit:

Revolving credit. There are credit cards and lines of credit that allow for flexible borrowing up to a set limit

Installment credit. These are auto loans and mortgages, which have fixed payments over time. Your interest rate depends largely on your credit score, with higher scores typically securing lower rates.

What is a credit score?

A credit score between 300 and 900 tells lenders how reliable you are when it comes to paying back money.

The higher your score, the more trustworthy you appear.

This score is based on your financial history, including how timely you pay bills and how much debt you have.

Here are the credit score ranges in Canada

• Excellent (800-900): You’re seen as a very low risk to lenders.
• Very Good (720-799): You will likely receive better interest rates and loan terms.
• Good (650-719): You qualify for most loans, but only sometimes with the best rates.
• Fair (600-649): You can borrow money, but your options and terms are limited.
• Poor (300-599): It’s hard to get loans, and the interest rates are high if you do.

What credit score do newcomers start with?

Newcomers start with no credit score or zero.

This means you haven’t yet built a financial history in Canada that lenders can review. You must build your credit history by applying for and using credit responsibly. Your credit score will grow as you use credit and pay your debts.

4 ways newcomers can start to build their credit score

• Get a secured credit card: You pay a deposit that becomes your credit limit. Using this card and paying it off monthly shows you can handle credit responsibly.
• Apply for a small loan: Some banks offer small starter loans to help you begin building your credit. Paying these back on time can boost your credit score. Pay extra attention to small loans and read the fine print to understand the rules and regulations.
• Pay bills on time: Always pay your utility, phone, and other bills on time. These payments, especially cell phones, can be reported to credit bureaus, helping to build your credit history.
• Use a credit-building program: Some organizations offer programs to help newcomers build credit. These can be a useful way to start establishing your credit history. We recommend KOHO.

What determines your credit score?

• Payment history (35%): This is the most important factor. It includes whether you pay your bills on time, including credit cards, loans, and other debts.
• Credit utilization (30%): This looks at how much credit you’re using compared to what you have available. It’s better to use less than 30% of your available credit (e.g. if you have $1,000 of credit, only use $300).
• Length of credit history (15%): The longer your history of responsibly managing credit, the better your score will be. This includes the length of time your accounts have been open and their average age.
• Types of credit (10%): A mix of different types of credit, such as a credit card, a car loan, and a mortgage, can positively affect your score.
• New credit inquiries (10%): Your score can experience a small drop every time you apply for new credit. Do it regularly, as it can be a sign of financial instability.
• Public records: Bankruptcies or collections can also negatively impact your score and stay on your report for several years.

Who determines your credit score? What is a credit bureau?

In Canada, credit bureaus determine your credit score. These organizations collect information about your financial behaviour from banks, credit card companies, and other lenders. The main credit bureaus in Canada are Equifax and TransUnion.

They gather data about how you use credit, such as whether you pay your bills on time or miss payments and how much debt you have. They compile this information into a credit report that calculates your credit score. Your credit score is what lenders use to decide whether to give you credit or not.

What is a credit report?

A credit report is a detailed document that shows your credit history. It includes information on how you’ve handled loans, credit cards, and other debts. Here’s what you typically find in a credit report:

• Personal information: This includes your name, address, Social Insurance Number (SIN), and date of birth.
• Credit accounts: A list of all your current and past credit accounts, such as credit cards, mortgages, and loans, along with your payment history.
• Credit inquiries: The lender records an inquiry whenever you apply for credit. It shows who has checked your credit and when.
• Public records: This could include legal matters affecting your credit, like bankruptcies or debt collections.
• Debt collections: If you have any unpaid debts sent to a collection agency, those will appear here.

You can request a free copy of your credit report once a year from Equifax or TransUnion to check your financial standing and correct any inaccuracies, such as fraud.

Why scammers target Newcomers in Canada

Scammers often target immigrants in Canada for several reasons:

• Lack of familiarity with Canadian systems: Newcomers may need to learn how banking, credit, and legal systems work in Canada. This makes it easier for scammers to trick them with false information or intimidating tactics.
• Language barriers: If English or French isn’t your first language, you might struggle to understand complex legal or financial terms. Scammers use complicated language to confuse or mislead you.
• Social isolation: You might have few friends or family in Canada to ask for advice, making you more susceptible to scams and lacking opportunities to verify information with trusted sources.
• Financial needs: Many immigrants need jobs, housing, or loans, and fast. Scammers exploit this urgency by offering fake job opportunities, rental deals, or loans that require upfront payments or personal information.

To protect yourself, always check information from multiple sources, ask for help when something is unclear, and if something seems too good to be true, it often is.

