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digin

Establishing Credit in Canada

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digin

At the suggestion of respondents to my article, I've decided to put together a short article on establishing credit for new immigrants. I could find a lot of information, but not a decent "how-to-establish credit" article, so this is my attempt at one. Most of it's based on my own regular reading of my credit score in the just under 3 years I've been here, so don't take it as gospel - as with any important matters, check the facts out and decide for yourself.

Your Credit Score

Canada has borrowed the USA's FICO system for credit scoring. Your credit history is essentially reduced to a single number between 300 and 900. This number is the first (and for many lenders - pretty much the only) criterion they use to decide to lend to you, and at what rate. Your credit score is influenced by 5 criteria:

(1) Payment History: This is the most important criterion - how on-time you are with paying. Pay each bill on time and your score goes up. Be later than 30 days with a payment, and you will be penalised severely. The amount you go down in your score if you miss one bill by 30 days or more will take about 3 months of good on paying time to repair.

(2) Amounts Owed: The percentage of a loan or balance that you owe is the second important criterion. If you owe less than 75% you will get a good score, "max out" your credit cards and you hurt your score. So if you have a credit card limit of $4000, you should never go over $3000 in spending before paying it off. Home Mortgages are specifically excluded from this, so do not worry if you cannot buy a home with less than 25% deposit, you will not be penalised on your credit score for this.

(3) Length of Time on File: This is the amount of time the Credit Bureau has had your file. It starts essentially the first month you get your first successful credit, and continues with you for life. It takes at least 4 months before you have a credit history worth anything to lenders, and up to 2 years to build a really good credit history.

(4) New Credit: Each time you apply for credit, it hurts your score slightly. If you apply for credit less than 4 times a year, the decrease is not significant. If you get the credit, your first month's on time payment will pretty much eliminate this initial decrease. However, if you continually apply for credit and get refused, those little decreases will add up. The credit bureau does have a special provision to allow you to shop for credit though: if you apply for credit to a number of institutions for the same type of credit (e.g. a car loan) in a short space of time (say one week), you will only be penalised once for the inquiry.

(5) Type of Credit: This is the least important criterion. The more different types of credit you have, the better you are. The basic types seem to be: credit card (doesn't matter whether store or bank), car loan, bank line of credit and mortgage / lease. Regular bill payment (such as your hydro bill) does not usually build up your credit.

What is a good Credit Score?

The credit score is not the sole guarantee that a lender will grant credit, so the numbers presented here should just be taken as guidelines. Your work history, net worth and other factors will come into play as well.

A credit score of 620 or less is usually considered too high risk by most scrupulous lenders (we are not counting "pay-day loans" or "bad or no credit car deals" in that category). Between 620 and 650 is a grey area - but if you have a credit history of less than 2 years - you are often refused.

At 650 - 700, you should be eligible for an unsecured credit card, and some banks may grant you a small line of credit or overdraft protection (for some reasons, Canadian banks call an overdraft "overdraft protection"). However, this range is usually not enough to get you those special 0% financing deals on auto loans and "don't pay till 2005" specials at furniture stores.

At 700 - 750, you should be able to qualify for special below prime rate deals on secured items like a car and furniture, though in most cases the store or dealer will require a deposit or "deferral fee".

Once your credit passes above the 750 mark, you suddenly become a prince or princess among the lenders. Just about everyone wants you to buy on credit from them, and you are usually actively marketed too. The occassional salesperson might even hug you after they have done a credit check.

How do you know your Credit Score?

You can request you Credit Report at anytime from Equifax either online or via post. It costs just over $20, but it's worth it.

I'd recommend you check your score every six months from landing for the first two years, and then at least once a year after it. It is especially important to check you score before any large purchase, as an error on your score could cost you say missing a 0% deal on a car loan, and having to use bank finance at say 8%. 8% on $20 000 car over five years is about $5000, so don't skimp on the $20.

By the way, checking your own credit score does not hurt it, so don't be afraid to do that check.

What should I do after I arrive?

Since its unlikely you qualify for a loan on landing, except for high interest loans, try and pay for the big ticket items you need in cash to begin with (such as a car or furniture). Personally, I think the high cost of a car loan at this point more than outweighs its usefulness in building up credit.

