Healthy credit is important, especially for consumers who are looking to apply for a loan or open a new credit account. Luckily, there are many credit building products and services in Canada. That said, some of the most common ways to build credit are also the most expensive. Keep reading to learn why certain credit building services aren’t for everyone.
What Are The Most Expensive Ways To Build Credit?
Credit products, like credit cards and loans, can help build a credit history and may even contribute to healthier credit scores. However, if you have bad credit, you may be tempted to use one of the credit building products or services below. Just keep in mind that the majority of these services come with some risk.
Credit Builder Loans
A credit builder loan is a type of loan that is meant to help you improve your credit. Although, unlike typical loans, you won’t receive the money upfront. Instead, you’ll make regular payments to fund the loan and your lender will, in turn, report your payments to Canada’s credit bureaus (Equifax and/or TransUnion). This will allows you to build a positive payment history which may improve your credit scores. Once you’ve paid the loan, the funds will be released to you minus the interest and fees.
Problems:
- Rates – Because you’re a “risky” borrower, these loans come with high-interest rates and fees that can add up quickly.
- No Money Upfront – You can’t access your loan immediately. You finance it in payments and only receive the funds when your term finishes.
Alternatives:
- Secured Credit Card – A secured credit card works just like a regular credit card, except you’ll be required to provide a security deposit and it usually doesn’t come with the added perks of a regular credit card, like insurance benefits and a points system. However, a secured credit card is very easy to qualify for and can help you build your credit. Moreover, some secured credit card services create plans, where you can upgrade to a regular card with them if your secured account remains in good standing for a year. Then you’ll be able to use the regular credit card to purchase items and pay bills while building credit and earning rewards.
Credit Monitoring
Both credit bureaus, as well as many third-party companies, offer credit monitoring services. This can be a good option for consumers who want to keep an eye on their credit. Credit monitoring allows you to check your credit report and score any time and alerts you of suspicious activity on your accounts. This can reduce the danger of identity theft and lets you monitor your progress.
Problems:
- Fees – It costs about $19.99/month for credit monitoring. While this may not be a huge price to keep your report safe, it’s still an expense to consider.
- No Credit Impact – Credit monitoring has no direct effect on your credit. It only tracks your activity and warns you if anything goes wrong. It’s best used as a tool to help you stay on top of your credit, rather than build credit.
Alternatives:
- Free Report – Equifax offers all Canadians free access to their credit report and Equifax score online. TransUnion, on the other hand, offers Canadians their consumer disclosure for free online each month. Moreover, due to a new law, residents of Quebec can also get their TransUnion credit score for free. This can be a good way to monitor your credit without purchasing credit monitoring.
- Choose A Free Credit Score Provider – In Canada, you can also get your credit scores free from third-party credit score providers. However, you should note, while these services are free, you are providing the company with your personal information, which they can use to market other products and services to you. Moreover, it should also be noted that the credit score you receive from third-party providers will likely be different than your Equifax or TransUnion scores. This is because you have multiple credit scores in Canada, which can vary based on the credit scoring model used by the credit score provider.
Get Your Credit Score For Free
| Cost | Credit Score | Credit Report | ||
 | Free | Yes | Yes | Visit Site |
 | Free | Yes | Yes | Visit Site |
 | Free | Yes | Yes | - |
Closing Old Credit Card Accounts
Just as carrying a lot of debt can hurt your credit, closing an old credit card account may also negatively impact your credit. While closing an old credit card account may seem like a logical decision, it can do more damage than good, especially if it’s an old account.
Problems:
- Higher Utilization – When you close a credit card account, you’ll be reducing your available credit which in turn will increase your credit utilization ratio. The higher your ratio, the more it may hurt your credit scores. Generally, it’s recommended that you keep your credit utilization below 30%, but that can be hard to achieve if you slash your available credit by closing a credit card account.
- Credit Age – Your credit age accounts for approximately 15% of your credit scores, so when you close an account that you’ve had open for a long time, it will reduce your average credit age. This, in turn, may negatively affect your credit scores. However, this isn’t to say you should never close a credit card account. If you have too many credit cards and are unable to responsibly use it, then cancelling your card will be worth the possible negative impact on your credit scores.
Alternatives:
- Keep Accounts Open – If your credit card has no annual fee and you can responsibly manage it, leave it active, then make small purchases from time to time to keep it active. Don’t forget to make full payments until your credit improves.
Prepaid Credit Cards
Another misconception about credit improvement is that a prepaid credit card can help build credit. While prepaid credit cards can help track expenses and avoid debt, they are not real credit cards as there’s no credit being extended. As such, any payments made are not reported to the credit bureaus.
Problems:
- No Credit Impact – Since no payments are being reported, prepaid credit cards don’t affect your credit report.
Alternatives:
- Secured Credit Cards – Only secured credit cards and conventional credit cards are reported to the bureaus. If you have poor credit and can’t qualify for a regular credit card, you should consider getting a secured credit card. Requirements for secured credit cards are easier, most simply require you to provide a minimum security deposit.
Relying On A Single Credit Card
Conventional credit cards can help build credit, but relying solely on one card to help build your credit might not be the best option for you. When working on credit improvement, variety can be important. Depending on the credit score model being used, your credit mix could affect the calculations of your credit scores.
Problems:
- Bad Habits – Conventional credit cards make it easy to accumulate debt. More debt leads to a higher credit utilization ratio and extra interest.
- Unpredictable Credit Impact – Timely payments can help elevate your credit score but the positive effect of a single credit card may not be enough. The impact of a credit product on a credit score varies greatly from consumer to consumer.
Alternatives:
- Variety – While it’s hard to say exactly what combination of credit accounts is best for the health of a credit score. Variety is important as it enhances your credit mix, which may be taken into consideration when a score is calculated.
Building Credit FAQs
What can help build my credit the fastest?
Do secured credit cards help build credit?
Can I increase my credit scores in 30 days?
Do cell phone bills help build credit?
Bottom Line
Although some credit-building products and services are pricey and may not be worth the cost, don’t be discouraged if you’re working toward a healthier credit score. There is no one size fits all solution and credit improvement takes time. Focus on creating healthy financial and credit habits and you should see your score improve over time.
