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What to buy with a credit card to build credit

5 min read

What to buy with a credit card to build credit

Written By

Nick Saraev
Nick Saraev

Reviewed By

Clay Shiffman

It's a peculiar paradox: to achieve a commendable credit score, one often needs to venture into debt first. Sounds counterintuitive, right? Yet, the intricacies of the financial world often defy initial logic.

One of the most straightforward gateways to building and enhancing a credit score is through the judicious use of credit cards. Delving deeper, a credit score is essentially a numerical summation of an individual's creditworthiness.

Crafted from components such as payment history, credit utilization, credit age, credit mix, and new credit inquiries, this pivotal score plays a starring role in decisions made by lenders, the interest rates you're offered, and even certain employment prospects.

Consider it the heartbeat of your financial health—the stronger it beats, the more vibrant your financial horizon becomes.

The Process of Getting a Credit Card in Canada

Embarking on the quest for a credit card in the Great White North? It's a rite of passage for many, marking a step into the realm of financial independence.

However, in Canada, the journey to secure a credit card isn't just about flashing a charming smile or signing on a dotted line. It’s an expedition that demands a sprinkle of research, a dash of paperwork, and a generous helping of financial awareness.

If you’re wondering, “Why not opt for a prepaid or debit card instead?” Though convenient, these cards can’t boost your credit score.

Now, let’s map out the Canadian credit card acquisition adventure:

  • Research and Comparison: Dive into the plethora of credit card offers out there. Weigh the annual fees, interest rates, rewards, and the bells and whistles that each offers.

  • Application: When you've pinpointed your card of choice, it’s paperwork time. Apart from the usual suspects like employment details and income, in Canada, you’ll also need to furnish your Social Insurance Number (SIN).

  • Credit Check: Then comes the moment of truth. Lenders, with their magnifying glasses, will meticulously assess your financial reliability.

  • Approval or Denial: The grand result! Depending on your credit history and that ever-important score, you'll either be greeted with approval, met with denial, or possibly extended a counteroffer.

  • Receiving and Activating: Celebrations are in order if approved! Your shiny new credit card will make its way to you via post. Once in hand, a swift activation brings it to life, ready for your purchasing pleasures.

For non-residents keen on applying, fear not. Though the process can be slightly more winding, with proof of identity, some additional documentation, and possibly a security deposit, the Canadian financial doors are open to you as well.

What To Buy With A Credit Card To Build Credit History Without a Lot of Debt

Credit cards can often carry the reputation of being mere wallets in plastic form. Yet, their true essence transcends this basic function. When wielded wisely, they can be powerful allies in shaping a robust credit profile. Here’s how:

  • Consistent Payment History: Think of on-time payments as the rhythm to your credit score's melody. Each punctual payment echoes reliability and trustworthiness, painting a portrait of an individual who respects their financial commitments.

  • Credit Utilization Management: It's not just about how much credit you have but how judiciously you wield it. Maintaining a utilization below 30% is akin to hitting the high notes, showcasing discipline, and ensuring your score remains harmonious.

  • Diverse Credit Mix: Diversity is the spice of life, and the same holds true for your credit. Balancing between installment loans (like car loans or mortgages) and revolving credit (like credit cards) not only adds depth to your financial profile but strikes the right chord to elevate your score.

Remember, every swipe, every transaction, and every payment is a note in the grand composition of your financial journey. Make each one count positively towards your credit history and utilizing your secured credit card account to its fullest.

The Role the Canadian Credit Bureaus and Building Credit Quickly and Easily

In Canada, credit limits and credit scores play crucial roles in individuals' financial lives, influencing their ability to access credit and manage their overall financial health.

Credit Limits: A credit limit is the maximum amount of credit a lender is willing to extend to a borrower. It applies to various credit products, such as credit cards and lines of credit. The credit limit is determined by the lender based on several factors, including the borrower's credit history, income, and debt-to-income ratio. A higher credit limit provides more flexibility for the borrower but also requires responsible usage to maintain a positive credit profile.

Credit Scores: Credit scores in Canada are numerical representations of an individual's creditworthiness. They are calculated based on various factors, including payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries. The two main credit bureaus in Canada, Equifax and TransUnion, compile credit reports and assign credit scores, typically ranging from 300 to 900. A higher score indicates better creditworthiness.

A good credit score is essential for securing favorable terms on loans and credit products. Lenders use credit scores to assess the risk of lending to an individual. A high credit score often leads to lower interest rates and more favorable loan terms, while a lower credit score may result in higher interest rates or difficulty obtaining credit.

Managing credit responsibly, making timely payments, and keeping credit utilization low are key factors in maintaining a healthy credit profile in Canada. Regularly checking one's credit report for accuracy is also recommended, as discrepancies can impact credit scores. Additionally, Canadians can access their credit reports for free from both Equifax and TransUnion at least once a year.

