You’re just starting out on your own or you’re new to the country and you need to build a credit profile, but you have no loans or cards. Where do you start?
Or maybe you’ve heard enough horror stories about credit card debt to scare you for a lifetime and you want no part of it. Does this mean you’re stuck without a credit score? Do you even need a score?
The short answer to the last question is yes, you definitely need to develop a good credit score. An increasing number of landlords are pulling credit reports before agreeing to rent out their units. Some employers also run credit checks to ensure that potential employees are responsible with money. It’s becoming increasingly difficult to get through life without a credit score.
Even if you plan to rely solely on cash as your payment of choice, you’re going to run into a roadblock somewhere. Will you have enough cash on hand to buy a car outright? Might you need a loan to grow a business? Buy a house some day? Reserve a hotel room?
A good credit score is indispensable. The only way to build one is by obtaining credit, either in the form of an instalment loan, which is repaid over time (i.e. student or car loan) or a revolving loan in which there is a limit to the amount of money you can borrow (i.e. credit cards). Revolving loans are usually repaid over a shorter period of time.
Either way, you need some form of credit in your name to build up a score. Thankfully, there are several ways to achieve this, with or without credit cards.
With Secured Credit Cards
Secured credit cards were created to help people with no credit, or bruised credit, (re)establish a good score. The idea is that you give the card provider security in the form of a deposit and they extend that amount in credit. Over time, your responsible use of the card prompts them to increase your credit limit. Every month, they report this activity to the credit-reporting agencies and your score goes up, assuming there are no problematic items on your report.
When your score is high enough, usually somewhere north of 680, you can thank the secured card for its service and obtain an unsecured card from any major bank or card provider. You are thus no longer tied to providers of secured cards and you get your security deposit back. Unsecured cards are typically viewed more favourably by lenders.
In Canada, there are a couple of good options for you regarding secured cards:
- Capital One Secured Mastercard
- $59 Annual Fee (at time of writing)
- Guaranteed approval
- $300-$2,500 credit limit
- Security funds required: $75 or $300
- They claim that if you send in more security funds, they’ll increase the limit by that amount. That was not my experience when I worked with families as a credit repair specialist. One set of clients wanted to increase their limit from $1,000 to $2,000 and they had the cash to do it. Capital One refused repeatedly without telling them why. Don’t assume you’ll be successful despite their published claims.
- Refresh Financial Visa
- $12.95 Annual Fee (at the time of writing)
- $3.00 Monthly Fee (This fee is mentioned in the small print, along with many other nickel-and-dime-type fees, like a $2.00 monthly inactivity fee and a $0.10 declined transaction fee.)
- Approval without a credit check
- $200 – $10,000 credit limit
The reality is that using secured cards is the fastest way to build a solid credit score when you’re starting out or rebuilding.
Without Credit Cards
For those wishing to avoid credit cards, you’ve got a couple of options.
Joint loans
These are loans in which you have a co-signor, often a parent or partner. In this case, you are both on the hook for the debt. Co-signors take on a level of risk, so it’s not always easy to convince someone to sign on the dotted line with you. If you have a parent or partner who has good credit and is willing to help you out, consider opening a small, unsecured line of credit. Then, be fastidious about making all payments on time.
If you have a relationship with someone at one of the major banks, it might prove helpful to ask them first, particularly if you explain that you’re trying to build a good credit score without resorting to credit cards. You’ll pay more interest than you would with a secured line of credit (i.e. a LOC using a piece of real estate as collateral for the loan), but it will still be a lot cheaper than the interest you’d pay if you held a balance on a credit card.
Cell phone plans
For the longest time, cell phones were not listed on credit bureau reports. Neither were mortgages, for that matter, but let’s stick to cell phones for the moment. As millennials hit the marketplace, the banks wanted to pitch their products to this new cohort of consumers, but since the latter were having trouble building credit scores, it was hard for lenders to evaluate the risk of doing business with them. The banks needed a way to capture this demographic’s spending and repayment patterns.
One of the lesser-known facts about credit scores is that you do not have a single credit score. If you’ve ever gone shopping for a mortgage at multiple lenders, you might have noticed that your score at TD Bank isn’t the same as your score at RBC. What gives?
Here’s the scoop: Credit scores vary from lender to lender because they are based on whatever information a given lender has requested from the credit reporting agencies. For example, Bank A sits down with Equifax reps to discuss the demographic they’re targeting and together they’ll determine which credit information to focus on. Equifax applies its magical (i.e. undisclosed) logarithm and the result is a report catered to the needs of Bank A.
Bank B, on the other hand, is aiming for a different demographic. As a result, they focus on different credit information, which yields a different score.
Same person, different banks, different credit scores.
Back to the millennials. When some of our big banks wanted to increase their exposure to young adults, they realized that the one thing this market has in common is the ubiquitous use of cell phones. You’d be hard-pressed to find a younger person without a phone in their pocket. Next thing you know, cell phone accounts began showing up on credit reports. In this way, lenders could start to get a glimpse of the credit-worthiness of the younger clientele they were going after.
This is a good place to start if you have no other choice. Cell phone companies typically offer options like prepaid plans and security deposits. Shop around to get the best deal.
If you have a parent willing to take the risk, you can bring them on board as a co-signor. Be careful about family plans. They are typically in a parent’s name and therefore, they will build your parent’s credit, not yours. (Ditto for supplementary credit cards, by the way.)
Rent reporting
If you pay rent, you can ask your landlord to report your on-time payments to a rent-reporting agency who subsequently reports to Equifax . There is no cost for landlords to set up an account to report rent payments, however as a tenant, you will pay a small fee to create an account and access your on-time payment history. I’m using Landlord Credit Bureau for one of our tenants who is rebuilding his credit after going through through significant financial challenges. It’s a win-win for both of us: He always pays on time – no chasing for me – and his credit score is getting better – more options for him.
Will it be enough?
Here’s something to bear in mind when it comes to your credit score: A good score alone isn’t enough to get you certain forms of credit. Looking for insurance for your car? A good score should do the trick, even if it was built with only a cell phone, rent reporting, and a shared loan with your parents. If, however, you’re looking for a mortgage, lenders will want to see deeper credit. If all you have is the previous mix, they might decline you on the grounds that your credit is too thin.
That said, it doesn’t take a ton of credit to build a solid profile. Two trade lines (i.e. credit cards and/or loans), each with approximately $2,000 of credit and a clean history of on-time payments should do the trick. You don’t need a mitt full of cards.
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