The Most Expensive Ways To Build Credit
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A healthy credit score 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 Worst And Most Expensive Ways To Build Credit?
Credit products, like credit cards and loans, can help build a credit history and may even contribute to a healthier credit score. 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 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). Once enough payments are made, your credit score will hopefully improve.
- 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.
- Secured Credit Card – With a secured credit card you’ll be required to provide a deposit. Then you’ll be able to use the card to purchase items and pay bills. The goal is to make timely payments and have them reported to a credit bureau, which can help improve your credit.
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.
- 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.
- Free Report – You’re allowed one free copy of your credit report yearly from both bureaus. Extra copies cost a fee but allow you to check your report for cheaper than credit monitoring.
- Choose a Free Credit Score Provider – In Canada, there are a couple of companies that offer credit scores, for free, to consumers willing to sign up. These services are free but keep in mind that you are providing a company with your personal information, which they can use to market other products and services to you.
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Closing Old Accounts
Carrying a lot of debt can hurt your credit, so closing an old account to prevent yourself from using it may seem like the logical decision. But, in reality, closing an old credit account can sometimes hurt your credit.
- Higher Utilization – By reducing your available credit, you’ll decrease your credit limit and increase your credit utilization ratio, which may hurt your score.
- Shorter Credit History – Closing an account you’ve had open for a long time will reduce your total credit history, which can negatively affect a credit score. If you want to close an account, choose your newest one.
- Keep Accounts Open – If your account has no annual fee, leave it active, then make small purchases and 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 finance expenses and avoid debt they are not real credit cards and therefore any activity is not reported to the credit bureaus.
- No Credit Impact – Since no payments are being reported, prepaid credit cards don’t affect your credit report.
- Secured Credit Cards – Only secured and conventional credit cards get reported to the bureaus. Because the requirements are easier, a secured card may be a better choice if you have weak finances/credit.
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 help.
- 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.
- 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 is taken into consideration when a score is calculated.
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.
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