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FINANCIALLY AESTHETIC · GUIDE 11/37
BUILD CREDIT FROM ZERO: WHAT ACTUALLY MATTERS
FA-2.5 · Banking, Payments & Credit
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WHAT THIS CONTROLS
Building credit is mostly boring repetition: verified identity, on-time payments and low avoidable risk.
What Determines Your Credit Score
Your payment history shows whether you pay your bills on time. It’s the most important factor in your credit score.
To improve your payment history:
- Always make your payments on time
- make at least the minimum payment if you can’t pay the full amount
- contact the lender immediately if you think you won’t be able to make a payment
- don’t skip a payment, even if you’re disputing certain fees
A strong payment history shows lenders that you reliably repay the money you owe.
Your financial institution may send you an alert when:
- your available credit falls below a set amount
- a payment is due
These alerts can help you keep track of your expenses and ensure you don’t forget to make your payments.
Credit Utilization Ratio
Try to use less than 30% of your total credit limit. For example, suppose your credit card has a limit of $5,000 and you typically use $1,000. Your credit utilization ratio is 20%.
To effectively manage your credit utilization ratio:
- Do not exceed your credit limit
- Try to get a higher credit limit and use only a small portion of it
- Keep your monthly credit utilization ratio low, even if you pay off the balance in full
Lenders look at your credit utilization ratio to assess how you manage your available credit. If you regularly use a large portion of your available credit, lenders may view you as a higher risk. This can be the case even if you pay off your debts in full every month. A low credit utilization ratio signals to lenders that you do not rely too heavily on borrowed money.
The Length of Your Credit History
Your credit history includes how long you’ve had your credit accounts and whether you keep them active. Lenders want to see a stable, long-standing history. Keeping your accounts open and active for a long time can improve your credit score.
If you get a new credit card to transfer a balance, it counts as a new account. This can lower the average age of your accounts and cause your credit score to drop. If you close the old account, it can hurt your credit score even more.
Closing an old account causes you to:
- lose your credit history
- reduce your available credit
Keeping the old account open, even with a zero balance, helps you:
- maintain your credit history
- improve your credit utilization ratio
Consider keeping an account open if:
- the account has no annual fee
- you can manage it easily
- you can use it occasionally to keep it an asset
Credit Inquiries: Why You Should Limit Them
Credit inquiries, also known as credit checks, affect your credit score. When a lender checks your credit report, the credit bureau records the inquiry on your credit report. They log it on your credit report.
It’s normal to apply for credit from time to time. However, a large number of credit inquiries made too close together can signal to lenders that:
- you have an urgent need for credit
- you are incurring expenses beyond your means
To limit credit inquiries:
- apply only for the credit you need
- avoid submitting multiple applications at the same time or too close together
- When shopping for an auto loan or a mortgage, get quotes from different lenders over a 2-week period. Credit bureaus treat these applications as a single
“Hard inquiries” appear on your credit report. They affect your credit score. Anyone who checks your credit report can see these inquiries.
Examples of “impactful” inquiries:
- credit card applications
- mortgage applications
- credit inquiries and loans
- certain rental applications
- certain job applications
"Soft" inquiries appear on your credit report, but only you can see them. They do not affect your credit score.
Examples of “no-impact” inquiries:
- requesting your own credit report
- A company requesting your credit report to update its records regarding an account you have with them. For example, an internet or phone company
Diversify Your Credit Products Carefully
Your credit history includes the various credit products you use. Your credit score may be lower if you have only one credit product.
It’s best to have a variety of credit products, such as:
- a credit card
- an auto loan
- a line of credit
Lenders want to see that you can manage more than one credit product responsibly. Only borrow money that you can afford to repay. You can damage your credit score by accumulating too much debt.
However, this point does not apply in the same way to someone starting from scratch: at first, the goal is not to accumulate multiple credit products, but rather to establish a solid credit history before considering adding others.
Where to Start When You Have No Credit History
A secured credit card could be an option if you have no credit history or if your credit is poor.
You must provide a security deposit to obtain a secured credit card. You give this deposit to the financial institution that issues the credit card.
Financial institutions typically set your credit limit at an amount equal to or greater than your deposit. The amount can range from a few hundred dollars to a few thousand dollars.
If you fail to make your payments, the financial institution may use your deposit to pay off the amount you owe.
