Keys to building good credit
Saving and investing can go a long way in building long-term financial security but good credit habits are vital in providing you much needed flexibility. Life comes at you fast, and that’s where building a strong credit history can help you with either taking the next big step in your life or allow you to stay afloat through murky waters.
What is a credit score, even?
It’s a rating system that tells lenders (banks, credit unions, etc.) how reliable of a borrower you are based on your individual credit history. Not having paid back that $20 you owe your friend may be long forgotten but a bad rap on your credit report can stick around for 6-14 years depending on your province.
Your credit score is a combination of how long you’ve had credit, how much of your credit you consume on a regular basis, how regularly you pay back what you borrow, the variety of ways in which you borrow (credit card, line of credit, mortgage), and even how often you’re looking for new credit.
Your score can range from 300-900, and the table below can help you understand the different tiers (ex. If you’re in the 743-789 range, your score is better than 41-60% of the population depending on the exact number).
It’s a marathon, not a sprint
Building up to that top tier is about consistency. The objective of having credit isn’t to spend to its limit and blow your budget, it’s to manage all that you pay for in a given month and better align it with what you earn on a monthly basis.
Understand the buzz words
Misunderstanding the minimum payment on your credit card statement is a basic mistake a lot of people make. It’s literally just the amount required to keep being able to use your credit card. Do not mistake this as the minimum amount needed to keep building a good payment history. It is absolutely not that. If you’re in a position to pay the full balance or as much of your monthly balance as possible, do it.
If you have a mortgage, make sure to understand what different terms like deferring a payment or payment vacations mean (yes, they’re different), and understand how the interest charges would work as well as the impact on your credit score.
Understand the cost of interest
Based on the interest rate climate today, most credit cards will charge you around 20% for outstanding balances, most unsecured lines of credit and student loans should be under 10%, mortgages under 3%.
If you’re deciding between putting money away in a savings account (that’s not your emergency account) that pays you 1-2% or the credit card that’s charging you 20%, it’s a no-brainer where your money should be going first.
Know when to hold ‘em, know when to fold ‘em
Closing credit products can be good or bad, depending on a variety of factors. One of the factors to consider is your debt ratio, which is how much of your available credit you’re using. If you’re in a healthy financial position, you are probably using less than 30% of your available credit on a regular basis (excluding your mortgage). If you have two credit cards -- each with a $5,000 balance -- and decide to close one, understand how this can impact your debt ratio.
One myth about closing credit cards is that you would immediately lose the history you’ve built up with that credit card. If you’ve reached a point where you want to discontinue a card for whatever reason, know that the history of it -- good or bad -- can remain on your credit report for up to a decade.
