If your credit scores could use some improvement, you’re not alone. Thousands of Canadians across the country have bad credit, which is preventing them from getting approved for loans, apartments, and even cell phone contracts. But there are things you can do to give your credit score a boost, including using a credit card responsibly.
Key Points
- Using a credit card responsibly is one of the best ways to build good credit.
- Making timely payments and keeping your credit utilization ratio down are specific ways to use your credit card to build a good credit score.
- If you can’t get a regular card, use a secured credit card or become an authorized user on another person’s card to build good credit.
Can A Credit Card Help Improve Your Credit Scores?
Credit cards can be used to build good credit and repair damaged credit scores. But it’s how you use the card that matters.
Not only are credit cards convenient for purchases but many of them also allow you to collect “points” to be redeemed and put toward various expenditures. Plus, many cards also offer levels of insurance coverage, including travel insurance, and purchase protection.
But these powerful little pieces of plastic can be used for a lot more than just expenditures. If used properly, they can also help you improve your credit scores.
How Can A Credit Card Affect Your Credit Score?
While your credit score can be calculated in several different ways, five common factors can affect it:
- Payment History – Credit cards can affect your payment history in both a positive and negative manner. On-time credit card payments can increase your credit score, while missed payments can hurt your score.
- Debt-To-Credit Ratio – Credit cards can also affect your debt-to-credit ratio, also known as your credit utilization ratio. This ratio looks at your credit usage versus your available credit. In general, lenders like to see a ratio of 30% or lower.
- Credit History – The longer you keep your credit card, the longer your credit history will be. Moreover, it will increase the average age of your credit, which can positively impact your credit profile.
- Credit Inquiries – When you apply for a credit card, the creditor will typically pull your credit report, which can negatively impact your credit. In general, it’s recommended that you don’t apply for too many credit cards within a short period.
- Public Records – Various negative remarks may be noted on credit reports, including bankruptcies, consumer proposals, and collection accounts. These public records will have a negative effect on your credit score.
How To Use A Credit Card To Build Credit
Whether you’re just starting to build your credit from the ground up or trying to improve a bad credit score, a credit card can help you. Here are some tips on how to use a credit card to build credit.
Choose The Right Credit Card For Your Financial Situation
If you don’t already have a credit card and are looking for one to apply for, be sure to do your homework and select the right one. You don’t want to apply for a bunch of different credit cards, as this will lead to multiple hard inquiries that can hurt your scores.
For starters, apply for a card with a high credit limit that exceeds your spending needs. Spending near your limit every month can increase your debt-to-credit ratio, which can hurt your credit score. But with a high credit limit, the odds are that you won’t spend anywhere near the limit based on your spending habits.
You also want to choose a card that offers perks that provide the most benefits for you. For instance, cashback cards can help you earn points that you can redeem for future spending. Plus, some cards come with no annual fee, comprehensive insurance coverage, and low interest rates.
Best Credit Cards In Canada
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Pay Your Bills On Time Every Month
Once you’ve been approved for a credit card or secured credit card, the best thing you can do is pay your bills on time every month. Your payment history typically accounts for around 35% of your credit scores. As such, your credit card payments can have a significant impact on your credit.
Make More Than The Minimum Monthly Payments
Paying the monthly minimum may be a good way to ensure that your bills are paid on time without having to come up with the full balance, but it’s not ideal. While you’ll still be considered on-time with your payments, you’ll be carrying a balance forward every month, which will increase your total debt amount and your debt-to-credit ratio.
If possible, try to pay down the full balance every month. In addition to ensuring timely payments, you’ll also avoid creeping up on your credit limit and racking up interest fees on a growing balance.
Keep Your Outstanding Balance Low
As previously mentioned, your credit card can also affect your debt-to-credit ratio. This is a common factor used to determine your credit scores and refers to the amount of money you spend relative to your credit limit. Generally, the higher this ratio is, the more likely it can negatively impact your scores.
Ideally, lenders like to see a ratio of 30% or lower. Keeping it under this threshold will show that you’re not overextending yourself more than what you’re comfortable with. You can achieve this by either limiting your spending or by making multiple bill payments within the same billing cycle.
Don’t Cancel Your Card Unless You Need To
The longer you keep these credit card accounts open, the higher your average credit account age will be, which can positively impact your credit scores. If you close a credit card, however, this can reduce the average age of your credit accounts.
So, if you’re opening up credit cards to take advantage of promotional deals only to close out your account soon after, you could be doing your credit scores more harm than good. By consistently using your credit cards over a long period, you’ll be able to build a long credit history.
Take Advantage Of Balance Transfer Cards
A balance transfer card comes with a low or zero interest rate for a certain amount of time. You can then transfer your existing credit card debt to the new balance transfer card. During the introductory period, you can take advantage of the zero interest and work diligently to pay down the debt.
Paying down your credit card debt can have a positive impact on your credit score. So, if you use your balance transfer card to pay down your account balances, your credit score may be better off in the long run. However, applying for a new credit card can temporarily pull your score down due to a hard inquiry. So, be sure to weigh the pros and cons of taking out a balance transfer card before getting one.
What If You Can’t Get Approved For A Credit Card?
If you have bad credit or are just starting to build credit from the ground up, it may be difficult for you to get approved for a traditional credit card. In this case, there are other options available that can still allow you to use a credit card to build good credit.
Take Out A Secured Credit Card
If you’re having difficulties getting approved for a traditional credit card, you may want to consider applying for a secured credit card. These cards don’t have any credit requirements. Instead, you simply need to provide a certain amount of money upfront as collateral or security. The minimum deposit requirement varies by provider but can be as low as $200, and serves as your credit limit.
Then, like a regular credit card, you’ll make payments on the card every month, which will be reported to one or both credit bureaus. Depending on how responsible you are with the card, your credit scores may be positively impacted.
Become An Authorized User
An authorized user is someone who is added to the credit account of the primary cardholder. Since you’re depending on the primary card holder’s financial and credit profile, you don’t need to meet the same criteria to take out a card. The primary cardholder is responsible for making payments, though you may want to contribute to payments if you spend on the card.
Becoming an authorized user can help you build or repair your credit if payments are made on time. So, if the primary cardholder is responsible with bill payments (along with your help), you can see your credit score grow over time.
Apply For A Store Credit Card
Store credit cards may be a little easier to get approved for compared to conventional unsecured credit cards. You may be able to secure a store credit card with less-than-perfect credit. However, keep in mind that because of the lower credit requirements, these cards may come with higher interest rates or lower credit limits.
As is the case with a regular credit card, you can use a store credit to build good credit by making on-time bill payments.
Bottom Line
Your credit card can help improve your credit scores, but it solely depends on how responsibly you use it. That means making all of your payments on time, keeping your credit utilization ratio low, and not opening and closing multiple credit cards just for their introductory promotions. When used right, you may see improvements to your credit scores in as little as a few months.
