Christopher Liew is a CFP®, CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.
From the time you’re old enough to sign a legal contract, you can start building your credit profile and the scores tracked by Canada’s two credit bureaus: Equifax Canada and TransUnion Canada.
Despite how important it is to build credit score early, most schools do not do a good job of showing young adults how to get started, especially when they are beginning from scratch with no credit history at all.
Below, I’ll share some tips to help you start from zero and build a solid foundation for the future.
Credit history in Canada: Why it matters
Whether you like it or not, your credit score matters. Even if you’re the type of person who likes to avoid unnecessary debt, pay with cash, and be as frugal as possible, your score still matters. A good score can:
- Qualify you for a lower security deposit on your apartment
- Allow you to receive low-interest financing for your car
- Qualify you to receive a mortgage for your home
- Qualify you for lower insurance premiums
How can I increase my credit score?
The good news is that building credit doesn’t mean that you have to get into mountains of debt or go on a shopping spree with your new credit card. It’s entirely possible to build great credit while also being frugal and financially responsible.
Typically, at age 18, you’ll start off with no credit. New immigrants to Canada may also start off with no credit in Canada, although Equifax is launching a program to help immigrants transfer credit from their home countries.
This is because your credit score is built over time. As you apply to lines of credit, maintain accounts, and make payments, your creditors will send reports of your activity to the two major credit bureaus. Each bureau has an advanced algorithm that’s used to generate your credit score (from 300 to 900), based on how well or how poorly you maintain your accounts.
The easiest way to start building your credit score is to start using a credit card or take out a loan and start making payments. The only issue here is that with zero credit, it can be difficult to obtain either a loan or a credit card in the traditional manner. But there are ways to build your credit score starting from ground zero.
How can I build credit fast?
1. Open a secured credit card to build the best credit score
Most major banks in Canada offer secured credit cards, so named because the card is secured with an upfront deposit. Essentially, these cards work like prepaid debit cards except they help you build your credit. The issuing bank reports a positive payment to the credit bureaus each time you reload the card, which helps you build payment history.
The bank takes on no risk since you’re pre-paying the card balance and you get to build your credit, making it a win-win scenario for both parties.
After successfully building six months to a year’s worth of credit history with a secured credit card, there’s a good chance you’ll be eligible to receive a traditional credit card.
2. Sign up for a credit builder loan
An increasing number of fintech companies such as Credit Karma and KOHO are offering small credit-building loans. These loans typically range between $500 and $2,500 and are paid monthly, with payments as low as $10 to $15.
The difference between a traditional loan and a credit-building loan is that you don’t receive the funds upfront with a credit-building loan.
Instead, the lender typically puts your money into an account and holds it as collateral until you repay the loan.
3. Pay your rent and utility bills on time
If you’ve rented an apartment, chances are that you have a rental credit score. Many landlords report your payment history as well as lease violations and evictions on your credit. Being a good tenant pays off, as your future landlords will be able to see this, resulting in lower security deposits or increasing your chances of approval.
Failure to pay your utility bills can also show up as a negative ding on your credit score, especially if the utility provider has to send your account to a third-party collection company.
Paying your rent and bills on time should be just as high of a priority as making your credit card and loan payments on time. This is also why it’s a good idea to thoroughly vet potential roommates, so you don’t end up in a situation where their failure to keep up with their end of bills and rent doesn’t negatively affect you and your credit.
Building good credit: A game that pays off
Today, a lot of your opportunities are determined by your credit score. The earlier you start to build a positive payment history and diversify your credit, the easier it will be for you to purchase an affordable and reliable vehicle, get a small business loan, get approved for an apartment, and one day, a house.
If you’re starting from no credit whatsoever, then start using some (or all) of the tips above. With a little bit of time and consistency, you’ll give yourself a massive head start in the game and will be able to reach your credit goals faster.
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