We often hear that we should try to build up our credit score as early as possible. When it comes time to take out a loan for a large purchase, such as a home mortgage, a strong credit score will help us qualify for a loan and obtain better borrowing terms.
But what exactly is a credit score? Simply put, it’s a number between 300 and 900 that provides information about one’s creditworthiness.
In Canada, our credit scores are calculated and updated by Equifax and TransUnion. Many factors go into determining your score, including the amount of debt you have, your history of making payments on time, and how long you have had credit for. In addition to credit-card or loan repayments, your payment history for phone bills and utilities are also considered.
Although buying a property is, admittedly, out of reach for many of us at the moment, it is still a good idea to start building a strong credit score. A strong credit score takes a long time to build and starting only when you need a significant loan is too late. A good credit score can also help you secure your desired rental unit in this competitive market, as it gives landlords some assurance that you will pay rent on time.
So how can you start building your credit score? If you are 19 and have no forms of credit, it’s a good idea to sign up for a student credit card. Most banks issue student credit cards with a low limit of $1,000. I personally only use mine for daily expenses and groceries, ensuring that I never exceed a $500 outstanding balance, and making payments for any outstanding amount within days of incurring them. It’s important to remember that a credit card is not free money and to ensure that you have sufficient cash to immediately pay for anything you charge to your credit card. If used responsibly, a student credit card is a great way to start building your credit score.
Another way to boost your credit score is to consider switching to a post-paid mobile phone plan if you are currently on a pre-paid plan. If you already have a credit card and a post-paid phone plan, keep paying your bills on time and avoid applying for new sources of credit unnecessarily. It’s also a good idea to obtain a copy of your credit report from Equifax and TransUnion at least once a year, and check to ensure that the information is correct. Look out for credit cards or other loans on the report that you did not apply for, and promptly contact banks and the credit unions if you find any mistakes.
Building a credit score is a long-term endeavour, and starting early is a great idea.