Building your credit score can seem daunting if you're a young person who has never used credit, are trying to rebound from past debt or are new in Canada.
There's no need to live with bad credit. Here are some ways you can build up your score so that when someone is looking for a mortgage or other loan, they'll be proud of the applicant—and qualification rates will go way up too.
Let’s take a closer look at credit and how to go about responsibly building yours.
Why You Should Build Your Credit
When applying for a loan or credit card, lenders often check your history to determine if you're a creditworthy borrower. If there are any gaps in coverage, these factors could affect how much interest charges on loans would be. Gaps could be caused by not paying off your balance in time or total. Unfortunately, these higher interest rates will cost you a lot more over time than the money you need to borrow.
Thus, by building good credit, you may be able to save money in the short term and eventually get approved for more oversized items, such as becoming a homeowner. Put differently; building credit can give you more control over your life.
Products to Help You Build Credit
Various credit products can help you build credit over time, but one of the simplest is a credit card. Although there are different types of cards to choose from, they are the fastest and easiest way to build credit. With some, you can be guaranteed approval if you meet qualifying conditions making the application process even easier! You might also consider a secured or retail card and a builder loan that will help start good payment habits.
1. Secured Credit Cards
A secured credit card can be a great option, but the drawback is you may not qualify for a card with a higher score.
Secured cards work primarily the same as any other credit card. The main difference is that you typically need to pay a deposit after you’re approved to access the account. Your limit is then usually based on the deposit you put down upfront. For example, if you make a $500 deposit, that amount is your credit limit.
Before applying for a secured card, here are some points to keep in mind.
Fees: Find out if there's an annual fee or any others you must pay out of pocket. These could include charges for paying late or exceeding your credit limit.
Interest rates: Fixed and variable rate credit cards are not the only way to go. A secured card can have higher interest rates than an unsecured one, so make sure you know your options before signing up for one.
Rewards: Although the rewards may not be as beneficial as some credit cards, you’ll still want to earn them for everyday spending.
Benefits: They often come with benefits like low rates and security measures to help build good standing.
2. Retail Credit Cards
If you want the convenience of carrying your favourite retailer, apply for a retail credit card. They are similar to traditional ones, except they come from big stores like Hudson’s Bay and Walmart.
Retail credit cards are a valuable option for individuals with low scores or limited history. If your application is approved, you can start shopping and earning rewards shortly after completing the form.
However, they also include several terms that make it essential to take a closer look.
Fees: Retail cards may carry additional fees, such as an annual fee and a fee for requesting a statement or sales slip.
Interest rates: The interest rates are typically high, so avoid carrying a balance.
Rewards: Some offer rewards programs, so if you’re a regular shopper at a particular store, you may be able to earn points or cash back.
Limited usage: You may only be able to use a retail credit card at the retailer that issued it.
3. Credit Builder and Saving Loans
If you're looking for an alternative to traditional loans, consider applying for a credit-builder or savings loan. With these types of programs, there is no money upfront, and Instead, the borrower makes their monthly payments which then improve their score due by reporting them as regular income when creditors need it.
Loans can help for positive activity as well as savings. There are numerously available, so assess how much interest rates could change or the associated fees that can reduce their effectiveness.
How to Build Credit Responsibly
Make payments in full and on time. It’s essential not just for good financial standing but also because it helps protect you against any potential impacts on credit health. If you are forgetful or inconsistent with paying off loans, perhaps consider setting up automatic payments!
Paying in full and on time can go a long way in improving your credit health. According to the Financial Consumer Agency of Canada, payment history impacts your credit scores most.
If you cannot make total payments, aim to at least make the minimum payment on time. Making no payment and hoping it will go away is always worse than the minimum payment. When it is late, the lender may report a late payment to the credit bureaus, Equifax and TransUnion. This negatively affects your credit health.
Instead, contact your lender to see if an alternative arrangement can be made. For example, some lenders like Royal Bank of Canada may let you skip a payment on your mortgage if you run into financial difficulties. However, this decision is at the lender’s discretion.
On another note, if you can avoid it, don’t get in the habit of only paying the minimum. It’s okay to do so occasionally, but interest will add up if you regularly carry a balance on your credit.
If possible, consider diversifying your credit mix. When you’re in the early stages of building credit, you may only have one form, like a credit card. But when you’re on your way to good credit, consider mixing it up with various credit types. These could include a car loan, a line of credit or a student loan.
Even different types of credit cards may help diversify credit health. However, while having more credit types can help, don’t apply for too many in a short amount of time. Limit the number of credit applications because each hard inquiry can negatively impact your credit health.
Bottom Line
By understanding how to build credit, whether you’re new to Canada or you’re a young person, you can take the necessary steps to improve your credit. An easy way for many is a secured credit card, but a retail credit card or credit-builder loan might be equally beneficial.
Regardless, it’s important to borrow responsibly. That means making your payments in full, on time and avoiding common mistakes, like paying only the minimum every month.