Credit scores are a bit of a double-edged sword. Too much credit and lenders might be worried that you’re not managing it properly. But if you have no credit history at all, then lenders might be worried that you won’t manage it properly. See the problem?
A good credit score can help you save tens of thousands of dollars in interest throughout your life. It will make it easier to qualify for a mortgage, rent an apartment or get behind the wheels of your dream car. The good news is that building a credit score from scratch is a whole lot easier than repairing a damaged one. At the same time, these tips also focus on making sure you’re staying in your financial lane. When you’re actively building credit, you can also quickly put yourself into situations where you’ll be tempted to overspend and hurt yourself more than you’re helping. The only credit situation worse than no score is a poor score.
Starting on the right foot (and staying there) is critical. If you’re a new Canadian, a younger person becoming more financially independent for the first time, or just a person with no credit score looking to build one, these smart fundamentals will help you build a solid credit score and keep it there.
Apply for a secured credit card first
Secured cards won’t give you the thrill of suddenly having extra money to spend — and that’s a very good thing. To get a secured card, you pay a deposit equal to the amount of your credit limit. You can then get a credit card to pay bills, shop online, and get all the other benefits of a traditional unsecured card.
As you pay your card off each month and manage it properly (‘cause that’s what you’re gonna do, right?), your secured card gets reported to the credit bureaus, and over time you boost up your credit score. If you close your account in the future, you get your initial deposit returned.
Particularly if you don’t make a huge income or are still in school, a secured card helps you learn how to manage credit with the big-time benefit of a little forced responsibility. Most of the damaging potential of credit comes from thinking of it as “free money.” With a secured card, your limit is only as big as the actual money that you’ve deposited, creating a strong mental guardrail to use it more wisely. Secured cards have incredibly high acceptance rates, even with no current credit score, and tend to have low rates and fees. They’re a perfect way to dip your toe in the waters of credit and learn how to manage it well.
Be (very) wary of high limit unsecured cards
While your focus is building a credit score, it’s wise to simultaneously aim to very responsibly manage a smaller amount of credit. The more you have access to, the more likely you will overspend and fall into the trap of only paying off your monthly minimum but letting a lot of interest-earning debt ride. Credit card companies are counting on that – the average Canadian carries a whopping $23,035 in non-mortgage credit debt. That’s more money for them, less for you, and a greater chance that you’ll fall behind and damage your growing score.
One of the easiest ways to avoid this situation entirely is a secured credit card like we talked about before. Don’t be tempted by the bells and whistles of rewards, cash back, and points. Along with those also come higher rates, hidden charges, and a bunch of unnecessary complexity.
You don’t need a fancy card with a high limit to shape your credit score. You might want one, sure. But knowing how to discern between what you need and what you want, especially when it comes to how you use a credit card, is a basic fundamental of wisely managing your finances so that they benefit you in the long run.
If you’re a new Canadian and will be making a significant income, then you might want to take advantage of more credit, knowing that you’ll have the money to pay it off responsibly. Most big Canadian banks offer a type of “Welcome to Canada” package of financial products to help you set up that will also help you set the foundations of your new Canadian credit score.
Be strategic about how and what you apply for
Your credit score loves a little diversity, and a mix of different types of credit accounts will help boost it. But be careful — at the same time, when you apply for a credit account, it creates a hard inquiry on your score. This means that a company accessed your credit score to look at your history and decide if they wanted to approve your application. A few hard inquiries are acceptable, but too many and your score will go down. If lenders see that you’re applying for a lot of credit accounts all at one time, they’ll worry that you’re desperate for credit and might be taking on more than you can handle.
A good mix of various credit accounts would look something like this:
● One recurring credit account (where you get a bill for a different amount each month).
● One fixed loan (with a set amount where you pay off the same amount each month).
● Monthly recurring accounts (utilities, mobile phone, and internet).
● If you want or need it, a mortgage or car loan.
To get approved for them without racking up too many hard inquiries:
● Make a list of the credit types and accounts you need.
● If you have an existing account at a bank, talk to them first. They might be able to offer you both a credit card and a small fixed loan with one hard inquiry.
● Only apply for one account at a time. Resist the urge to apply for multiple accounts simultaneously and see which you’re approved for.
● One credit card is enough. Once you’re approved, don’t apply for any others until your credit score is established.
Pay everything on time every single time
The building blocks of a good credit score show how month after month, year after year, you pay your bills on time each month. This matters more than anything else. Just two factors of your credit management count for more than 65% of your total score:
● Your payment history is 35%
Paying your bills on time is the #1 most important thing you can do to create and maintain a good credit score. Don’t pay your bills late, not even once. Set up automatic payments and reminders so that your bills are paid automatically if you can.
● Your credit utilization is 30%
For recurring accounts, like a credit card or line of credit, your credit utilization tracks how much of your total available credit you’re using each month. If you’re using too much of your credit, that shows lenders that you might be dipping into credit that you can’t pay off.
You want your credit utilization to be as low as possible — ideally around 10% but definitely less than 30%. Say you have a credit card with a $1000 limit. You’d want your monthly bill to be $300 or less.
● Don’t play the monthly minimum game
It’s true that paying your monthly credit card minimum means that you’ll have paid your bill on time. But, if you’re letting high amounts ride (especially more than 30% of your limit,) you’re not only hurting your credit score utilization, but also paying unnecessary interest charges. Aim to pay off your entire credit card bill each month.
Be consistent, and patient
There’s no set rule for how long it takes before your score will be reported. It will usually take up to eighteen months before you’ll see a base credit score and can take even longer than that. Put yourself in the mindset that you’re in this for the long haul. It’s not exciting, but establishing a credit score is a bit of a waiting game. There’s no way to get around the system and raise it quickly.
Remember, this is an investment in your long-term financial future. Starting smart financial habits now will not only benefit your credit score, but your entire life both now and in the future.
Jeremy Elder is a Toronto-based content marketer and copywriter with over a decade’s experience telling stories for some of the world’s biggest brands. He’s an expert at finding WiFi wherever you least expect it.
Jeremy Elder is a paid Sonnet spokesperson.