Credit scores and credit reports: What newcomers to Canada need to know

The terms “credit report” and “credit score” get tossed around a lot, especially when it comes to borrowing large sums of money to buy big items. Credit reports and credit scores also come up when you need to buy smaller items and when you apply for a credit card. But what are credit reports and credit scores, and how do they work?

How credit reports and credit scores work in Canada

Credit reports and credit scores may sound similar, but they function differently.

What is a credit report?

A credit report is essentially a summary of a person’s credit history. Yours is created the first time you apply for credit, borrow money or purchase an item on credit. Lenders will send your information to credit bureaus or credit reporting agencies. It will also keep a record of other financial transactions, including:

• Open and closed credit cards and bank accounts
• Credit inquiries from lenders in the past 3 years
• Payments to your phone and internet providers
• Department store and retail credit cards
• Mortgage payments
• Bounced cheques and non-sufficient funds (NSF) payments
• Any debts sent to collection agencies
• Any issues like identity theft
• Liens claimed against assets you use as collateral
• Bankruptcies

What is a credit score?

A credit score, on the other hand, is a three-digit number based on the activity in your credit report. Credit scores range from 300 to 900. The higher your number, the better you are at managing credit and repaying your debts, and the more likely it is that lenders will loan you money at a better interest rate.

Your credit score can and will change over time based on multiple variables. For example, it drops if you miss a payment deadline, and it rises if you use your credit responsibly (and make payments on time).

Why is a good credit history so important?

Honestly, it’s because your credit history impacts your life quite a bit. Lenders want to know how you handled credit in the past, as that’s a good indication for any future credit.

Who might look at your credit report? Credit card providers, mortgage lenders, potential employers, landlords and even insurance providers will check your report before offering you a credit card, a job or any kind of loan.

If you have a low credit score or no credit score—as many newcomers to Canada do—it’s worth getting a credit card to start building your credit history. You might not get the apartment you want, or you might not get the job you applied for, especially if it’s finance-related, as you may be deemed high-risk for roles that involve accessing money. You may also need a co-signer for any loans.

How to build a credit history in Canada

With that in mind, you can build your credit history a few different ways:

• Start early, because the length of your credit history counts towards your credit score. Consider getting a credit card, using it as needed (for groceries, bills, etc.) and paying it off on time every month. Most financial institutions, like banks and credit unions, offer cards and will work with people to find the best one for them.
• Or, if you don’t qualify for a typical credit card, get a secured credit card and either pay off the balance each month—that’s the best option—or a lesser amount, as long as it is at least the minimum required each month. (To use a secured credit card, you must deposit money with the card issuer in advance—this is called a “security deposit,” and the amount is usually one or two times the card’s credit limit.)
• Keep your debt-to-credit ratio low. The recommended ratio is 30% or lower. (Here’s how to calculate yours: Divide the total amount of debt by the total amount of credit available to you.)
• Pay all bills on time, including any loans.
• Know that using a debit card won’t help you build your credit history, as debit purchases are considered cash transactions.

Should you use credit or cash?

Some cultures frown on using credit or debt, preferring the security of using cash. And some countries don’t offer credit-reporting agencies like Canada does with Equifax and TransUnion, so the idea of being tracked or rated on your borrowing history may not be the norm for many newcomers. And even if you have a credit score from another country, it may not be recognized in Canada—another reason why it’s important to start building a credit history here.

A credit card is a convenient way to pay for things when you’re out and about, and there are plenty of other ways to use it—such as managing your spending, earning rewards through loyalty programs and accessing funds in an emergency. 

How to check your credit score

As mentioned above, there are two main organizations in Canada you can contact to check your credit score and credit report: TransUnion and Equifax. Both have online and in-person access and will also send you your report via mail. Equifax lets you request your report by phone.

You may have to provide identification and your social insurance number (SIN) in order to get your information. Your credit score will be part of the report.

How to increase a credit score in Canada

After requesting your credit report, you may wonder if it is possible to improve your credit report and your credit score. It is, and here’s how:

• Pay your bills on time, every month. Automate the payments if necessary. This includes your credit card bills, too.
• Don’t skip payments without talking to the lender. Some lenders have skip-a-month offers on certain credit cards or mortgages, but you need to let them know beforehand.
• If you have any significant consumer debt, create a plan to pay it down as quickly as possible. This may mean renegotiating with your lenders or consolidating your debts.
• Don’t apply for unnecessary credit cards or loans. The application process can affect your credit score.
• Keep an eye on your credit report by checking it annually.
• When you review your credit report, look for any suspicious and fraudulent activity—this could indicate identity theft.

See all of National Bank of Canada’s tips to build or improve your credit score in Canada.

A good credit report and credit score underpins so much of what Canadians and newcomers need today, such as housing and employment. Building a favourable score means you can get better interest rates and access to more jobs, and it could save you money in the long term. Read more helpful advice on getting settled in Canada.