How to Build Credit with Credit Cards

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    The first rule of adulting is to care about your credit score as much as you cared about passing your exams when you were younger. Only this test never ends, and it affects your entire life. High school taught you a lot of really valuable lessons. But has anyone taught you how to build credit? Or how to use a credit card? Nowadays, you can’t get a cell phone or rent an apartment without good credit. Even some jobs require you to have a good credit score.

    When can you start to build a good credit score?

    The best way to establish your credit score is to use credit. You can start fairly early in life, even if you’re not yet 18 years old. Fortunately, many banks and other companies offer credit cards specifically designed for those new to credit. Others offer cards that are easy to get for people with bad credit. Here are a few ways to get started.

    Ask a parent to co-sign a joint credit card

    If you are too young to open a credit card by yourself, ask one of your parents to co-sign on a joint credit card with you. You will each be issued your own card linked to the same account. The activity will be reported to both your credit files and you will both be equally responsible for the monthly payments and outstanding balances.

    Open your own credit card

    Depending on the province or territory you live in, you may be old enough to open a credit card without a co-signer. If you live in Alberta, Manitoba, Ontario, PEI, Quebec, or Saskatchewan you can open your own credit card when you turn 18. For all the other provinces and territories, you have to be 19. You will be the only one named on the account, and you alone are responsible for the payments and any balance owing.

    Start early with a KOHO prepaid card and learn how to manage your money

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    You don’t have to go hard right out of the gate. Consider taking it slow and playing it safe with a prepaid credit card before you jump into getting a real credit card. Unlike regular credit cards, a prepaid card only allows you to spend the money that you’ve preloaded onto it. It’s not a real credit card, so it won’t help you build a credit score. But it’s a great way to get used to going cashless and managing your money.

    Prepaid cards help to keep your spending in check so you learn how to budget your money while steering clear of debt. This early training can be your secret weapon to forming healthy financial habits that set you up for success when it’s time to build credit with a traditional credit card.

    The KOHO prepaid card is perfect for beginners just like you. If you open a KOHO account, you’ll get almost free banking with crazy cash-back perks. How does it work? Once you open your Easy account for free, you’ll get a KOHO Mastercard prepaid card that you can use everywhere Mastercard is accepted. You load the card with funds from your own bank account, so you never owe money or pay interest. You can use your account like a guilt-free spending account.

    Apply for a free and easy to get credit card

    There are many free and easy to get credit cards in Canada. With generous acceptance criteria, you have a better chance of finding one you’re happy with.

    If your score is so low you cannot get such a card, look for secured credit cards. They are like training wheels for your credit score. But in order to get one, you need to give a certain amount of money to the credit card issuer to “secure” the card in case you stop making payments on it. Approval is usually guaranteed as long as you are a resident of Canada and legally old enough for a credit card, and your credit limit is equal to the amount of your security deposit.

    Neo Credit

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    We voted the Neo credit card “best card for 2024”. Why? Because you can get 15% cash back on your first purchase at a Neo partner. The best way to get maximum discounts is to always consult the Neo application. There you’ll find offers from the various partners, so you can shop knowing where to go. On average, we’re talking about a 5% cash back, which is excellent compared to other credit cards with no annual fee. Note also that Neo accepts a wide range of credit scores, so as long as yours reaches 600, it shouldn’t prevent you from getting it.

    Some participating Neo partners include Netlifx, Amazon, Walmart, and more as well as small local businesses in your area. Furthermore, Neo ensures that if your average monthly cash back is less than 0.5%, they’ll step in to make up the difference.

    If your score is lower than 600, the Neo Secured Mastercard is an excellent tool for building your credit history and it’s one of the best secured credit cards in Canada. There is no credit check required, no annual fee, and the minimum security deposit is just $50! This card will also give you amazing cash back.

    BMO Cashback Mastercard

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    Nothing is more versatile than cold hard cash. The BMO Cashback Mastercard will put money back in your pocket. You can use your cash back rewards for books, groceries, and maybe even some school spirit wear. Or you can be a cash back master and use the rewards you earn to invest. The possibilities are endless. 

    In addition to the welcome offer, you’ll get 3% cash back on groceries, 1% on recurring bill payments, and 0.5% on all other spending categories. You can redeem your cash back starting at $1 and choose whether you want it deposited into your BMO account or as a credit on your credit card statement.

    What is credit?