Instead, get a secured credit card or line of credit, and use this card up to 75% of its limit on all your basic expenses, and pay it off each month. Most banks will give you a two-for-one secured credit card, that is for every $1000 secured, you get $500 credit. You earn interest on your security deposit, and if you pay each month on time, you should pay no interest. A good many secured cards have a card fee associated with it - if you can pay a monthly fee of say $7 a month - this is better than one where you pay a full annual fee, since you can always cancel it after 4-6 months when you can get a regular credit card.

If the two-for-one rule will tighten up your cash flow, get the lowest credit limit, say $1 000, and pay it off each time during the month when it reaches $750 (you are allowed to pay down your balance more than once a month!). This is better than taking out a $2 000 credit card (which will tie up a deposit of $4 000) and maxing it out because of cash flow constraints.

If you do have to take credit for a car loan when you land, try and get the shortest possible loan deal you can, and ensure you can pay it off earlier without too big a penalty.

Always make sure that the initial starter credit is reported to all the major credit bureaus (if you with any of the big five banks, this will be the case).

During your first six months, don't apply for credit, even if a shop assistant tries to tempt you with special offers like $10 off your first purchase. If you are refused, you will hurt your credit score, and you want it to be good for the big ticket items later on, like houses and cars (remember a difference of 1% on a house or car loan will save you hundreds of dollars, so the $10 off is not worth it at this stage.)

What should I do after the first six months?

After the first six months, check you credit score. If you have a score of 650 or more, consider approaching the lender of your secured credit card and see if they can convert it to a unsecured credit card, and free up your deposit. If you have received credit card offers in the mail, consider applying for the best one if your lender is not willing to convert your secured card, and cancel your card with them.

Once you have got an unsecured credit card, open up at most 3 more sources of credit in the next few months so that you have about 4 different credit items building up your score. If you don't have a need for credit, just open a couple of department store cards at your regualr haunts or no-fee credit cards, buy $50-100 on these cards each month and pay them off before the balance incurs interest.

What should I do after a year?

After the first year, check your credit score and make sure it's at least 700 or more. To maintain your credit from here on, keep those 4 initial lines of credit going and only add to them if you need the credit. Do not close any of your initial credit cards down in the first 3 years of having them. Opening and closing too many accounts will also look bad on your credit report.

What are some of the common myths about credit?

There are a lot of common myths about credit, and banks and lenders do not actively campaign to quash those myths that are in their favour. Here are some of them:

(1) You have to carry a balance to get credit: You can build up a perfectly good credit score without ever paying a single penny of interest. Your credit report is updated each time you use and pay off your credit card, not just when you are carrying a balance.

(2) The more credit cards you have the better your score: There is some part truth in this: It is better to have two credit cards at 50% of their limit than have one maxed out credit card. However, applying for credit on a regular basis is almost certain to hurt your score. Apply for as much credit as you need, leaving about 25-35% buffer room.

(3) A credit card with a high limit enhances your credit score: When credit card companies phone you to increase your limit, don't think it helps increase your credit score. It usually doesn't, unless your credit card is maxed out and it brings it down to within 75% (though in this case, your bank will not be calling you to raise your limit).

(4) Switching your balance from a high interest credit card to a low interest one will hurt your credit score: While the initial switch will hurt your credit score slightly, within a month or two of paying off more than the minimum on your credit card, this initial hit will be more than compensated. And the fact that, with a lower interest rate, more of what you pay each month will go to reducing your balance, your amount owed as a percentage of your limit will decrease, helping your credit score even more.

Conclusion

Unless you a millionaire and will be buying your house and car cash, build up your credit with a secured credit card as soon as you arrive here, and check your credit score frequently. The initial costs and fees will more than pay off when you later shop for those big ticket items and qualify for the best deals possible.

Remember, people with good credit save hundreds of dollars of interest each year with those good deals. Make sure you are one of them!

Edited by digin
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Harry

Digin,

this is just simply a superb piece of work. Thanks a heap. Having lived through the process of going from zero rating to nominal huggability, I really wish I had had this article 3-1/2 years ago. I lived a year in the USA without a credit card, and it was an utter nightmare. So I was at least prepared for a degree of struggle.

Over here I struggled to get going until I dropped the name of my employer company and a credit card appeared in front of me. That got the show going. I think I DID make the mistake of trying too many times at the beginning to get credit when I did not need it....so one learns.

