People who move to Canada are often looking for one thing: a better life. A big part of their transition is getting acclimatized to not only the cultural differences, but the financial customs of their new home.
Understanding how credit works and knowing how to build your credit score is crucial for things like borrowing money, buying a home, and avoiding dangerous debt traps.
People who have lived in Canada all their lives see their parents use credit cards, hear them talk about credit scores and often start establishing a credit history in their teenage years with a credit card, often cosigned by their parents.
But as a newcomer, you have to learn about credit all on your own, and really quickly.
“There is no universal credit reporting system and all new Canadians arrive with no credit history,” says Rebecca Sudano. For someone new to Canada, “getting a loan for a car or renting an apartment when they don’t have a credit score can be very challenging.” Places that offer support to new Canadians often don’t help them understand how the credit system works. “The talk around finances tends to focus on budgeting, which is a much more universal habit than establishing credit,” Rebecca notes.
The credit landscape in Canada is complex. There are all sorts of different types of debt, good and bad, with varying levels of interest, and it’s almost impossible to go through life without it.
“New Canadians have to learn about our credit rating system, interest rates, the differences between a credit card, a line of credit and payday loans,” she adds.
Installment loans or payday loans are financial products that are risky and it’s important that newcomers understand what they are and how they work.
“Installment loans can be very attractive for people with no credit history, because the lenders don’t run a credit check. They really only require proof of address and a paystub,” says Rebecca. These kinds of loans often come with higher interest rates than other forms of credit. Installment loans allow a person to make regular payments for a set period of time to pay off the debt. If you know you can afford the payments these loans can be helpful because you know exactly when it will be repaid completely.
However, large late fees can be applied if the payments are not made in full and on time though. If someone continues to miss payments it can mean defaulting on the loan and becoming trapped in a cycle of debt, where they need a new loan to help pay off the first loan.
Getting a loan is easy, Rebecca says, but getting out of the credit cycle is hard.
There are a lot of reasons besides the easy access to credit that newcomers can get into financial trouble. Sometimes it’s simply unfortunate and unlucky circumstances.
Ama (a pseudonym) moved to the Vancouver area from Ghana on her own about two years ago. She’s in her late 30’s with no children.
Soon after her arrival she became sick and had to spend a few weeks in the hospital. As a non-citizen with no insurance, she was handed a $12,000 bill after she was released.
“She didn’t know what to do,” said Dustin Joslin, the Licensed Insolvency Trustee who is helping Ama with her situation.
“She told me that in Ghana there isn’t really any form of credit system. There you either pay cash, or you don’t pay at all,” Dustin explained. “She had no credit here in Canada. She had no loans, no credit card. She wasn’t used to the idea of borrowing money.”
Ama was focused on getting her citizenship and finding work, so when she was offered a payment plan from the local Health Authority of $50 a month, she agreed to it.
But “that’s just not a realistic payment plan. That would take her 20 years to pay it all off, and that’s without any interest charges,” Dustin points out.
In March of 2023, Ama began working part-time and worried about how long it would take to pay the debt off completely. She saw a billboard ad for BDO and decided to call to see what could be done.
Dustin has now done a Consumer Proposal with Ama. For it, she’s agreed to pay $150 a month for 5 years. That’s a total of $9,000, a reduction of her debt by 25% and allowing Ama to be completely debt free 15 years sooner than she would be if she had stuck to the original payment plan.
She’ll also have to attend 2 financial counselling sessions, that Dustin hopes helps her gain a better understanding of credit.
Overall, “she was very happy there was a solution and that she could put this behind her and have it dealt with,” Dustin says.
While arriving in a new country with zero credit history can be a challenge, it does not make it impossible to build credit. Here are the steps to take.
1. Open a bank account. Many Canadian banks have bank accounts and credit cards offers that are specifically geared towards newcomers.
2. Get a credit card but keep the credit limit low. Credit cards are also included in the bank account opening process for newcomers. Make sure you understand the credit limit and ensure you do not spend over what you can afford.
3. Get a secured credit card. If you’re uncomfortable with the idea of having to track your credit card balance and afraid of racking up lots of debt quickly then a secured credit card is a good alternative. A secured credit card requires you to hand over a deposit that then serves as collateral to your credit limit. If you make a deposit of $500, then your credit limit is also $500. If you make regular payments in full, then it helps you build credit.
4. Buy things with a credit card and pay off the debt. Once you begin making regular payments, you begin building a credit history. If you pay in full each month, you’ll have a better credit score than someone who only pays the minimum.
5. Get a cell phone plan. This is one of the easiest and best ways to build credit as cell phones have become a necessity in Canada. Paying the phone bill each month helps you establish credit and shows you can be trusted to use credit responsibly.
6. Apply for a small personal loan. Once you have been using your card for a bit and if you’re paying it off on time, you can apply at your bank for a small personal loan. A personal loan can be used to help buy a variety of things, such as furniture or a car. Making payments to pay back the loan will help you build credit. A loan should only be taken out if you need it though and are sure you can afford to pay it back.
Remember, building credit is a long process. It doesn’t happen overnight. It’s a continuous journey that lasts your entire life. It's important to borrow only what you can comfortably repay within the designated timeframe. By paying bills on time, and managing your finances effectively, you can establish a positive credit history in Canada.
As many immigrants to Canada are unlikely to know many of the rules of how building credit works, or the rules governing how loans and other forms of credit work, they’re more susceptible to falling for scams.
“People who move here as refugees are often targeted for fraud because they’re from venerable situations,” Rebecca says.
“They’re new to the country and they likely don’t have a great understanding of how a lot of the financial systems work,” she noted.
They may not understand the insurance industry, that’s not just health insurance like in the case of Ama, but car insurance or tenants’ insurance as well, Rebecca points out. They may not understand what it means to have a loan with high interest. They’re as a result more likely to fall victim to scammers looking to take advantage of them.
There are two main types of scams, those targeting individuals and those targeting businesses. Immigrants, and anyone in Canada really, can fall prey to both.
For individuals, the easiest way to avoid falling for scams is to “ensure you have trusted individuals working with you to help you get a credit card, or a line of credit or a lease,” Rebecca says.
Never send money from your personal bank account to someone you’ve never met. Beware of unsolicited phone calls or emails. If you receive either of these do not give out any of the following information.
It’s best to hang up the phone or delete the email straight away.
There are a wide variety of organizations and charities across the country that are dedicated to helping new Canadians. The government of Canada has a handy tool on its website to help new Canadians find trustworthy services near them that can help them adjust to life in Canada.
Rebecca also reminds us of the old adage that “if something sounds too good to be true, then it probably is.”