Credit is a total double-edged sword. It’s convenient and enticing because it feels like free money, but misstep with your credit and you could be hit with all kinds of financial headaches in the future.
And without credit, it’s nearly impossible to get credit. Yep, you read that right. It’s like applying for an entry-level job that requires five years’ experience.
In order to qualify for most credit cards or other loans, it’s necessary to have an established credit score that enables a bank or other lender to determine your risk as a borrower. The logic is downright frustrating; which is why we’re here to help.
Whether you’re a newly minted adult, or a newcomer to Canada, you may not have any established credit. Here are five things you can do right now that can help you build your credit rating and serve as the foundation for your financial future.
1. Apply for a credit card and use it responsibly
This credit-building method may seem obvious, and we did already say that you need credit to get credit; but there are a number of credit card options that are geared towards those with little or no credit.
For example, some banks offer student cards as well as cards for new residents in Canada. These cards often come with high interest rates and low credit limits, but they can be great tools for establishing credit, especially if they’re used smartly. As a student, you could use a student credit card each month for one specific budgetary item; say you use the card only for groceries. At the end of each month, you pay off that bill in full, and you’re on your way to establishing credit.
The trick with a card like this is finding the right card for your needs, and then using it responsibly. Having a student credit card and pairing it with a prepaid Visa card like KOHO allows you to create a more strict budgetary plan. You’re able to make the most of your KOHO account by earmarking payments that go directly to your specific-use credit card. You can then pay that card off on time each month using the money you already have in your KOHO prepaid Visa account; it’s a great way to live within your means while also establishing credit.
2. Get a secured credit card
Secured credit cards are tools more or less designed for establishing new credit or rebuilding poor credit. A secured credit card is like any other credit card, but they require a security deposit. This serves as a risk management tool for the card issuer that gives them the confidence in knowing that regardless of your financial situation, you’ll pay them back.
So if you’re setting up a secured credit card, you’ll put $1,000 down, for example, which would then give you an established credit limit of $1,000. Essentially, the card works as a debit card, but you aren’t drawing from that initial $1,000; that money stays in as a deposit which the card issuer can pull from if you fail to pay back the money you spend on the credit card.
Once you have a secured credit card, it functions the same as any normal credit card (when you’re making purchases it doesn’t get flagged as a secured credit card). You’re able to make everyday purchases, earn rewards, and, most importantly, establish credit. Secured credit cards, like all credit cards, should be paid back on time and in full, especially when you’re working to establish your credit score.
Some secured credit cards come with annual and/or monthly fees, so shop wisely when you’re weighing different options. The important aspect of secured credit cards is that you can get them with poor or no credit. And again, when you couple them with something like a KOHO prepaid Visa card, you’re able to set up regular payments that can help avoid high interest rates for late payments, pulling directly from the money you have.
"Secured credit cards are tools more or less designed for establishing new credit or rebuilding poor credit."
3. Choose a mobile phone plan that reports credit
There are a number of small things many of us don’t even think about that can have a big impact on our financial futures. Choosing the right mobile carrier, for example, is one of those things that can help establish credit by doing something you’d be doing anyway. I mean, we all have cell phones, why not choose one that helps build your credit score?
Many Canadian cell phone carriers will report post-paid cell phone bill history to credit reporting bureaus. So this isn’t an option if you’re someone who uses prepaid cell phones. But if you have a cell phone plan where you’re making monthly payments, those payments can help you establish your credit score. When you’re setting up your cell phone plan, check with a customer service agent to confirm that your bill activity is being reported, because this fact isn’t always apparent when you first set up your plan.
And, again, much like a secured credit card, it’s imperative that you’re paying your cell phone bill in full and on time. If you’re opting for a cell phone plan specifically because it can affect your credit score, you want to be sure that the effects are all positive. Drawing recurring bill payments from a prepaid Visa card like KOHO can be a huge difference maker; by setting up automatic payments with KOHO, you’re guaranteed to have your bills paid on time, which will help build your credit rating.
4. Get a cosigner or a joint account
This option may not work for everybody, but it can also be a shortcut to establishing credit for yourself. Having a cosigner (that you trust, of course) on a credit card can help you borrow on someone else’s credit standing to build a credit history of your own.
For example, entering a joint credit agreement with your parents or another close relation can give you the benefits of their responsibility, reflected in your credit score. Let’s say you and your parents start a joint credit card account together; you all get cards based on whatever credit limit they’re eligible for. Your parents use the card regularly and pay their bills on time (and maybe you have the credit card for emergencies). Those regular payments reflect positively on your credit, because the account is also in your name.
This type of arrangement requires trust on both sides; your relative or close friend has to trust that you won’t overspend on the card, and you have to trust that the primary account holder will pay the bills on time. But hey, you’re reading this article, so you’ve already proven you’re serious about your financial future, right?
What’s great about cosigned or joint accounts is you can set them up when you’re young. Even if you never touch the account, you could have a credit card that’s been accruing regular payments from the time you’re 18 years old, and by the time you’re going to get your own credit card at age 23, for example, you would’ve already had five years of established credit. The major credit bureaus TransUnion and Equifax take into account length of accounts when making credit score determinations, so you benefit from that longevity.
"Many Canadian cell phone carriers will report post-paid cell phone bill history to credit reporting bureaus."
5. Open a bank account and build a relationship
This is sort of abstract, but oftentimes when we talk about credit scores we’re thinking of ourselves reduced to numbers on a page. We imagine an anonymous bank manager sitting in an office, reading our credit report and stamping a big red “Denied” stamp on our loan application. In reality, there are actual, personal considerations that can factor into our finances and credit.
Opening a bank account can develop a rapport and history with yourself and that institution. If you create a savings account with a bank, you’re demonstrating to them your ability to, well, save money. You’re also giving them a clearer overall picture of your finances. By establishing this trust, a bank may be more inclined to give you a line of credit or issue you a credit card, regardless of your history.
Additionally, by working with your bank, you’re able to speak to financial experts who can help guide you towards steps you can take to help build credit that make sense to your specific financial situation. KOHO has a similar service with KOHO Premium which gives you access to a certified financial coach that can help you as you navigate building a credit foundation. It’s also worth noting that we’re working on a feature that will help our users seamlessly build their credit scores, so stay tuned!
Wrapping it all up
Credit scores might seem untouchable and a little random at first glance, but there are real, actionable steps to improve yours over time. It just takes a little patience and consistency. At KOHO, we’re always excited to provide people with tools to improve their financial wellbeing, which has a big impact on credit over time. Keep up the good work!