Credit Scores & How to build Credit

Credit Scores & How to Build Credit

Why a credit score matters

A good credit score will make it easier in the future to borrow money from lenders or make big purchases on credit, such as applying for a mortgage on a house or buying a car. The higher the score, the more sellers will trust that you will make the repayment in the future. This also comes with the rewards of lower interest rates and higher limits on credit cards.

What it is

Credit scores are a three digit number ranging from 300-900 that represents your financial reliability, taking data from your credit report, which is a history of an individual’s borrowing activities, such as taking loans, credit card history, account balances, and payment history. Equifax and TransUnion are credit bureaus that collect and manage this information to calculate your credit score. Individuals who use their credit responsibly gain points for this score, and lose points for irresponsibly managing this credit.

Credit report and score basics for a more detailed overview of what is included in the credit report and how your score is calculated.

What is a good credit score

760-900 - excellent

725-759 - strong

660-724 - typically approved

560-659 - face higher interest rates

300-559 - hard to qualify for credit

Ways to check your credit score

Equifax

Borrowell

ClearScore Canada

How to build credit — there are several ways that young adults can begin building credit early. Credit accumulates over time, so it is beneficial to start building credit as early as possible.

Student credit card — use for small expenses, no annual fees, and start building credit while in school.

CIBC Aventura Visa Card for Students is good for students whose home is in a different province from their school and need to fly back and forth.

BMO Cashback Mastercard - Student - 3% cash back on groceries, 1% cash back on recurring payments, 0.5% cash back on every day expenses

RBC and TD also have good student credit, though the above mentioned have the strongest reward programs.

Never miss payments — make sure to pay your credit balance at the end of the month and not to miss this payment, as a score can be significantly affected with one missed payment.

Keep credit use low — don’t seem dependent on credit use by using less of your limit. Ideally try to use ~30% of your limit. High credit use gives the impression of financial stress, and that you constantly need to use borrowed money. Lower use shows self control.

Keep old accounts open — longer credit history contributes positively to your credit score.

Pro Tip — remember to check your bank statements to avoid identity theft or payment errors

How to apply for a student credit card

First, you should do some research on which credit card best suits your personal needs. The credit cards listed above offer some of the most desirable benefits for university and college students, but you can also research other cards to take every option into account – all of the major banks in Canada offer their own version of a student credit with varying interest rates and benefits, so you should choose the card with the benefits that best suit your needs. For example, students who need to buy their own groceries would find more use out of the BMO Cashback Mastercard than a card that rewards points for flying.

As mentioned, each credit card comes with their own interest rates as well as monthly fees that you must take into account before purchasing your credit card. Although benefits are great, you need to make sure that you are able to afford the credit card that you want to get, and that it fits within your budget. Also make sure to look for any hidden fees, such as foreign transaction fees (typically 1-3% of the purchase amount) as these types of fees tend to add up quickly if you aren’t made aware of them.

After you receive your credit card, use the notes given previously in order to build up a reputable credit score and keep track of your purchase to avoid fraud, and also to get an idea of your spending habits so you can adjust your budget for other purchases appropriately. Also keep purchases small and manageable in order to easily pay off the balance at the end of each month, and so that your bank does not feel you are relying on the credit card. You can set up automatic payments to further ensure that you do not miss any payments.

Credit Cards for Travel

The two most common methods of payment when travelling are cash and credit cards.

Cash

Must exchange your money to a local currency exchange. You can also buy foreign currency in advance, but you might need to pay fees and exchange rates.

Avoid exchanging your money at foreign exchange booths or ATM machines abroad as these booths and tourist spots typically offer bad rates and very high service fees.

Credit card

Credit card companies typically offer lower exchange rates than currency exchange offices, although some cards also have foreign exchange fees.

Some credit card companies also offer perks such as travel insurance, as well as reward points.

Notifying credit card companies about your travel plans is important as it helps avoid any confusion and the bank possibly freezing your card while you are abroad which can be hard to deal with.

Instead using cash, making large purchases on credit is safer and more convenient, and some credit cards offer rewards for travel-related purchases.

ATMs in foreign countries typically charge high interest rates on cash withdrawals using credit, so make sure to bring a debit card as well to make withdrawals with.