    To understand how to increase your credit score with a credit card, you need to understand credit. Credit is money that you borrow from a bank or other financial institution; they are also called creditors or lenders. Very few people have enough of their own money on hand to purchase a house, new car, or pay the full cost of their university program with spare cash. So they borrow money to help them pay for the expensive things. They take out mortgages, student loans, and personal loans

    Interest is the extra money you pay back to the lender on top of the original amount you borrowed. All loans charge interest. Lending is a business and it needs to be profitable so people continue to have access to credit when they need it. Think of interest as the price you pay to use someone else’s money. Any money you owe to a creditor is called debt. What role does your credit score play in all this?

    What is a credit score?

    Before any lender will give you money, they will check your credit score. Your credit score is a 3-digit number on a scale of 300 to 900: 300 is the worst credit score, and 900 is the best. It’s like a grade that evaluates how well you manage your debt; the money you owe to other people. Your score is determined by:

    • Payment history: whether or not you make all your payments on time. On-time payments are good. Late or missed payments are bad. 
    • Credit utilization: how much money you owe on credit cards and lines of credit. Low or no balances owing are good. High balances are bad.
    • Age of credit file: how old or new your credit file is, and the average age of your credit accounts
      Older is better. New is considered risky. 
    • Types of credit: how many different types of credit products you have like credit cards, installment loans, lines of credit, etc. Too many credit cards or installment loans are bad. Different kinds of credit are good. 
    • Public records: court judgements, bankruptcies, collection accounts, etc. All public records are bad. 
    • Inquiries: how often other creditors have checked your credit file. A few inquiries in a year are ok. A lot of inquiries in a short period of time are bad.

    Do you want a high or a low number?

    The higher the score the better. It means you’re really good at keeping your word because you paid back your loans as agreed. If you have a low score, it usually means you didn’t make your payments on time, you missed payments altogether, or your creditors had to pursue you legally to make you pay back the money you borrowed. But sometimes a low score simply means you are very new to credit so your credit history isn’t long enough to indicate how you handle debt. In other words – it’s just too early to tell!

    Students and young people often have lower credit scores without ever missing a payment, or even carrying any debt at all. Part of your credit score is based on how old your credit file is. If you are brand new to credit, your credit card or student loan is probably your very first credit account. Your credit score will naturally be lower than average even though you haven’t done anything wrong. Just give it time.

    Why is your credit score important?

    Your credit score is important because it tells creditors how trustworthy you are. If you have a bad credit score you will be charged much higher interest rates, which means your debt is a lot more expensive than someone with really good credit who borrowed the same amount. You also run the risk of being denied credit altogether. How will you get to work if you can’t get approved for a car loan? How will you pay for tuition next year if your bank won’t increase your student line of credit?

    Your credit score is important for things other than borrowing money too. If you want to open a cell phone in your own name, the mobile phone company will check your credit score. If you want to rent an apartment, the landlord will check your credit score. Even some employers will look at your credit report when you apply for a job. That’s because your credit score isn’t just about debt and credit, it says a lot about your character too. 

    If you fail to manage your debt properly, it will hold you back from being able to live independently. If your credit is very poor, you may not be able to move into your own apartment. You may need roommates, or continue living at home. You could be denied a really great job after you graduate, making it harder to find meaningful employment. That could affect your ability to pay back your student loan. And what if you can’t even get a cell phone in your own name?

    6 ways to build credit using your credit card

    Let’s talk about building credit with a credit card. Consider it a game where the points are your credit score, and every responsible decision you make—like paying your bills on time or keeping your balance low—boosts your score higher. It’s a powerful way to prove you’re responsible with money, and it opens the door to major adulting milestones down the line. Here’s how to do it right:

    Understand what your credit card is for

    Your new credit card is not free money. Nor is it extra income to help you buy the things you want, but can’t afford. It is either a tool if you use it properly, or a weapon of destruction if you don’t. Your credit card is a means to build a strong credit score so that you can achieve bigger financial goals down the road.

    Pay off your credit card every month

    It is a myth that you need to carry a balance on your credit card to build a good credit score. In fact, the best way to use your card is to pay it off every single month before the due date. Use your credit card for purchases you need to make every month anyway, like your cell phone bill or gas for your car. Keep track of your purchases then pay off the entire balance owing before your payment due date.

    Make your credit card payments on time

    Sometimes an unexpected expense comes up, or someone rear-ended your car on the way to work. If you need to carry a balance on your credit card because life happened, make sure you make the minimum monthly payment on time without fail. Once things are back on track, put as much extra money onto your credit card as possible until it’s paid off.

    Keep your credit card balance low

    If you have to carry a balance, try your best to keep it under 30% of your credit card limit. That means if you have a credit card that allows you to borrow up to $3000, do not carry a balance over $900. If your balance crosses over that 30% threshold, it starts to damage your credit score.

