How to build your credit without a credit card in Canada

Building a credit history isn’t solely dependent on owning a credit card. It plays a crucial role in various aspects of your life, like securing low-interest loans, availing affordable car insurance rates, or even improving your employment prospects. Here’s an in-depth guide to fortifying your creditworthiness even if your current credit score is on the lower end, or non-existent.

Credit Score in Canada: Why It Matters

In Canada, a credit score is a crucial indicator of financial health. This three-digit number, which typically ranges between 300 and 900, is a measure of your creditworthiness. The score is based on several factors, including your payment history, the amount you owe, length of credit history, new credit, and types of credit used.

Your credit score can significantly influence your life in a variety of ways. It affects your ability to secure loans or mortgages, the interest rates you’re offered, and sometimes even your eligibility for certain jobs or rental properties. While most people associate credit scores with credit cards, it’s possible to improve your score without them. Let’s delve into the details.

Assess Your Current Credit Situation: Knowledge is Empowerment

Your first step towards improving your credit score involves understanding where you currently stand. Obtain your credit report from one of Canada’s two main credit bureaus: Equifax or TransUnion. Under Canadian law, you’re entitled to one free report each year.

Once you have your credit report, carefully review it for inaccuracies, such as incorrect personal information or inaccurately reported late payments. Any error can negatively affect your credit score, so it’s essential to ensure that your credit report is accurate. Should you identify any errors, promptly notify the credit bureau.

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Credit-Builder Loans: Boosting Credit Through Savings

In Canada, credit-builder loans, also known as secured savings loans, are designed to help those with poor or no credit history. These loans work in a unique way: the loan amount is held in a locked savings account, and you make monthly installments to repay it.

These loans provide an excellent platform to demonstrate your ability to make regular payments. Not only does this process improve your credit score, but you’ll also have a tidy sum saved up once the loan is repaid. Bear in mind that these loans usually carry interest charges and potential application fees, so make sure to understand the terms before signing up.

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Student Loans: Leveraging Education to Improve Credit

If you’re a student with a government student loan, you can use this to your advantage in building your credit history. Making on-time repayments can positively impact your score. But remember, acquiring student loans for the sole purpose of credit building is not a good idea due to the high cost involved. 

Auto Loans: Steering Your Credit Score in the Right Direction

Auto loans can contribute to a healthier credit score, provided repayments are made on time. However, low credit scores can lead to high-interest rates, which can increase the total cost of your vehicle. It’s better to improve your credit score with other means before resorting to a large loan such as an auto loan.

Personal Loans With a Co-Signer: Build Your Credit On Someone Else’s Credit Score

Another option for building credit in Canada without a credit card is to use a co-signer. A co-signer is someone who agrees to take legal responsibility for your debt if you default on payments.

This can help you qualify for personal loans that you may not be able to secure on your own. However, it’s essential to choose a co-signer who is financially responsible and has a good credit score. Make sure you have a clear understanding of your responsibilities as the borrower and communicate openly with your co-signer to avoid any misunderstandings.

Rent Payments: Make Your Residence Count

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While rent payments have traditionally not affected credit scores, several Canadian services now report your rent payments to the credit bureaus. Making rent payments on time can hence be another strategy to build your credit. However, late rent payments can harm your credit score, so this option should be chosen with care.

Mobile Phone Plans: Your Phone Bill Can Boost Your Credit Score

In Canada, your mobile phone contract is another avenue to create a credit history. When you sign up for a mobile phone plan, you’re effectively entering a credit agreement. Every time you pay your monthly bill on time, it can contribute positively to your credit score. However, failing to meet your obligations can negatively impact your score. Therefore, ensure you’re diligent with your payments.

Alternative to traditional credit cards

While credit cards can be a key tool for building credit, they should be used responsibly. There are several options for Canadians with limited or poor credit history:

Secured Credit Cards: Lower Risk, Higher Reward

Secured cards function like regular credit cards but require a security deposit which typically defines your credit limit. Regular on-time payments can help build your credit score and potentially allow you to upgrade to an unsecured card in the future.

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Student Credit Cards: Learning Financial Responsibility

Student credit cards are tailored for university students with little to no credit history. They often come with lower credit limits and higher interest rates, but consistent, responsible use can be a stepping stone to better credit.

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Store Credit Cards: Balancing Rewards with Risks

Retail cards can offer lower credit requirements and tempting in-store rewards. However, they often come with higher interest rates and the credit line is typically limited to purchases within the specific retail chain.

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Joint Credit Cards: Sharing Credit Responsibility

Consider becoming an authorized user on a family member’s or friend’s credit card. This arrangement can positively impact your credit score, provided the joint credit card is used responsibly by both parties.

Building a robust credit score without a credit card is a journey. It requires consistent, responsible financial management and patience. By understanding and leveraging the methods mentioned above, you can steadily build a credit history and eventually achieve a strong credit score, setting a solid foundation for a secure financial future in Canada.

Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications