By Sean Cooper
Do you want to build your credit history and score? Maybe you just moved to Canada or you’re a young person who has never used credit. Building your credit can seem daunting, but there are proven ways to do it.
When you lack credit history, you may have to pay more in interest on loans – or you may not be able to qualify for credit at all.
Let’s take a closer look at credit and how to go about responsibly building yours from scratch.
Why you should build your credit in Canada
When you apply for credit, businesses often review your credit report and credit score to help with their decision. Your credit history can help them determine how risky it is to lend to you.
If you have a low credit score – or no credit at all – you may receive less generous borrowing terms (such as a lower credit limit or higher interest rate). A higher interest rate can end up costing you a lot more money in interest over time on any money you borrow.
Worse, your credit application could be denied.
By building good credit, you may be able to save money, get the best interest rates and get approved for more products, such as a mortgage, line of credit or premium credit card.
Products that may help you build credit
There are a variety of credit products that can help you build credit over time. The simplest and fastest way to build is with a credit card.
1. Secured credit cards
There are different types of secured credit cards on the market. For example, the Canadian Imperial Bank of Commerce (CIBC) offers a secured credit card that you can apply for with no credit history. Even better, you don’t need to put down a security deposit.
However, you’re required to meet the following criteria:
- You acquired Canadian permanent resident status within the past 36 months;
- You need to have another eligible CIBC personal product, such as a chequing or savings account, in good standing (or have a minimum household income of $15,000 and meet CIBC’s credit criteria).
- You need to go to a branch to apply – you can’t apply online.
Another type of secured credit card is where you pay a deposit in order to qualify for the card. Your credit limit is typically based on the deposit you put down up front.
For example, the Home Trust Secured Visa Card allows you to put down a deposit between $500 and $10,000. That amount will then serve as your credit limit.
“After responsible usage over time, [using a secured card] can help you build credit,” says Laurie Campbell, CEO of Credit Canada Debt Solutions.
Be aware that secured cards may come with a variety of fees. For example, CIBC’s secured cards come with annual fees that range between $0 and $120. Secured cards may also come with additional fees for adding an authorized user or exceeding your credit limit.
Also, like standard credit cards, secured cards can have high interest rates so it’s best to make on-time (and in-full) payments every month.
2. Retail credit cards
Another option is to apply for a retail credit card. Major stores such as Hudson’s Bay, Walmart and Canadian Tire offer them. Some of them offer rewards programs so if you’re a regular shopper at a particular store, you may be able to earn points or cash back, depending on the program.
The interest rates on these cards may be high, so try to avoid carrying a balance at all costs. For example, the Walmart card carries a percent APR between 19.89 and 25.99, which would be applied to your balance.
They also typically limit your usage – you may only be able to use a retail credit card at the retailer that issued it. Retail cards may also carry many other fees. For example, the Canadian Tire card carries a $2 fee when you request a copy of a statement or sales slip.
How to build credit responsibly
Once you’ve obtained credit, you’ll want to use it to build your credit history responsibly. Here are some tips on how to do this:
Make payments in full and on time. Not only can late penalties result in interest charges and fees, but they can also have a negative impact on your credit health.
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 is the most impactful factor that contributes to your credit score.
If you’re unable to make full payments, aim to at least make the minimum payment each month. Not making any payment and hoping it will go away could be detrimental to your credit health. The lender may report a late payment to the credit reporting agencies, Equifax and Transunion. This may, in turn, negatively affect your credit health.
If you have an auto loan or mortgage and can’t make the payment in full, contact your lender to see if an alternative arrangement can be made. For example, some lenders like Royal Bank of Canada (RBC) may let you skip a payment on your mortgage if you run into financial difficulties. However, this decision is at the lender’s discretion.
If possible, consider diversifying your credit mix. When you’re in the early stages of building credit, you may only have one credit type. But when you’re on your way to having good credit, consider mixing it up with a variety of credit types. These could include a car loan, line of credit or student loan.
Even different types of credit cards may help your credit health. However, while having more credit types can help, don’t apply for too many. Make sure you can afford any money that you do borrow.
Common mistakes that people make when new to credit
Here are some common mistakes to avoid when you’re new to credit:
- Applying for too much credit in a short amount of time. Limit the number of credit applications you make as each hard inquiry can negatively impact your credit health.
- Only making the minimum payment. If you regularly carry a balance on your credit card and you only pay the minimum, it may take you years to pay off your debt and potentially cost you thousands in interest.
- Making late payments or missing payments. This can severely impact your credit health. Add a reminder of your credit card due date (for example, your cellphone or a mark on a physical calendar) or set up automatic payments.