6 Ways New Canadians Can Build Up a Good Credit Score
In order to get a mortgage for your home, you need to have a good credit score. Even if they have excellent credit in their home country, new Canadians are often at a disadvantage here because they haven’t had the time to build up their Canadian credit score.
Credit scores are determined by a combination of credit history, on-time payments, credit mix, and credit usage. Lenders want to see whether you use the credit you have wisely and pay them back on time. Your credit score is a number that reflects how creditworthy you are.
It seems like a daunting task, but the good news is that a few things can make a big difference, and there are steps you can take to quickly increase your credit score so that you can qualify for a mortgage.
Get a Credit Card
The credit bureaus need to see you can use credit responsibly. While it seems like it makes more financial sense to pay with cash, you’re better off getting a credit card. Many banks have special programs for newcomers that include getting a credit card to build up credit.
If you’re having trouble getting a credit card, you can apply for a secured credit card. With this type of card, you pay a deposit, and that deposit becomes your credit limit. For instance, if you pay $500, you’ll have a $500 credit limit. It’s not ideal, but it can be a good way to build up your credit.
Buy a Car with an Auto Loan
The credit bureaus like to see a mix of revolving credit (like a credit card) and installment loans, where you borrow a set amount and make steady payments over a few years.
Car loans, student loans, and mortgages are all examples of installment loans. If you’re new to Canada, you probably need a way to get around, so you should consider buying a car. Even if you have the cash to buy the car outright, it’s a smart idea to take out an auto loan and make payments on that loan for a year or two before paying it off. Auto loans typically have low interest rates, so you won’t be paying too much additional money.
Make On-Time Payments
The most important thing you can do to raise your credit score is to make your payments on time. Any time you’re late, the lender reports that to the credit bureaus, and that late payment can stay on your report for seven years. To prevent this from happening, consider setting up automatic payments.
Pay Your Balance Off in Full
Credit cards charge interest whenever you don’t pay the balance off in full. As a newcomer without a strong credit history, you’ll probably only qualify for credit cards with high interest rates.
The good news is you don’t need to carry a balance in order to build up your credit! The lender reports your on-time payment to the credit bureaus whether you pay the minimum due or the full balance. By paying the full balance each month, you can avoid those interest charges. This is one of the smartest ways to build up credit.
Avoid Maxing Out Your Credit
The credit bureaus also pay attention to the percentage of available credit you’re using. If you’re using a high percentage, your credit score will be lower. Ideally, you don’t want to get close to your credit limit. First-time credit cards typically have low balance limits, so this can be a challenge.
If your credit limit is only $1,000, avoid making large purchases on the card even if you can afford to pay it off when the bill comes. Instead, make small purchases or use it for groceries and make a payment shortly after so you’re not using too much of your credit.
If you do need to make a big purchase, make sure you can make a payment before your next billing date so it’s cleared off the balance.
Ask for a Credit Limit Increase
We just mentioned that using a smaller percentage of your credit limit will increase your credit score. One easy way to do this is to have your limit increased. If you’ve had your card for a few months and you’ve been making on-time payments, you can ask the company to increase your limit. This can have a big effect on your score.
Ultimately, it takes years of good behaviour to build up an excellent credit score, but these small steps will put you on the right track. In no time at all, you’ll have a score that will help you get the mortgage you need for your first home in Canada.
Photo credits: depositphotos.com
