How to build credit and maintain a good score

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The credit rating system can feel like a mysterious force, controlling your financial fate. A high score can pave the way for approvals on a new credit card, loan, or even rental apartment, while a low one will bring on high interest rates and restrictive terms or conditions that hold you back from achieving your goals. If you’re starting from scratch, building a solid credit rating may seem intimidating, but it’s entirely doable with the right strategies.

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Before explaining the how-to, it’s worth highlighting what a credit score is and how it is calculated. In Canada, your credit scores are calculated by the two major credit bureaus, Equifax Canada and TransUnion Canada, based on reports to them about your credit-related behaviour. This includes how you’ve handled debts such as credit cards or loans, and in some cases, even bill payments.

Lenders rely on this score to gauge the risk of lending to you. Your scores may differ between the two credit bureaus and each lender chooses how to interpret or use your score. A higher score shows you’re a dependable borrower and repay your obligations as agreed. For those with no credit history, perhaps because you’re a newcomer to Canada, a young adult starting your financial journey, or have had past financial troubles wiped clean, building this score from the ground up is often a priority.

Start with a secured credit card

One of the most effective ways to begin building credit is through a secured credit card. Unlike traditional credit cards, which usually require an established credit rating to qualify, a secured card asks for a cash deposit upfront, usually between $200 and $1,000, which is held by the lender. This deposit acts as your credit limit and serves as security for the lender. For instance, if you deposit $500, that’s the amount you can spend. The trick is to use the card wisely — think small purchases such as a tank of gas or a recurring bill — and pay off the full balance every month. You must actively use credit to build up a rating, so by doing this consistently, you show lenders you can manage credit responsibly.

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Leverage everyday payments

Utility bills aren’t normally reported to the credit bureaus, but if you fall behind, the collection agency will report your arrears and the impact to your credit rating can be significant. The exception is a cell phone contract held in your own name. While a phone contract is not a substitute for a secured credit card, a contract can serve as an additional tool to demonstrate your ability to manage regular financial obligations. The key is to only take on the commitment if you can manage it effectively, ensuring that your payment history remains unblemished.

Practice good credit habits

While starting with the right tools is essential, maintaining good credit habits is what keeps your score moving in the right direction. Paying all your bills on time is non-negotiable; late payments will dent your score and linger on your report for years. Another critical habit is to keep your credit utilization low, which means not maxing out your available credit. For example, if your card has a $500 limit, try to keep your balance below about $350, or 70 percent of the limit, to avoid looking overstretched.

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It’s also wise to only apply for new credit when you really need it because each application triggers a “hard inquiry” that can temporarily dip your score. Lastly, make a point to review your own credit report from Equifax and TransUnion at least once a year to spot and fix any errors that might lower your score. While your free credit report won’t include your score, if your report is accurate, your score will look after itself.

Patience will pay off

Building a good credit rating doesn’t happen overnight and there are many ‘financial’ factors that are not on your credit report at all. It takes several months of steady credit use to even generate a score, and several years to make it truly robust. This is especially relevant for those recovering from bankruptcy, where the mark stays on your report for six to seven years after you obtain your first bankruptcy discharge, and much longer for subsequent bankruptcies. You can start rebuilding your credit once your debts are discharged.

For newcomers, keep in mind that credit histories from other countries typically don’t transfer to Canada, so you’ll be starting fresh. Improve your Canadian financial literacy skills as you work on your credit rating. Young adults, meanwhile, should seize the chance to learn early. Banks and credit unions offer free resources on budgeting and credit to help you avoid pitfalls and there are countless reputable Canadian books, blogs, podcasts, and websites to help start your financially independent life without debt.

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Building credit in Canada is about taking steady steps toward a stronger financial future. Applying for a high-interest loan from a finance company simply to build credit is costly and won’t bump your score up higher or faster than you can do yourself for free. Resist the temptation to fall for a scam that promises you a quick credit score hack; there are no shortcuts, and you don’t want to waste your money trying to game the system. Consistency is your greatest asset to watch your efforts transform into lasting financial opportunities.

Mary Castillo is a Saskatoon-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt since 1996.

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