Building a Better Credit Score

Dear Jeff,

I just graduated from university, got my first job, and I’m adjusting to “real life”. I’m by no means a financial expert so when people start to talk to me about “credit scores”, I usually just tune them out. But recently, my father has been telling me that I need to build a credit history. He says that if I have no history of using credit, I will have a problem when I buy my first car. Is having no credit history a problem? How can I build up my credit score?

Tara S.
London, Ontario

Hey Tara,

A lot of new graduates are in the same boat as you. You may have spent the last 20 years in school and haven’t had to make any major purchases. So, just like your dad says, it might be tough to get that first car loan. Credit companies want to know that you are trustworthy and capable of paying back your debts. One of the ways that the credit companies make that assessment is by utilizing the credit score – a number that most people don’t understand.

So, what makes up this credit score (and how can you build yours up)?

  1. Payment History (35%) – this is as simple as its name suggests. When you make payments on a debt, it’s a positive. But, if you miss a payment, it hurts your score. So, Tara, for a person in your situation, you need to develop a history of payments. It can help to get a secured credit card from a bank. The “secured” part just means that you deposit the limit of the card in the bank before you start using it. Thus, if you miss a payment, the bank can just take it from that deposit amount. Once you get it, Start using a credit card for some daily purchases. Grabbing a coffee at Tim’s? Put it on your card. Picking up some groceries for dinner? Leave your cash in your wallet and use the card. As long as you pay off these small debts as soon as possible, you will be developing a healthy payment history.
  2. Amounts You Owe (30%) – when you apply for that car loan, the lender is going to know if you already owe large amounts to another bank or credit card company. If you aren’t paying those debts, the lender isn’t going to trust you to pay them back either. So, don’t carry large debts on any credit cards. Keep the balances small and pay them off. Think about it this way – if your friend Katie asked to borrow $100 from you, but you know that she owes money to your other friend, are you going to trust her to pay you back?
  3. Length of Credit History (15%) – this one is going to be tough for you, Tara. Like you said, you don’t have much of a credit history. Building up this part of your credit score can only be done with time. However, as you get older, this part of your credit score is going to improve. Every morning you wake up, your credit score is going to be a little bit better. Now, that’s a thought to get you out of bed in the morning!
  4. New Credit (10%) – lenders don’t want to see that you applied for five credit cards a week before you applied for a car loan. They want to see you have a long history of established credit – not just a bunch of new debts. Again, this can only be solved with time. It doesn’t take a rocket scientist to know that new credit eventually becomes old credit. This is another time that I have to preach patience.
  5. Type of Credit in Use (10%) – variety is the spice of life! Well, variety is also the spice of a credit score! Granted, it doesn’t have the same ring to it but let me explain. Different types of loans and credit show lenders that you have responsibly used credit in a variety of different situations, and from a variety of different sources. So, a mix of a secured credit card, a student loan, and your cell phone bill is more valuable than credit from just one source. It’s just like a bowl of chilli – would you rather have it with just meat and beans or with some onions, hot peppers and pineapple tossed in (yes, pineapple. It’s delicious in chilli – just trust me)?

The most important thing, Tara, is paying your debts on time. Consistent payments over the long haul will show the lenders that you are responsible and trustworthy. If you follow this advice, you’ll be ready to buy that first car in no time. Road trip, anyone?

Jeffrey Schwartz
Executive Director

Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and President of the Credit Association of Greater Toronto (CAGT).

If you have a question about budgeting with kids in the household or just about finance in general, Jeff is here to help. Send us an email with your question to [email protected]. You’ll get the expert advice you need and your question may be featured here on our website.