    Don’t apply for a lot of credit cards at once

    Every time you apply for a credit product, like a loan or credit card, that creditor will access your credit file to check your score. That’s called a “hard” credit check. A few a year is ok and expected. But if you have too many hard credit checks in a short period of time, like a few weeks or months, it can really damage your credit score. That’s because a lot of credit checks make it look like you are desperate for credit, which makes you look risky in the eyes of lenders.

    Don’t close your credit card

    If you find you just don’t use your credit card often, or at all, you may be tempted to close it. Try not to close your credit accounts. The older your credit card is, the more it helps your score. Use it once or twice a year to keep it active, and pay off the balance immediately.

    If you’re worried about it getting lost or stolen, put it in a safe place and sign up for a free credit monitoring app like Borrowell. You’ll be able to keep track of your score for free,  and you’ll be able to see if there is a mysterious balance owing on a card you rarely use.

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    In order to build a great credit history, you need to use credit. The easiest way to do that is to open a credit card and use it wisely. Contrary to popular belief, credit cards are a powerful way to build financial independence. You can even do it without ever going into debt or spending a dime on interest. 

    When you’re new to credit, there’s a lot of conflicting advice out there. It’s hard to know what to believe when it comes to starting your credit journey. So whether you’re a student using credit for the first time, or you’ve had credit cards for years, there’s only one way to achieve an amazing credit score without going into debt: Pay your balance off in full every month. That’s it, that’s the secret. In order to build a credit history, you need to pay the balance off in full every month before the due date. Most cards include a 21-day interest-free grace period, so use it. With this trick, you’ll never pay a dime in interest or miss a payment. That makes the annual interest rate entirely irrelevant since you’ll never actually pay any. Plus, you’ll build a killer credit score. 

    FAQs about using credit cards to build your credit

    How to build credit with a credit card?

    To build credit with a credit card, it’s important to use it responsibly. This means making on-time payments and keeping your credit utilization low. Start by using your card for small purchases and paying the balance in full each month. Over time, your credit score will improve as you demonstrate your ability to manage credit responsibly.

    How to build credit without a credit card?

    There are several ways to build credit without a credit card. You can take out a small loan, such as a personal loan or a car loan, and make on-time payments. You can also become an authorized user on someone else’s credit card, as long as they use it responsibly. Another option is to use a secured credit card, which requires a cash deposit and can help you establish credit if used responsibly. Finally, you can ask utility companies to report your payment history to credit bureaus, which can help build your credit over time.

    How many credit cards should I have to build credit?

    While increasing your cumulative credit limit by opening many credit cards could help you improve your credit score, having too many credit cards can make it difficult to keep track of your spending and may lead to overspending and debt. In general, having one or two credit cards that you use responsibly can help you establish and improve your credit. Ultimately, the key is to use credit responsibly and avoid taking on more credit than you can handle.

    Are Capital One credit cards good for building credit?

    Capital One cards are generally good credit cards to help you rebuild your credit, as many of their cards are designed for individuals with limited or average credit histories. However, it’s important to use the card responsibly by making on-time payments and keeping your credit utilization low.

    Do charge cards build credit?

    Charge cards can help build credit, since they report to the credit bureaus. Unlike regular credit cards, charge cards require you to pay your balance in full each month, so they don’t involve interest charges or revolving debt. As a result, they may be easier to manage for those who struggle with credit card debt.

    Do prepaid credit cards build credit?

    Prepaid credit cards generally do not build credit. Prepaid cards are not credit products, but rather a form of debit cards that you can load money onto and use to make purchases. Because there is no credit involved, using a prepaid card does not affect your credit score. However, some prepaid credit cards such as KOHO offer a credit building add-on that can help build your credit.

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    Heidi Unrau is a senior finance journalist at Hardbacon. She studied Economics at the University of Winnipeg, where she fell in love with all-things-finance. At 25, she kicked-off her financial career in retail banking as a teller. She quickly progressed to become a Credit Analyst and then Private Lender. This hands-on industry experience uniquely positions her to provide expert insight on loans, credit scores, credit cards, debt, and banking services. She has been featured in publications such as WealthRocket, Scary Mommy, Credello, and Plooto. When she's not chasing after her two little boys, you'll find her hiding in the car listening to the Freakonomics podcast, or binge-watching financial crime documentaries with a bowl of ice cream. Fun Fact: Heidi has lived in five different provinces across Canada and her blood type is coffee.