Need to build your credit score from scratch? Here’s how to do it

In Canada, I have a pretty good credit score. Although there have been plenty of times when I’ve been strapped for cash — one time, the situation was so dire that I had to invest in an entirely new belief system — I’ve always been vigilant about knocking down the minimum monthly payments on my credit card and student loan bills, mostly because my mom… made me do it. Yes, even when there were three (and, for a few years, four) provinces standing between us. Thank you, mom.

Last year, though, I moved to the U.S. And because a person’s credit score in one country isn’t recognized outside of its borders, in my new home, my credit score stood at zero. It quickly became clear that this wasn’t only a nuisance, but a liability with concrete consequences: without credit, you can’t apply for rentals on your own, get a local credit card, or open an account at banks with the most competitive rates. Cell phone providers can run a credit check on you to determine if they want you as a customer; employers can also do this, to see if they want to hire you.

Building credit from scratch was new territory for me, and as I did more research, it became clear that there are right and wrong ways to go about it. Or, better put: there are better and worse ways to do it. So, let’s say your situation is the inverse of mine, and you’re a newcomer to Canada. What’s the best way to build your credit? Below, we recommend some options — and list the options you should avoid.

Open a bank account

Opening a bank account won’t directly raise your credit score, but many methods for building your credit require you to have a chequing account. Think of it as a prerequisite for your credit journey.

This is where you might run into a conundrum: there are a lot of banks that need to run a credit check before they will open an account for you, but you also can’t improve your credit unless you have a bank account. Tangerine, a popular bank in Canada, is one example of an institution that runs credit checks when you apply for an account.

Don’t worry, though: there are plenty of options for newcomers with Canada’s major banks. Scotiabank, for example, has a program explicitly for newcomers called StartRight. CIBC, the Bank of Montreal, National Bank and Toronto-Dominion Bank also have options.

To find the best deal, make sure to shop around and compare deals — things to consider include:

• The account fee
• The APY (annual percentage yield) — i.e., how much interest you can earn from the money sitting in your account
• Whether your bank will waive your fee once you save up a certain amount of money

Many banks will offer great introductory offers when you first sign up for an account, but it’s important to also look at the terms of your deal beyond the introductory period, and see how they measure up.

Get a credit card

The easiest way to build your credit is to get a credit card, and use it. The best credit cards on the market have low interest rates, low annual fees and substantial rewards, but if you don’t have a good credit score, you won’t qualify for any of them.

To build good credit when your score is either low or nonexistent, you’re going to have to start with cards that are less desirable. None of these cards will offer an amazing deal, but it’s still important to compare multiple options to make sure you’re getting the best deal out of the lot. Never settle for the first card you find.

Factors you should compare include:

• Annual fees
• Interest rates
• Rewards — you’ll typically need a non-starter credit card to access better rewards, though
• Other benefits

Keep in mind that each time a credit card company performs a “hard” (instead of a “soft”) credit check on you, your credit score will decrease. Each time you apply for a new credit card, make sure to ask the credit card company whether they’ll be doing a hard check.

Secured credit cards

Here’s how secured credit cards work: you put down a deposit (usually no more than a few hundred dollars), and whatever amount you put down will be your credit limit. Let’s say you put down a $200 deposit. You can now spend up to $200 using your card.

This is not the same as a prepaid debit card, which operates more like a gift card. If you load $200 on a prepaid card, whenever you use that card, you’re spending the money you’ve loaded. You cannot build credit using prepaid cards.

But when you put down a deposit for a secured credit card, you are technically still borrowing money from the credit card company. The company just holds onto your deposit, and will keep it if you can’t pay your bill. You can build credit using a secured credit card.

Guaranteed credit cards

Like secured credit cards, guaranteed cards are tailored towards people who either have low credit scores, or no credit at all. Like secured credit cards, the credit limit on a guaranteed card is pretty well, limited — you’re not going to be able to make big purchases with one.

There are two differences that set a guaranteed card apart from its secured counterpart. While you’ll always have to put down a deposit for a secured card, you won’t necessarily need a deposit for a guaranteed card. Also, if you do put down a deposit for a guaranteed card, your credit limit won’t always directly correlate to it.

For example, let’s say you put down a $300 deposit on your guaranteed credit card. While your credit card company might start you off with a $300 credit limit, if you prove yourself to be a reliable customer — e.g., you pay your bill on time every month — your company may upgrade your credit limit to $1,000, without asking you to contribute another $700 to your deposit.

Retail credit cards

These types of cards are offered by major retailers in Canada, including Hudson’s Bay, Canadian Tire and Walmart. While some of these cards can be used to make purchases at any retailer, others can only be used at the stores that they’re linked to — for example, Hudson’s Bay offers both the Hudson’s Bay Mastercard, which can be used anywhere Mastercard is accepted, and the Hudson’s Bay Credit Card, which can only be used at the retailer’s brick and mortar and online stores.

Retail credit cards are typically easy to qualify for. Oftentimes, you’ll be able to earn “rewards” or “points” that you can later redeem in the form of discounts or cashback.

Services to avoid

As you research ways to build your credit, you may come across other types of loans that are easy to qualify for. However, it’s important to be cautious when it comes to several types of loans. Two highlights? Payday loans and savings loans.

If you haven’t already, you’ll eventually come across a storefront offering “payday loans.” These are loans that you can get pretty easily when you’re strapped for cash, but you should be extremely wary of taking one on: they usually come with very high interest rates and severe penalties if you can’t return the money on time. They also don’t impact your credit: they don’t show up on the credit records of major credit reporting agencies, so even if you could pay them back on time, your credit score will stay the same. Better to steer clear.

Savings loans are a relatively new product on the Canadian market, and were designed expressly to help people build their credit. Instead of putting down a deposit, a lender will loan you an amount of money that matches what you’ve already saved in a bank account. You make regular payments on the loan, and in theory, credit reporting agencies can see how responsible you are and raise your credit score.

There are several reasons you should be cautious about taking on a savings loan, but it’s important to note that they’re not even always an effective way to build your credit.

Maintaining your credit

Once you’ve achieved a decent credit score, you’ll need to keep maintaining it. To do that, it’s important to understand the factors that impact your credit — and tend to each one on a regular basis.

You’ll do great.