For reasons I do not understand to this day, a mortgage seems to count flat zero towards one's credit rating...at least that was what the bank told me...and I do not believe banks too easily in ths country...they have too much power in this country.

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digin

Mortgages go onto your credit record (so people can see if you have not paid your mortgage on time), yet your mortgage history does not affect your score. This I believe has got something to do with Fannie Mae (the govt housing company that acts in a similar way the CMHC in Canada) in the US not wanting that when the Faar Isaacs Company first set up the FICO formula.

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LynetteH

Thanks for all this great info Digin!!

Do you (or anyone else) know if a USA credit history means anything in Canada?

I know a South African credit history means nothing but was hoping that the credit history I have built up in the US might help in Canada

Edited by LynetteH

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thelategans

Hi Digin,can you tell me what effect a fairly dormant credit card with a positive balance, has on one's credit rating. I have two credit cards, but only use the one because it gives me airmiles. The other one was my first card and has a collateral deposit tied to it. I was going to cancel it in June when the deposit reached maturity as I do not really use it.

Stuart

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digin

If the card carries no annual charge, I would keep it open. Closing the card will not hurt your credit score, however, the fact that you opened and then closed an account will show up on your credit report to a prospective lender. If it's just one card that you've closed, this is not a problem. A person who frequently opens and closes accounts will become a red flag, however.

If this card carries an annual charge, though, it's definitely not worth keeping it open.

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Guest georgia

i have several credit cards with diff. interest rates and a car loan summed together total roughly CAD20,000.00 I would like to pay the lowest interest possible so I can get out of debt faster. The debts were incurred as a result of trying to get recertified in my profession has nothing to so with careless spending. Last night I checked my FICO score and it was 701, my husband's is 692.

What type of loan is available and best for me and should I apply or should it be a joint application bec. we have diff. credit scores.

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Seanhay

Hi All,

I've sent an email to a Manager at TransUnion Credit in Toronto. They have purchased ITC in South Africa - now known as TransUnion-ITC. I'm trying to get them to recognise our credit history from SA.

I'll keep u all posted..

Thanks for all of the info Digin!

:unsure:

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digin

Hi Georgia

It is very difficult for me to advise on what to do with your current debt situation without more information. However, $20 000 is not a lot of debt (it may seem that way) and with your relatively good credit, you should be able to do quite a good bit of consolidation and get a good rate.

The questions that I would need to know are:

(1) Do you own or rent your home?

(2) Do you have an itemised list of the interest rate, current balance and credit limit on all your credit cards and your car loan?

(3) Does you car loan agreement contain any penalties for early settlement?

(4) How much can you afford to pay off each month, and how much are you currently paying off?

(5) Do you have any savings plans or non-registered investments i.e. investments that are not in your RRSP or a company pension plan?

(6) What is the current resale value of the car, and what was the purchase price?

If you feel comfortable putting the answers here, do so, and I will advise on the forum (it may be useful to other people in the same situtation). If not, send me an email to david.jacobs[at]dig-in.net

Replace the [at] with an @ sign! I've done this to avoid those SPAM robots picking up my email address.

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Guest Nic

:lol:

The article on "Establishing Credit in Canada" is probably one of the best articles or overviews that I have come accross in my time in Canada.

We immigrated to Canada in Dec 1997 with exactely the same obsticles and challenges of building up credit.

I don't think I would change any of the contents of this article - Well done!

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digin

Thank you, comments like these are always welcome. I must say my financial situation has been one of the most stressful things for me to deal with with coming to Canada, especially for a money control freak like me.

While I am fortunate enough to be have had it good here, and having worked in financial services before, I realise I have it much easier than most. I wrote the article to help people who perhaps do not have either the background or resources I have had, since I figure it must be even harder for them.

Glad to know its doing some good.

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Adele

David,

An excellent article. May I add something that a friend sent to me? I am not sure who is the original author, but the script at the end has worked for me. This is something that has helped me and hopefully will help others now. IF someone knows the author, please thank them for this invaluble advice.

Adele

WHAT IS YOUR BEACON SCORE?

Your beacon score is your credit rating. Knowing your beacon score is all about protecting your credit and your credit rating. The higher your beacon score, the better your credit. Keeping regular tabs on your credit information also prevents possible identity theft or fraudulent activities from being registered under your name.

