Canadians could do a lot more to manage their finances. Believe it or not, the average Canadian owes over $73,000 in debt as we speak, and many of their credit scores suffer the consequences as a result.
Fortunately, there are plenty of ways to build your credit score. You just need some patience, planning, and the right credit-building tips. Let’s talk about building good credit in Canada!
Factors Affecting Your Credit Score
We don’t need to talk about the benefits of having good credit, do we? For the vast majority of us, our social mobility largely depends on this three-digit number. If you want to buy a house, car, or start a business, you’ll likely need loans.
Well, the first step to understanding how to build good credit is to understand the factors involved. Here’s a brief description of the most important ones.
The top factor, accounting for 35% of your credit score, is your payment history. It should come as no surprise that paying back your loans on time is the top factor, but there are some important aspects to understand here. If you miss a payment’s due date, it’s not the end of the world.
For most lenders, you’ll only have to pay a fee, which can range widely depending on the type of loan and the lender. You can expect to pay between $20 and $40 in most cases, so don’t make it a habit, but this won’t affect your credit score unless it’s at least 30 days late.
In most cases, but not all, this is what causes bad credit. Missed payments can quickly deteriorate your score, especially for a new borrower!
After 30 days, they can report it to the credit bureau as a late payment. If it crosses the 60-day or 90-day threshold, this could be reported as “delinquent”, which could tank your credit score. Even one late payment can hurt your credit score, and the effects can last for up to 7 years!
This involves your revolving lines of credit primarily, especially credit cards. We’ll discuss why having a credit card is so important, but note that your installment loans (car payments, mortgage, etc.) won’t affect this aspect. However, this still accounts for up to 30% of your score.
Ideally, your credit utilization will stay between 0% and 9% every month, but that isn’t always possible. Going above that occasionally isn’t a big deal, and can even help prove to lenders that you can handle your debts! There are still limits to avoid though.
Generally speaking, try to keep your balance below 20% at the end of each month, and ideally under 10%. If your credit limit is $25,000 and you spend $6,000 in one month, try to pay off at least $1,000 to save on interest and stay below that 20% threshold.
Fortunately, if you do go high on your credit utilization for a short period, you should be quick to recover. High utilization may hurt your score substantially, but its effects won’t last long once you pay it off. Unless you’re trying to open a loan soon, take out what you can afford to pay back, and don’t worry about it.
Length of Credit
The age of your credit history is an important factor, accounting for 15% of your score, as lenders want to see how well you’ve managed your debts over time. They do this by averaging the length of each line of credit.
Unfortunately, the only way to improve this part of your score is with time, so keep your credit cards open and in good standing for as long as possible. Most Canadians have multiple credit cards, which can help improve this average over time. Installment loans have expiration dates, so credit cards are your best opportunity to drive up the average.
New Credit & Credit Mix
The last two factors account for 10% of your credit score each, which means they have minimal impact. If you’re keeping your credit utilization fairly low and making payments on time, then these are negligible, especially for new credit.
New credit is measured by hard inquiries into your credit report. If you aren’t applying for dozens of loans at one time, then you really don’t have to worry about this. A few hard inquiries may drop your score by 2 to 10 points, but the effects won’t last for more than 2 years and, more likely, 2 months.
Your credit mix may last longer but its impact isn’t too dramatic. If you have both revolving lines of credit and installment loans, then there’s no sense in opening more lines of credit to boost this portion. However, it does help to show lenders that you can handle different types of credit.
How to Build Good Credit
Now that you know the most important factors in your credit score, it’s time to talk about improving them. Let’s talk about how to build good credit in Canada!
1. Set Up Automatic Payments
If you’re worried about missing a payment because of forgetfulness and not inability to pay, try to automate your payments or set reminders on your phone. Most lenders will send email reminders, but let’s be honest, how often do we open these?
By setting up automatic payments, you can rest assured that you won’t miss a payment, which would have the most devastating impact on your score. If you’re worried about not having the funds in your account, set a monthly reminder a few days before the due date so you have time to address the situation if needed. Even if it takes 30 days to affect your score, late fees can be expensive!
2. Use Credit Cards Wisely
We mentioned that keeping your balance low is a good idea, but let’s take it a step further. Honestly, it’s no big deal if you keep a balance on there every once in a while. You’ll see an impact on your score, but it won’t last for long if you pay it off.
Leaving an occasional balance and paying it down over time may even show creditors that you can handle extra debts on top of your installment loans. Don’t be afraid to do this when you need it but don’t put yourself into unnecessary debt in an attempt to boost your score. Always try your best to keep utilization under 10%, as this will improve your score, or under 20%, which will have a neutral effect.
3. Increase Your Credit Limit
On your credit cards, it wouldn’t hurt to increase your credit limit, even if you don’t intend to spend more. Increasing your credit limit from $10,000 to $15,000 could be the difference between a utilization of 10% or 15% if you’re leaving a balance of $1,500.
You can either request an increase from your creditor or open a new credit card. Remember that your utilization is based on your total credit limit across all of your revolving credit lines!
4. Plan Ahead
When it comes to building good credit, you need to develop a long-term mindset. For example, if you know that you’re planning to buy a home in two years, now would be a good time to start working on your credit. If you’ve only used installment loans in the past, now would be a great time to open a credit card.
On the other hand, if you’re overwhelmed with credit card debt or other high-interest loans, you’ll need to think long-term about how to pay them off and stay out of debt. Getting a no-credit-check loan could help you avoid the high-interest payments and still help you pay down your debt over time.
When making a decision that will impact your credit, always think in the long term. Will a new credit card really help me or will it just put me into more debt? These are the types of questions to ask before making any decisions.
Whatever your circumstances are, there’s always a way forward, as long as you plan it out. As we mentioned before, all of the factors on your credit score have a time limit. They will be removed from your credit history eventually, and if you’re building your credit, they’ll likely be removed before the limit!
Start Building Good Credit Today
If you take away anything from this, remember that building good credit takes time and consistency. Unfortunately, there are no shortcuts. However, the potential payoffs of building good credit are well worth it, as it could help you do just about anything you want in your life!
Stay up to date with our latest financial tips and feel free to contact us with any questions or for help with your credit strategy!