How To Build Credit From Scratch

March 01, 2022
Build credit

It’s a fact you will need build credit to ensure a solid financial future.

Although it may seem difficult to build credit from scratch, it is possible. Although credit scores and credit reports can be important in determining your financial health, credit building is possible with hard work and good money management. We have listed eight steps to help you get started building credit.

Credit basics

It is essential to have a solid understanding of credit and how it works.

Credit scores are a measure of your creditworthiness. They are essentially a measure of how responsible you are with money and how likely you will pay back debts. Canada’s credit scores range from 300 to 901 and are divided into five categories. The lowest is a low credit score, and the highest is excellent. Your credit score will determine how highly potential creditors rate your creditworthiness. This will affect the number of financial products you can get approved for at the most favorable rates.

There are two credit bureaus that manage Canada’s credit scores and credit reports. These credit bureaus collect information about your creditors, such as loan and credit card companies, and then use specialized algorithms to calculate your credit score.

Credit scores are composed of five factors. Each factor contributes a different percentage to your overall credit score. These five factors are:

  • Payment history (35%)
  • Utilization (30%)
  • History (15%)
  • Mix (10%)
  • Credit inquiries/credit checks (10%)

Your payment history and credit usage influence your credit score. So pay attention to your payments on time and manage your credit responsibly.

Credit bureaus can also produce more detailed credit reports, which contain all of your credit histories. These reports contain a lot of information about your finances, both past and current. They include details such as how long you have had a loan, credit card, late or missed payments, balances, and credit limits. You can also see if you have ever declared bankruptcy. Potential lenders may look at your credit report for many reasons. For example, they will want to know how much debt you have, whether you have defaulted on loans in the past, and if you are prone to miss payments.

Examine your credit report

Potential lenders will use credit reports to evaluate your creditworthiness. They provide a detailed view of how well you manage money. You should monitor your credit report carefully once you have established it. This will help you catch mistakes such as late payments or bankruptcy filings. You should scan your credit report and correct errors immediately to improve your credit score.

Apply for a Credit Card

One of the fastest ways to build credit is getting a credit card and responsibly using it. Three credit cards are best for people just beginning to build credit in Canada.

Secured credit card

Secured credit cards are a valuable tool for those with poor credit histories. They can also be effortless to obtain, regardless of your financial history. Secured credit cards are a way to “secure” your payments with cash deposits. Credit card providers have no liability if you default on payments. Secured credit is only available to those who make a deposit. This is unlike a traditional (aka unsecured) credit card. The credit card provider can use your deposit to pay you if you don’t make your payment. Your deposit also determines the credit limit. For example, if you deposit $500, you can only spend $500. A secured credit card allows you to establish credit and build your payment history.

Students credit cards

Students who attend post-secondary schools can apply for student credit cards. There is no expectation that applicants have excellent credit scores or long credit history. This makes them easier to obtain. In addition, these cards often have lower credit limits, making it easier to manage your card responsibly and pay off your balance each month. Students cards often have special requirements such as proof that you have completed post-secondary education. To get a student card, you will need to prove that you have income and that your minimum age is 18.

Retailer’s store-credit cards

You may not be allowed to use store credit cards. However, it is easier to apply for them because they have lower credit limits and high-interest rates.

Request a credit-builder loan

Although credit builder loans are not common in Canada, credit unions and other financial institutions often offer them. Although they can be challenging to find, they can help you build credit. Because this type of loan is not the usual way that loans work, it can be confusing. A credit builder loan is a loan from a lender to you with a set amount. However, rather than giving you the money right away, the lender will put the money in an account that earns interest, similar to a savings account. If you have not paid off your loan, the lender will continue to charge you monthly payments. Here’s where credit building comes in. Your credit history is built up as you make the payments on the loan. Since you’re not borrowing money, your lender doesn’t have to take any risk. This makes it easy to obtain a credit-building loan even if you don’t have a credit history.