What is a credit score? Each time your apply for credit, the lending institution reviews your credit history at one or more of the major credit reporting agencies (such as Equifax or Trans Union) and calculates a score based on variables in your credit file. The institution uses this score as a factor to decide whether or not to extend credit to you. Your credit score calculates your debt-to-income ratio, income stability, type of loan or credit you are seeking, your payment history, how much debt you are carrying, the length of time you’ve been using credit, how many applications you have pending for credit and the relationship you had with your last lending institution.

Your beacon score will determine whether you are a credit-worthy risk from applying for a new credit card, a line of credit, mortgage, personal or business loans, a car loan or lease, department stores such as The Bay, Future Shop, The Brick, Home Depot, Esso, Chevron, Shell, Petro-Canada, the local utility company, buying a new cell phone to opening a brokerage account. These are acts of opening a new account or increasing the credit limit on an existing account.

Managing your credit information is an important part of everyone’s fiscal responsibility and an essential tool in planning for your financial freedom.

Investor Tip: When searching for a mortgage, limit your applications to 1 or 2 financial institutions. Why? Applying for a mortgage at 5 different banks will produce 5 separate credit inquiries. This actually reduces your beacon score. Even though you are searching for the best mortgage, it looks like you have been turned down by 4 banks and now you’re onto the 5th one. The solution? Let a mortgage broker source the best rate for you. They are independent of any financial institution. You provide them the information once and they can take your application to multiple lending institutions.

Q: How do I get my beacon score?

A: Requesting a copy of your personal credit is FREE.

In Vancouver, Equifax Canada is located at #504 – 4190 Lougheed Highway, Burnaby, BC (604) 291-8600. The other reporting agency is TransUnion Canada located at #215 - 9600 Cameron Street, Burnaby, BC V3J 7N3. By appointment only at (604) 683-2426. You will need 2 pieces of identification such as your driver's license and passport. If not, you can also provide a verification of address that is 60 days current such as a utility bill, telephone bill.

In Canada, Equifax is located in Montreal, Quebec at (800) 465-7166, fax (514) 355-8502 or email at consumer.relations@equifax.com. TransUnion is located in Hamilton, Ontario at (800) 663-9980, fax (905) 527-0401 or visit www.tuc.ca.

Credit card companies are allowed to make changes to your account once every 6 months. The object is to increase your credit limit (without using the increase) so that your credit balance to credit limit ratio gets smaller and smaller. So every 6 months, call your credit card company with the following script:

Script for calling credit card companies

You: Hi, I’m calling to find out what my current credit limit is?

Them: Your current credit limit is $__________.

You: Hmmmmmmm. I’m considering a significant purchase and would like you to increase my current limit now please. .

Do not say another word.

Them: Well how much would you like?

You: How much can you give me?

Them: How much do you need?

You: How much are you authorized to give me without doing a credit check?

Them: I am authorized to give you $__________.

You: That’s not enough but I will take that for now. I would like to speak to your supervisor at the end of our conversation. By the way, what is my current interest rate?

When speaking to the Supervisor, repeat this conversation to get to the limit you need

Them: Your current interest rate is _____ %.

You: Hmmmmmmm. I would like you to lower my interest rate for me now please.

Do not say another word.

Them: Okay.

If not enough:

You: Is that the best you can do?

You: What is the annual fee I’m paying?

Them: You are currently paying $__________.

You: I would like you to waive my annual fee for me please.

Do not say another word

Them: Okay.

If they hesitate

You: Because I don’t want the balance transferred to another card. (or): Because I don’t want to pay it.

You: Was the interest rate you quoted me now and the annual fee that you waived retroactive 6 months ago?

Them: Yes.

You: I would like you to please credit my account the difference.

Them: Okay.

You: Thank you. Now please transfer me to your supervisor.

When speaking to the Supervisor, repeat this conversation to get to the limit you need

Then, Thank and Congratulate the Supervisor for the Customer Service you have just received from the them and their staff.

End Call.

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digin

That is a great script! If it is one I've learnt here in Canada, don't be afraid to ask a business for a better deal. Most companies give their call centre operators a range of goodies they can use to help them retain customers - it does no harm to find out if you can get that.

Here are some of the tips I use when asking for something:

(1) Always be polite - never threaten to withdraw as a customer - until you actually do so. It does, however, not hurt to mention other companies good offers.

