We’ve already talked about credit score, credit report and credit history. If you need to read that article, click here.
Now it’s time to get into detail about what credit is, the different types of credit in Canada and what newcomers should know before applying for a credit card. Let’s dive in!
The banking system in Canada.
The Canadian system is similar to the US but different from other countries. It’s considered one of the most accessible and stable systems in the world, but for newcomers from European, Asian or African countries, it might initially seem very confusing.
Interesting facts about the banking system in Canada:
1. More than 99% of Canadian adults have an account with a financial institution.
2. Banks in Canada are leaders in cyber security and heavily invest in cyber security to protect their customers and the financial system.
3. The percentage of Canadians who do most of their banking digitally, using online (49%) and mobile (29%) banking, is up to 78%.
What is credit in Canada?
Generally speaking, credit is borrowing money from a financial institution based on the understanding that you will repay the borrowed money at an agreed-upon date and interest rate. Simply put, it’s the amount of money you were approved to borrow.
Types of credit in Canada:
Revolving Credit (credit card).
This type of credit allows you to use money from your credit card up to a certain amount you were approved for (ex: $1000, $2000 or even $7000). Therefore, you get closer to your limit each time you purchase something on credit.
When you pay off the amount owed (or a part of it), that amount adds back to your available credit. Interest rates may apply if you only pay the minimum amount required.
In Canada, revolving credit is the most common form of credit issued by Visa, MasterCard, and store and gas cards.
Pro tip: Using up only 30% of your monthly credit is recommended.
Charge Card (different type of credit card)
Charge cards are less common than regular credit cards and can only be obtained with established credit. Unlike credit cards, they allow unlimited spending and don’t charge you interest, but they must be paid off monthly, limiting their use.
This type of card usually includes a high annual fee of up to $500.
Nevertheless, only a few financial institutions offer charge cards anymore. One of the most well-known is American Express.
To note: Missed payments are always reported to credit bureaus and can significantly affect your credit score.
Prepaid cards.
Prepaid cards are reloadable and can serve as a great budgeting tool, have minimal fees and are an easy way to make convenient online or in-store purchases. Many companies in Canada offer prepaid cards, like Koho, BMO, Canada Post, CIBC, etc.
Important to note: Prepaid cards do not have any impact on your credit score, because they do not report to the credit bureaus. Their main purpose is essentially to be a substitute for cash – like debit cards.
Line of Credit (secured or unsecured).
A line of credit (LOC) or a personal line of credit (PLOC) is a type of loan that lets you borrow money up to a certain limit with a lower interest rate than your credit card. There is usually no specific purpose for which you must use the funds. This allows you to draw as much or as little as you need, up to a set limit, and you only have to pay interest on the money you take.
Personal loan or Installment Loan.
A personal loan is when you borrow a fixed amount of money and agree to pay it back over a specific time by making regular payments, called instalments.
The primary condition is to pay it back in full with interest and applicable fees.
Applying for a credit card.
Applying for a credit card can be stressful for newcomers, so here are five things to know beforehand.
Interest rates.
The lowest interest rates are usually offered to those with good credit scores, which can be added to why it matters. For newcomers, higher interest-rate credit cards will be available, but it shouldn’t be a problem if you plan to pay off the balance of your credit card each month.
As soon as you improve your credit score, you can always apply for a lower-interest-rate card.
Fees.
Most credit cards don’t have fees, but there are some exceptions. For example, sometimes banks will have payment protection fees, paper statement fees, late fees, cash advance fees, checkout fees, balance-transfer fees, rewards-related fees or foreign transaction fees.
Your limit.
The credit limit on your first card highly depends on your income and job. Usually, newcomers in Canada will get a limit of $1000-5000 on their first card.
Your limit should increase over time as you pay your bills on time. Of course, there is always an option to request a higher limit, but having a limit that exceeds your monthly spending or income can make it harder to manage your charges and debt.
Rewards
Almost all credit cards have rewards like cash back, reward points and even airline miles. To choose the best option, consider what will benefit you the most.
Promotions
For new users, banks usually have great offers and promotions when you apply for a credit card. Some promos may include bonus rewards or cashback just for signing up. Others may consist of benefits for the first few months.
The most important thing: Always read the fine print and ask questions before applying.
Top 5 programs for newcomers in Canadian banks:
Every Canadian bank currently has a program for newcomers, giving you various options. Most banks offer the same interest rates for credit cards, but you should pay attention to some additional services which can be helpful to every newcomer.
To help you choose, we’ve prepared a summary of five programs for newcomers from different Canadian banks:
Scotiabank
Starlight program (chequing and savings account)
- No monthly fees for one year
- Unlimited no-fee international money transfers
- Free small safety deposit box for a year
Scotiabank PassportTM Visa Infinite (credit card)
- No annual fee in the first year
- Earn up to 40,000 bonus
- Scene+TM* points in your first year (valued at up to $400 towards travel)
- The interest rate for purchases is 20.99%
- The interest rate for cash advances is 22.99%
CIBC
Smart™ Account (chequing and savings account)
- No monthly fees for two years (up to 12 transactions per month)
- An opportunity to get $400 after completing several steps
- One free non-CIBC ATM withdrawal per month in Canada
- Apply online and access your bank account instantly
CIBC Dividend Platinum® Visa Card (credit card)
- No monthly fees for two years
- 3% cash back on eligible gas and grocery purchases
- The interest rate for purchases is 20.99%
- The interest rate for cash advances is 22.99%
RBC
Newcomer Advantage Program (chequing and savings account)
- No monthly fees for one year
- Unlimited Debit Transactions in Canada
- No-charge on non-RBC ATM withdrawal
- One free book of 50 cheques
- Two free International Money Transfers per month for a year
RBC Cash Back Mastercard (credit card)
- No annual fee
4% bonus cash back for the first three months - The interest rate for purchases is 19.99%
- The interest rate for cash advances is 22.99%
BMO
NewStart® Program (chequing and savings account)
- No monthly fees for one year
- Unlimited BMO Global Money Transfers with no cost for one year
- Earn up to $400 when you meet the qualifying criteria
- One free non-BMO ATM withdrawal
BMO CashBack® Mastercard (credit card)
- No annual fee
- Up to 5% cash back in the first three months
- The interest rate for purchases is 20.99%
- The interest rate for cash advances is 22.99%
TD
TD Unlimited Chequing Account
- Newcomers from China and India can open a chequing account up to 75 days before you arrive.
- No monthly fee if you maintain at least $4000 in your account.
- Unlimited transactions.
- No-charge on non-TD ATM withdrawal
- Free to send or request money using Interac e-Transfer.
TD Aeroplan® Visa Platinum Credit Card
- No annual fee
- Earn Aeroplan points.
- The interest rate for purchases is 20.99%
- The interest rate for cash advances is 22.99%