Register to be an Authorized User

Canada is not like other countries, where you cannot establish credit or raise your credit score by being an authorized credit card user. Most financial institutions only report the primary cardholder’s transactions to a credit bureau. Ask your credit card issuer whether they report authorized user activity.

Co-sign a loan

Another option is to get a loan with a co-signer. This will help you build credit. A co-signer is usually a friend, family member, or trusted person who agrees to repay the loan in full if they default. If you default on your payments, it could cause permanent damage to their credit and finances. This could lead to a breakdown in your relationship.

Register for a cell phone plan

A cell phone plan is a great way to build your credit in Canada, especially if you have just moved to Canada. Your credit file is updated with cell phone companies’ information to credit bureaus about your monthly bills. Your credit score is affected by how timely you pay your phone bill.

You must be able to pay your monthly bills on time. The cell phone provider will add this positive information to your credit report, which could help you improve your credit scores. However, you could also be penalized if you default on payments, eventually affecting your credit score.

Healthy credit habits

You don’t want to build credit. You want to create good credits. Healthy credit habits are vital to maintaining a solid credit score and credit history. This includes:

  • Regularly monitor your credit reports.
  • Making timely payments.
  • Not borrowing more than you can afford.

If you struggle to make timely payments, debt consolidation could be an option that gives you some cash flow relief.

Be patient

It takes many years to build a credit score. Keep doing the right thing, like paying on time and monitoring your credit reports, and you will get there.

Why is my credit score important?

A healthy credit score is vital. Good credit scores will allow you to qualify for low-interest loans, making it easier to buy oversized items like a home or car. In addition, your credit score can make or break renting a vehicle or purchasing your first home.

You will also be able to apply for the best credit card offers and get credit lines with excellent rates. A good credit score is a great way to rent an apartment or get a job. Many potential landlords and employers will check your credit report to determine your trustworthiness.

What is the average time it takes to get a good credit score from scratch?

Credit scores don’t appear overnight, no matter how diligent you may be in managing your credit responsibly. You’ll have to wait and persevere. It takes at least six months for credit bureaus to have enough information about your behavior (such as how well you make payments) to create a credit score when building a credit history. In addition, bad financial habits can set your score back and make it difficult to get a score.

What is the fastest way to build credit from scratch?

When it comes to building credit, there is no quick fix. It would help if you had patience, diligence, and the ability to take your time. Responsible credit card use (meaning that you pay your credit card in full each month and never miss payments) is considered to be one of the best ways to build credit. A low credit utilization ratio, a solid credit mix, and a high credit score will help you establish credit quickly. You should also be careful not to apply for too many credit cards at once if you want to build credit fast. This will negatively impact your credit score.

How can you maintain good credit?

Here are some tips to help you maintain good credit.

You can pay your bills on-time

Your payment history influences your credit score. For example, your score will increase if you don’t make late or missed payments.

Keep your old accounts opened

Are you thinking about cancelling your credit card because you haven’t used it in years? Reconsider! It would help to keep them in your possession for small purchases to ensure that the issuer does not cancel them. Inactivity with your credit card may cause it to be cancelled. This can quickly damage your credit score since it can increase your credit utilization rate overnight.

Credit utilization below 30%

Your credit utilization is 30% of your score. This is how much credit you use out of all the available credit. Your score will be higher if you have a lower credit utilization. Try not to use more credit than you have available at once.

Diversify credit

It would be best if you had several types of credit. Potential lenders want to see your ability to manage multiple credit products, such as revolving credit and installment loans. Two credit accounts are a good credit mix. For example, you could have a credit card and a mobile phone plan or a card and a loan. You should make sure that you can afford your monthly payments.

Increase credit limit

It’s wise to increase the credit limit for credit cards, as long as you’re confident that spending more won’t be encouraged. This is because you can keep spending the same amount but increase your limit. You will then decrease your credit utilization ratio.