Thriving as a new member in a credit society

Tosan has been getting many credit card offers from various financial institutions and turning them down without giving them a thought.

As an immigrant, she is trying to avoid credit cards and debts in any form. She has heard gory stories of how people rack up thousands of dollars in credit card debts and have been forced to declare bankruptcy which stays on their records for years. As a result, she uses her debit card and pays cash for everything.

Tosan is now considering buying a home in Canada, and she would need a mortgage as she can’t pay cash for a house. She approaches her financial institution to begin the mortgage pre-approval process only to find out that a good credit history is an important requirement, and hers is almost non-existent. Tosan realises that she doesn’t really understand the Canadian credit system. Still, she’s curious to learn the fastest way to build a good credit history and score, and here is what she learns:

Good credit history is vital in Canada

A good credit rating is essential for life in Canada, as most lenders want to know how you have handled credit in the past to determine how well you will handle it in the future. Credit card issuers, auto dealerships and mortgage lenders will check your credit score before deciding how much to lend you and at what interest rate.

Five tips for building a good credit score

1. Apply for an unsecured credit card: To start building your credit history, having and using a credit card is essential. Many big banks offer new immigrants a credit card when you open a new account.
2. Pay off your balance in full each month before the due date: Your credit card statement will show your new balance, the minimum payment and the payment due date. Usually, you have a 21-day grace period to pay up either the full balance on your credit card or the minimum payment each month. No interest is charged when you pay up the full balance before the due date. However, you get charged interest on the balance you owe on the credit card after the due date. From a  financial perspective, it is best to pay the balance in full each month before the due date regardless of the minimum payment. This helps you avoid racking up credit card debt at a high interest rate.
3. Use credit wisely: Always stay within your credit limit. You should spend only what you can afford to pay back. If you have a credit card with a $1,000 limit, avoid going over that limit. As a rule of thumb, try to use less than 35 per cent of your total credit limit each month.
4. Limit your number of credit applications and/or checks: Every time you apply for credit, the lender checks your credit history. This results in an inquiry on your credit report, which may reduce your score. Apply for credit only when you need it.  If offered or pre-approved, accept it and stay disciplined.
5. Pay your monthly utility bills in full and on time: Consistently paying up your rent and monthly utility bills also helps improve your credit rating.

Pitfalls to Avoid while building credit

As Tosan tries to find answers to the top questions on credit history and score, she realises that there are pitfalls to avoid. A major one is taking huge loans just to build credit, resulting in unnecessary interests payments until the loan is fully paid off. She also realises that accepting a pre-approved credit limit increase or line of credit can improve your credit rating over time, as long as you are disciplined enough to handle it. Additionally, closing up old credit card accounts just because you found a better option could reduce your credit rating because closing the account will wipe off your history on that account.