A secured credit card might be an option to consider if:
- you are a newcomer to Canada and have no credit history
- you have filed for bankruptcy in the past
- you want to rebuild your credit score because you’ve had credit problems in the past
Be cautious when applying for a secured credit card from an unfamiliar financial institution. Be especially wary of secured credit card offers from issuers located outside Canada. If you have problems with the company’s services, it may be more difficult to resolve them.
Some secured credit cards do not carry a recognized brand name such as VISA, Mastercard, or American Express. These cards may have limited uses and be accepted only at a small number of stores.
To obtain a secured credit card, you may have to pay a one-time application or activation fee. These fees are not part of your security deposit. You may not be able to recover these fees if your application is denied. Your card may also have an annual fee.
Check with your financial institution to confirm that your deposit is secured. Generally, your financial institution holds your security deposit. It may also enter into an agreement with another financial institution to hold your security deposit.
To cancel your secured credit card, you must pay off the balance in full. Your security deposit will be returned to you when the account is closed.
Some credit cards are also designed for students. Generally, these cards have a lower credit limit than regular cards. They may offer benefits tailored to students, such as discounts at certain retailers.
Student credit cards with low-interest rates are also available. Contact your credit card issuer to find out if you are eligible.
Check Your Credit Report Before Applying
Check your credit report with Canada’s two major credit bureaus, TransUnion and Equifax.
If your credit report contains an error, request that it be corrected immediately. Such an error could prevent you from obtaining an unsecured credit card.
Requirements for Applying for a Credit Card
To apply for a credit card, you must be of legal age in your province. Before filling out the credit card application, make sure you fully understand the terms and conditions applicable to the card.
A credit card application from a federally regulated financial institution, such as a bank, must include an informational box. This box must describe the credit card’s key features, such as interest rates and fees. The information must be clear and easy to understand.
When you apply for a credit card, you may be offered credit card balance insurance. This insurance is optional and is a separate product from your credit card. Therefore, you do not need to purchase it for your application to be approved.
Compare Available Cards Up Front
A credit card allows you to borrow a pre-approved amount of money. It can help you pay for goods and services. When you use a credit card, you must make your minimum payment by the due date. Generally, if you do not pay your balance in full, your credit card issuer will charge you interest.
The main differences between cards are:
- interest rates
- fees
- rewards and benefits
The interest rate may be a less important factor when making your choice if you:
- pay your balance in full every month
- do not use cash advances
- do not make transactions such as cash advances
When you use a credit card, you may have to pay fees for certain services. These fees include fees for cash advances or for using your card in a foreign country. Fees for different credit cards may vary.
You may also have to pay fees such as:
- fees for foreign exchange transactions
- fees for exceeding your credit limit
- reprint fees for statements or receipts for previous transactions
- dishonoured payment fee
- fees for inactive accounts
- insurance fees (or credit card balance insurance premiums)
- Surcharges charged by the merchant (except in Quebec). These are added at the register for using a credit card as a payment method
Regional Differences
A merchant may decide to impose surcharges (except in Quebec). You may have to pay up to 2.4% more for each purchase. The percentage may vary from merchant to merchant depending on the card you use for your purchase.
What Doesn’t Actually Speed Up the Process
Making too many credit inquiries doesn’t speed anything up - in fact, it may signal to lenders that you have an urgent need for credit or are facing expenses that exceed your means.
Opening a new credit card to transfer a balance, or making multiple applications in the hope of “building credit faster,” reduces the average age of your accounts and can lower your credit score - the opposite of what you’re aiming for.
Similarly, accumulating multiple credit products without being able to repay them all does not build a solid credit history: borrow only the money you can afford to repay.
Practical Implications of This Chapter
The goal is not to reconstruct a credit bureau’s proprietary algorithm or to produce 13 provincial and territorial mini-guides. The aim is to highlight the documented behaviors that truly matter for building a credit history: payments, utilization, account age, inquiries, prudent product diversity, and credit checks.
OPERATING RULE
Use only products that report in your jurisdiction, pay on time and don't pay interest just to 'build' a score.
CURRENT-RULES CHECK
Legal protections, tax rates, reporting duties, deadlines and product rules change by country and over time. Use the jurisdiction labels in this guide and check the linked official source before acting.
- CFPB - Understand your credit score - United States - scoring factors.
- CFPB - How to rebuild your credit - United States - credit rebuilding.