How newcomers can protect themselves from fraud

• Educate yourself: Learn about common types of scams in Canada. Understand how the banking and credit systems work and what legitimate communications from these institutions should look like.
• Verify information: Always double-check the details you receive. Use official websites and contact numbers to verify the legitimacy of any offer, job, or request for personal information.
• Keep personal Information secure: Do not share personal details like your Social Insurance Number (SIN), bank account numbers, or credit card information unless you know the other party’s identity and the necessity of sharing such information.
• Use secure connections: Ensure the network is secure when accessing financial accounts or entering personal information online. Avoid using public Wi-Fi for financial transactions or sensitive communications.
• Report suspicious activities: If you suspect a scam, report it to the Canadian Anti-Fraud Centre or local authorities. Reporting can help you get guidance and prevent others from being scammed.
• Ask for help: If you’re unsure about any financial dealings, ask for advice from trusted sources, such as a bank official, a legal advisor, or community support groups for newcomers.

How to check your credit score (and how often you should check your credit)

In Canada, you can check your credit with Equifax or TransUnion. Many banks or other financial institutions may display your credit score within your account (sometimes for a fee). Here’s how to check your credit score with Equifax or TransUnion.

• Online: Both credit bureaus offer online access to request your credit report and score, sometimes for a fee.
• By mail: You can also request a free credit report once a year by downloading a request form from the bureau’s website and sending it in.
• In-person: Some locations allow you to request your credit report in person. You can use your maps app on your cell phone to find the one closest to you.

How often should you check your credit?

You should check your credit report at least once a year to ensure the information is accurate (free from fraudulent activity) and up-to-date.

When making a major financial decision, such as applying for a mortgage, getting a car loan, or renting a home, this will give you an idea of what potential lenders will see and allow you to address any discrepancies.

Finally, if you believe you are a victim of fraud or identity theft, check your credit report immediately to see if there are any unauthorized accounts or activities.

Things that will hurt your credit score

• Late payments: If you pay your credit card, loan, or mortgage payments after the due date. Always make your payments on time.
• Credit counselling: While entering credit counselling itself may not harm your credit score, the accounts managed through the program might be marked as part of a repayment program, which may play a role in lender decisions.
• Consumer proposals: A consumer proposal is a process where you negotiate to pay back only a part of your debt. It shows on your credit report for 3 years after you complete the payments or 6 years from the date it was filed, whichever comes first.
• Lawsuits: If you are sued for a debt and the court issues a judgment against you, this judgment can be listed on your credit report. Judgments generally remain on your report for 6 years.
• Collections: If you fail to pay a debt and it is sent to a collection agency, this will be noted on your credit report and typically remain on your report for 6 years from the date of your last payment on the original debt.

How to improve your credit score

• Make payments on time: Always pay your bills on or before the due date. This includes rent, utilities, loans, and credit cards. Consistent, timely payments are the most significant factor in calculating your credit score.
• Keep your credit card balances within 30% of your limit: High balances relative to your credit limit can negatively affect your score.
• Limit new credit applications: Each time you apply for credit, the lender makes a “hard inquiry” that lowers your score. Frequent applications can signal financial stress, so apply for new credit only when necessary.
• Build credit history: Since credit history length affects your score, keep old accounts open even if you don’t use them often. This helps extend the average age of your credit accounts.
• Mix types of credit: A mix of credit types, such as a credit card, a personal loan, and a line of credit, can help your score because it shows you can manage different types of credit responsibly.
• Regularly check your credit report: Obtain your annual free copy of your credit report from Equifax or TransUnion. Review it for errors that might be lowering your score.
• Deal with outstanding debts: If you have collections or past due accounts, work on paying them off. Contact the lender to see if you can negotiate a repayment plan.

Frequently asked questions about Canada’s credit system

Will cancelling my credit card improve my credit score?

Cancelling a credit card will not improve your credit score. In fact, it can lower it by reducing your total available credit, which may increase your credit utilization ratio, a key factor in credit scoring.

Is it possible to get a 900 credit score in Canada?

Yes, it is possible to achieve a 900 credit score in Canada, though it is rare. Reaching this score requires an exceptional credit history, including long-term timely payments, low credit utilization, and a diverse set of credit accounts.

Is it true that after 7 years your credit is clear?

In Canada, most negative information, like late payments, collections, or bankruptcies, will drop off your credit report after 6-7 years, depending on the province. This does not necessarily mean your credit is “clear” as ongoing financial activities continue to impact your score.

What credit system does Canada use?

Canada uses a credit scoring system that ranges from 300 to 900. Credit bureaus like Equifax and TransUnion calculate scores based on your payment history, amounts owed, length of credit history, new credit, and types of credit used.

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