A good credit score is important, because it can help you get approved for a car loan, a credit card, a mortgage, or even an apartment. But it can feel impossible to build credit if you don’t have much of a credit history.
One of the fastest ways to grow your credit score is with a credit card. However, getting approved for a credit card typically requires a fair to excellent credit score. But is it possible to build credit with a debit card?
Here’s what you need to know about growing your credit score, whether a debit card can help, and additional ways to get approved for credit accounts when you’re just starting out.
What is a Credit Score and How is It Calculated?
Your credit score offers lenders a glimpse into how you handle credit, so they can decide if you’re a responsible borrower. In Canada, your credit score can range from 300 (poor) to 900 (excellent).
Credit scores are made up of five factors:
Credit utilization (used versus available credit)
The length of your credit history
Public records (bankruptcies, accounts in collections, and other derogatory marks)
Inquiries on your credit report
Your payment history is the largest contributor to your credit score. If you pay your credit accounts on time, your score will go up. But if you pay late or fall behind on your payments, your score will start to suffer.
Negative remarks on your credit report can take up to six years to fall off of your profile, so it’s important to try to always pay at least the minimum on all of your credit accounts each month.
Typically the two Canadian credit bureaus — Equifax and TransUnion — update your credit scores every 30 to 90 days, but this can vary by account.
Credit Building Tips For Beginners
If you’re new to building credit, there are a few ways you can jumpstart your credit score:
Enroll in autopay
A late payment can significantly hurt your credit score. Setting up automatic payments for at least the minimum due on your credit accounts can prevent you from ever missing a payment.
Treat your credit card like a debit card
A good way to avoid credit card debt is to pay off purchases you charge as you go. Think of your credit card like a debit card and each time you tap your card, pay off the balance. You should check in on your bank account before using your credit card to ensure you have the funds to pay a purchase off.
Keep your balances under 30% of your credit card limit
Your credit utilization is the second biggest factor that makes up your credit score. Experts recommend keeping your utilization under 30% each month — and even lower if you can. For example, if you have a credit limit of $500, try not to keep your card balance under $150.
Don’t chase credit card rewards
Earning cash-back can be a nice credit card perk — but when you’re just starting out, it’s more important to develop healthy credit habits, like paying your bill in full and on time. Pursuing rewards before you feel confident about managing a new credit card could lead you into a cycle of overspending.
Review your credit score regularly
The best way to track your progress is to check-in on your credit score routinely. Since it takes most lenders at least 30 days to update credit bureaus, reviewing your score monthly can help you stay on top of your credit growth. You may have access to your score through your credit card issuer. If not you can access your Equifax credit score for free online. If you live in Quebec, you can also access your TransUnion credit score online for free.
Can Debit Cards Help or Hurt Credit Scores?
A debit card is typically linked to your chequing account and used for day-to-day purchases. Using your debit card generally won’t directly impact your credit score — but there are some indirect ways it might help or hurt your credit.
For example, if you tend to overspend, it may be a good idea to use your credit card for small, more affordable purchases, and your debit card for everything else. While you won’t build credit when you shop with your debit card, it can prevent you from accruing credit card debt.
Additionally, if you forget to use your credit card regularly because you prefer to use your debit card, your credit score might remain stagnant or start to decline due to lack of activity.
How overdrafting can hurt your credit
There is one instance where your credit score might decrease because of your debit card usage: overdrafting on your bank account. If you spend more money than you have available in your checking account, you typically have a period of time where you can repay the funds. But if you don’t pay the bank back in a timely fashion, your balance might be moved to a collection company. In this case, the overdue payment would hit your credit report and likely ding your credit score.
Are There Debit Cards to Help You Build Credit in Canada?
While there are a few debit cards that report your spending activity to the credit bureaus in the United States, like Extra or Fizz, in Canada there aren’t currently any credit-building debit card options.
How a Secured Credit Card Can Increase Your Credit Score
A secured credit card offers an easier path towards building credit for newcomers. You can often get approved for a secured credit card without having a credit score. But secured cards work a little differently than traditional credit cards.
You’ll need to provide a one-time cash security deposit which will often serve as your credit line. So, if you put down $300 to open a secured card, you’ll have a $300 line of credit available to pull from. Like a regular credit card, secured card providers will report your payment history and usage details to the Canadian credit bureaus, so you can start building credit right away.
After using a secured card for six months or more, you may be able to graduate to a traditional credit card.
Other Ways to Build Credit in Canada
Although you can’t build credit with a debit card in Canada, there are a few other ways you can get started — even if you have no credit.
Sign up for rent reporting
If you pay rent each month, you can make sure that money counts toward growing your credit score. You have two options to consider if you want your rent payments to count on your credit profile. Borrowell offers Rent Advantage reporting for $8 per month and Landlord Credit Bureau offers a similar service through FrontLobby for $5 per month.
Both options only report your rent payments to Equifax. That means they won’t show up on your TransUnion report. So expect your credit score to vary between the two credit bureaus.
Become an authorized user
Another way to help establish credit is to ask to be added as an authorized user on a trusted family member’s credit card. Each time the family member makes payments on their credit card bill, you’ll also receive a positive mark on your credit report.
Becoming an authorized user is a good option if you’re under 18 or unable to apply for credit on your own yet. But it can also hurt your credit report. If the card holder forgets to make a payment or can’t afford their credit card bill, it can decrease the credit score, and yours.
Apply for a credit building loan
Some banks and credit unions offer a credit building loan designed to help boost your credit score with minimal risk — and you often don’t need a credit score to apply.
Here’s how it works: the bank will agree to set aside a sum of money in a savings account for you. You’ll then make payments toward that lump sum of money, which the lender will report to the credit bureaus each month. Once you’ve made all required payments, you’ll receive the full amount of money.
Courtney is a professional writer, editor and financial literacy enthusiast. You can find her writing on CNET, Investopedia, The Motley Fool, Yahoo Finance, MSN and The Balance. She spends her free time exploring different cities across the globe or enjoy some downtime with her two cats and one dog.