(2) When asking for something, always give something in return: usually what you are giving in return is your business, and it pays to remind them of that, as well as the good things about their service, and how good a customer you are.

(3) When making a proposal, do the following 4 things:

(i) Use one simple If YOU ..., then I will message: e.g. If you will lower my credit card interest, I will move my balance from my other credit card to your company.

(ii) Follow it up immediately with asking for an answer: "Can you do this for me?", "What do you think of that?"

(iii) WAIT! Listen to their response. If they hesitate, keep waiting. Don't try to jump in while they are thinking through their counter-offer.

(iv) If you like what they are offering, thank them and take them up on their offer. If not, ask them what they can do for you instead.

I often (like many people who have been in Canada two years or more) get credit card offers telephonically. While I am not a fan of telemarketing to home users, I do not believe in ever being rude or just putting down the phone on a marketer. Instead, If I am not interested, I just politely say so, and if pressed, I just put an unreasonable proposal to them that they almost certainly cannot fulfill. My standard one is "Your offer sounds tempting, but the only debt I have is $12 000 on my car over the next 3 years at 4%. If you are prepared to give me a no annual fee credit card with a $12 000 credit limit, an introductory interest rate of 3.5% for 3 years and no fees for transferring my balance, we'd have a deal. Can you make this work for us?"

No-one has yet taken me up on the offer, and the good news is most marketers stop trying to market to you at this point.

Edited by digin

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digin

Another couple of things, though about the post:

(1) Beacon is just another term for FICO score.

(2) It is not necessarily true that applying to 4 or 5 lenders at a time will hurt your credit score. Provided you apply to all the insitutions within about a week, and apply for the same amount for the same purpose (e.g. housing loan), it will be grouped as a single inquiry in the FICO system.

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Merv

Came across this very informative article about credit scoring, well worth a read.

Credit Scores explained - How stuff works

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Gautenger

Here is another article I discovered on MSN about gaining a high credit score. It is an American article, but I think that this applies worldwide.

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mandy

We are in Canada on a workpermit, and I was wondering if you also get a credit record if you are not a permanent resident or citizen?

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Harry

Mandy,

the banks and creditors are purely interested in how you handle debt, not in what your legal landed/citizenship status is....so the answer is "YES". Nevertheless, I regard digin as the expert here on matters money, so I defer to him.

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digin

People on a work permit are treated exactly the same way as permanent residents. Even with a work permit, you will have a SIN (Social Insurance Number).

Your only restriction will be perhaps a higher deposit if you decide to buy a house while still not a permanent resident.

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Radius
People on a work permit are treated exactly the same way as permanent residents.  Even with a work permit, you will have a SIN (Social Insurance Number).

Your only restriction will be perhaps a higher deposit if you decide to buy a house while still not a permanent resident.

<{POST_SNAPBACK}>

I don't fully agree with the above statement. If you are not a PR you'll have the infamous SIN starting with a 9. Most banks will, depending on what type of credit you are looking for, tell you that you need to be landed.

I've had recent experience with this. It definitely changed from my initial arrival in 2003.

Also the Canadian Credit Score is by any standard complicated. It takes time, among other things, to get a decent score.

Radius

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Craig
People on a work permit are treated exactly the same way as permanent residents.  Even with a work permit, you will have a SIN (Social Insurance Number).

Your only restriction will be perhaps a higher deposit if you decide to buy a house while still not a permanent resident.

<{POST_SNAPBACK}>

I do not agree with this-I am still having problems even though we have been here for 2.5 years.

Having a SIN number beginning with a 9 indicates one is still on a work permit.The prevents banks also giving out morgages unless one has a 35% deposit.

CHLC will not underwrite a loan to a person who does not have PR.

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Majec

Will my canadian wifes bad credit score have an effect on my score and disadvantage me?

Thanks

M

Edited by Majec

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digin
Will my canadian wifes bad credit score have an effect on my score and disadvantage me?

No it should not, unless you start sharing joint accounts, or apply for credit jointly in your names.

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Ann
Will my canadian wifes bad credit score have an effect on my score and disadvantage me?

<{POST_SNAPBACK}>

The other day I was wondering about what type of things guys may worry about when considering marrying someone. Knowing how we girls love ;) to shop, I thought if I was guy I think that would be something to be concerned about. A wife who overspends would be to her husband's disadvantage.

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