How to use credit cards to build credit in Canada

Whether you're a newcomer with no credit history or just starting your financial journey, building credit in Canada can open opportunities to have a strong portfolio. For example, you can enjoy more favourable loan terms, qualify for different credit accounts, and get better interest rates when making repayments. A good credit rating can also help you secure better rent or housing, or even get hired for certain jobs, like a financial advisor.

It takes time and discipline to build a good credit history. While your credit rating can change monthly, some records stay on your report longer. Since lenders and financial institutions look at your credit score to make important decisions about whether to lend you money, it's a good idea to start building credit early.

Getting a credit card is a great way to build your credit and work towards a high credit score. We dive into your credit history, how it relates to credit cards, and what you need to know for building a good credit history.

What is a credit history?

Your credit history contains important information about how you handle debt. Creditors, lenders, and financial institutions often look at your credit history when you apply for a new credit account, like a credit card, personal loan, mortgage, line of credit, or auto loan. Credit bureaus use data from your credit history and other financial information to determine your credit score. Your credit score is a three-digit number that assesses your overall financial well-being.

Factors that can affect your credit history

Several factors can potentially affect your credit score in Canada:

Payment history

Your payment history indicates whether you pay bills and debts on time regularly. There's always a risk for lenders when they approve a new credit account as you can default on payments. A strong payment history indicates consistent and reliable financial habits, giving lenders more confidence.

Length of credit history

The length of credit history indicates the amount of time you've had access to credit. Credit bureaus measure the average length of your credit history, from the first account you opened to the most recent one. A longer credit history length positively impacts your credit score as it shows lenders you're financially responsible and can handle debt repayments.

Credit mix

Lenders typically look for a variety of loans and debt to give you a credit score. They want to see you can reliably pay back mortgages, personal loans, credit card statements, installment loans, and other types of debt. Having too much or not enough variety can negatively impact your credit score. Too large of a credit mix can indicate potential credit and debt issues and too small of a mix doesn't prove to lenders you have a strong enough financial portfolio.

Credit utilization rate

Your credit utilization rate is the percentage of your total credit limit used. A high credit utilization can indicate you have too much debt, which isn't a good sign as it increases the chances of missed or late payments. It can also indicate you have poor credit management or are too reliant on your credit card. Lenders are less likely to loan you any more money and your credit score can decrease.

New credit

If you've opened many new credit accounts in a short period, lenders and creditors may flag you as a high-risk borrower. The more accounts you have, the harder it is to manage all your balances and you can easily miss a payment by accident or overspend and not have the funds to pay off your total debt.

Why building your credit is important

Your credit report is an important indication of your overall financial health. Lenders, creditors, and other financial institutions often use your credit report to determine your risk as a borrower and whether they want to extend credit products to you, such as a line of credit, credit card, or mortgage.

As you move through life, you may need these credit accounts to help you reach various milestones, like going to post-secondary education, buying a house, or getting your first car. A healthy credit score and report make it easier for you to qualify for these products and get favourable interest rates, a higher credit limit, and loan terms.

Secured vs. unsecured credit cards

There are two types of credit cards you'll see - an unsecured and secured credit card. Regardless of which credit card you apply for, they are both great tools to help you build credit.

Unsecured credit card

When you think of a credit card, most people are likely referring to an unsecured credit card. Unsecured credit cards have no collateral to secure the funds. You can borrow money from the credit card issuer every time you swipe your card, up to the credit limit. The credit limit is determined based on your current income and credit score.

Most unsecured credit cards offer perks and rewards programs, such as cash back, travel benefits, and points. These cards may have stricter requirements to qualify since lenders take on more risk without collateral. The interest rates are also typically higher to compensate for the higher risk. Lenders want to see someone with a good credit score and stable income.

Secured credit card

Secured credit cards require collateral, such as a cash deposit. Your credit limit is equivalent to the deposit. The security deposit lowers the risk for lenders because they can take your collateral if you default on your payments. As a result, you typically find lower interest rates with these credit cards. If you have a lower credit score or no credit history, a secured credit card is a great way to help you fix your bad credit score and practice credit management skills.

How to use credit cards to build credit

The average credit score in Canada is around 680. Your score may be higher or lower based on your credit and payment information, and your rating can change monthly. Adding a credit card to your overall credit mix is a great way to work towards a solid credit history to open more opportunities when it comes to financing different purchases. Here are some ways you can use credit cards to build credit.

Use your credit card regularly

Make regular purchases with your credit card to build a good payment history. Lenders want to see that you can use your card responsibly and pay your credit card balance on time. Check your statement regularly to keep track of how much you're spending and ensure you pay off the balance at the end of the month. Late payments can lower your credit score and result in expensive interest charges.

Have a low credit utilization ratio

Experts recommend keeping your credit utilization ratio around 30% whenever possible. If your credit limit is $1,000, 30% would be $300. A low credit utilization rate shows a lower debt-to-credit ratio and is easier to pay off than an expensive credit card bill. You can also increase your credit limit, which helps lower your credit utilization. However, it's essential to ensure you aren't tempted to overspend with a higher limit and can still repay your balance on time each month.

Check your credit score

Check your credit score regularly to ensure you're doing everything you can to build credit with your credit card. Your credit report provides valuable insights into the factors lowering your score so you can adjust accordingly. You can be alerted to any concerns to ensure your information is accurate and complete and dispute concerns immediately.

Why is a good credit score important?

A good credit score has many advantages to help you secure financing in the future. You may need to make expensive purchases, such as buying a house or a car, paying tuition, funding home renovation projects, or dealing with car repairs. While you likely have savings goals and set aside money regularly to afford these expenses, it can still be challenging to pay for it all. That's where credit comes in.

Lenders and creditors review your credit score to assess your risk as a borrower and approve you for loans accordingly. If you have a good credit score, you're more likely to receive financing, lower interest rates, better loan terms, lower minimum payments, and a higher credit limit. You can also qualify for a wider range of credit cards, like unsecured credit cards, and earn rewards with every purchase.

How long does negative information stay on your credit report?

It depends on the type of information. Most major credit bureaus typically keep negative information on your credit report for seven years. Negative information can include late or missed payments, bankruptcies, and accounts sent to collection agencies. Here's a breakdown of how long information can stay on your report:

• information about credit cards and loans can stay up to six years

• credit checks can stay up to six years, depending on the credit bureau

• bankruptcies can stay on your report for up to seven years, depending on the province

Your credit score can change monthly if you practice good credit management skills, like lowering your credit utilization rate and paying your bill on time. Some information, like bankruptcies, can be harder to clear, but discipline and consistency keep you on the right track.

Build credit with your KOHO credit card

A credit card gives you the flexibility to make purchases whenever you want and pay off your balance later. We can help you build healthy credit management skills to use your credit card responsibly and build a good credit score in Canada.

With the virtual credit card, you can spend instantly from the convenience of your phone and earn cash back with every dollar. We provide helpful insights to track your spending and set limits to help you stay within the recommended credit utilization rate. Monitor your credit report with a free credit score to ensure you're doing everything to build good credit.

Worried about going over your balance? Overdraft protection coverage gives you zero-interest cash advances to help you in emergencies. As long as you pay the subscription fee and repay cash advances on time, you don't have to stress about extra charges when you face unexpected expenses.

Learn more about how you can build credit with KOHO and earn interest and cash back when you spend and save with us.