Using Credit Cards Intelligently by Knowing What to Use Your Credit Card For to Build Credit Limit

Harnessing the potential of a credit card requires more than just possession, it's about intelligent utilization. Here's a breakdown of smart ways to use your credit card usage for a flourishing credit score:

  • Pay in Full: It’s tempting to merely scratch the surface by paying the bare minimum, but this can be a costly approach in the long run. Clearing your balance each month not only shields you from accumulating high interest rates but also keeps your credit utilization in check, fostering a healthier credit score.

  • Treat It Like a Debit Card: One of the most pragmatic approaches is to view your credit card as a debit card. By spending only what you know you can repay at the end of the month, you avoid falling into the debt trap and simultaneously nurture sound credit behavior.

  • Set Up Automatic Payments: In the hustle and bustle of life, payment due dates can sometimes slip our minds. The solution? Automate your credit card payments. This not only guarantees timely payments but also eliminates the possibility of inadvertent credit score dents due to missed dues.

  • Monitor Your Charges: It's essential to regularly sift through your statements. This practice not only helps in budgeting and tracking spending patterns but is also a crucial step in identifying any unauthorized charges. Regular monitoring can be your first line of defense against potential fraud.

  • Limit Credit Inquiries: Submitting applications for multiple credit cards in a short period can send a ripple of caution to lenders. Such frequent inquiries might imply financial desperation or over-reliance on credit, potentially denting your score.

The ultimate lesson to know is to use your credit card responsibly and to think about the purchases you are putting on the card. You can establish credit and build credit history but it takes a careful balance of decisions and responsible card use.

What Purchases Should You Avoid on a Credit Card to Protect Your Credit Scoring Rate

Credit cards are indeed a marvel of modern-day convenience, but like all powerful tools, they require discretion. Although a secured credit card can offer flexibility in handling financial transactions, not all purchases are credit card friendly. Here's a look at some expenditures you might want to think twice about charging to your credit card to [protect your good credit standing:

  • Large, Unplanned Purchases: The ease of a simple swipe or tap can sometimes lure us into impulse buying. However, these unplanned expenses can snowball into debt that's hard to manage. It's always best to plan significant expenses and set aside funds specifically for them.

  • Cash Advances: Withdrawing cash using a credit card might seem like a handy option in a pinch, but it's a pricey one. Cash advances frequently come with steep fees, immediate interest accrual, and often a higher interest rate than regular purchases.

  • Medical Bills: Health emergencies are stressful enough without the added burden of high-interest credit card debt. Instead of immediately charging medical expenses to a card, explore options like payment plans, medical loans, or even health-specific credit services.

  • Tuition Fees: Pursuing education is an investment, but using a credit card to fund tuition can be counterproductive. Some educational institutions slap on additional fees for credit card payments. Instead, consider educational loans, scholarships, or payment plans that many institutions offer.

  • Mortgage Repayments: Your home is likely one of the biggest investments you'll make. Using a credit card to pay off your mortgage might sound tempting, especially if you're eyeing those reward points. However, this can quickly compound debt, making it harder to manage in the long run.

  • Taxes: Paying taxes with a credit card can come with convenience fees. Plus, if you can't pay off the credit card balance immediately, you'll be accruing interest on a debt that's non-negotiable and inevitable with the credit card company.

  • Down Payments: Whether it's for a car or a home, down payments signify your commitment to a long-term purchase. Using a credit card might seem like a shortcut, but it's only delaying and potentially increasing the financial obligation with added interest.

In essence, while credit cards offer a multitude of benefits, they're best used judiciously. Balancing convenience with financial prudence ensures you reap the rewards without the pitfalls. You need to be mindful of your credit limit and credit report history to make sure you being smart with your spending and purchasing habits on your secured credit card. Tiyr standing with the credit bureaus can hang in the balance.

How Credit Card Payments Impact Credit History Now and Down the Road

Your payment history is a pivotal component in the world of credit scores in Canada, acting as a litmus test of your financial discipline and reliability. Your progress and credit scoring will be provided on your credit report and help you see how you are using your credit card and the way it is influencing your spending habits.

Every time you swipe your credit card and settle the bill, it sends out a message. Timely payments solidify your image as a dependable borrower, progressively enhancing your credit score.

However, falter in your punctuality and those missed or delayed payments can cast shadows on your credit report. your credit limit can be impacted as can your standing with the credit bureaus when they look at your credit card account standing.

Considering that payment history is responsible for a significant 35% of your total credit score, its influence cannot be underestimated.

A KOHO Credit Building Credit Card is Available

Building a robust credit foundation is essential, and KOHO is here to streamline the process. With its tailored solutions, KOHO is revolutionizing how Canadians approach credit-building.

For those seeking simplicity, the Credit Building option lets you tap into a dedicated KOHO line of credit.

If flexibility is your priority, Flexible Credit Building offers a unique spin with a secured line of credit.

Opt for maximum effect by choosing to supercharge your credit-building journey and harness the power of both options.

Ready to pivot towards a credit-empowered future? Dive deeper into these innovative offerings and tips for boosting credit scores by KOHO and embark on a transformative financial journey. Check out the credit card options available and make the most of your available credit limit today!

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!

Nick Saraev

Nick is a freelance writer and entrepreneur with a particular interest in business finance. He's been featured in publications like Popular Mechanics and Apple News

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