Ahh sweet, sweet credit. You can definitely live without it, but credit is an amazing leveraging tool that can help you reach your goals a lot easier.

A credit score is a number between 300-850/900 that represents whether or not you are a trustworthy borrower that pays their bills on time. The higher the score the better. In the 700+ range, it’s more likely that you’ll get the absolute best rates on loans so you’ll pay less interest over time compared to the next person with a lower credit score. The less you pay in interest, the faster you’ll pay off the debt and be able to move onwards and upwards with your life. Want to buy a house or a car some day? Your credit score will be extremely important when the time comes.

Now I know there’s tons of fake news out there about credit scores and how to build up your credit so all the information I share in this article can be found from the two credit bureaus in Canada: Equifax and TransUnion. I’m just going to make the info more easy to understand and explain how you can optimize the use of credit in your everyday spending. Whether you just got your first credit card or you’ve got five of them along with a mortgage, I’m sure you’ll learn something that you can incorporate into your life from today onwards.

 

Pay Off Your Credit Card In Full

You may have been told in the past that holding a balance on your credit card helps build your credit but that’s just not true. I’ve definitely heard this one before and it’s terrible advice! Always always always pay your credit card off in full every month. Yes, carrying a balance will notify the creditors that you are using credit but they will flag this as a negative on your credit report and your credit score will suffer. Receiving your credit card statement then proceeding to pay the balance off in full will show lenders you are using credit responsibly and this will help you build your credit score.

Carrying a balance on your credit card will decrease, not increase, your credit score. Even one late payment can show up as a flag on your credit report and can result in a drop in your score. Late payments will stay on your credit report for seven years! If you accidentally miss a payment, take the time to call your bank and explain what happened. If you are a first time offender, they may let you off the hook but you’ll never know if you don’t try.

The absolute least you should do if you can’t pay the balance in full is pay the minimum payment due on your monthly statement. This way you’ll be able to keep your account in good standing, just know that you will start racking up interest. Most credit cards have interest rates from 19-30%, which is outrageous. Trust me, you do not want to fall into credit card debt! If you tend to carry a balance often, I encourage you to download my budget template and check out my post How To Start Budgeting.

 

Credit History

History is a very important factor in your credit score. You won’t just start with a score of 900 and lose points when you mess up. You have to earn that high score by showing lenders you have a long history of paying bills on time.

Having different kinds of credit history like paying for your cell phone bill, your mortgage and your credit cards will help show lenders that you’re able to manage multiple accounts and are a trustworthy borrower.

Something you might not have thought would negatively impact your credit score is cancelling cards, but in some cases, this can really hurt your score. I personally won’t be cancelling my first student credit card I got when I was 19 because it actually helps increase my credit score by increasing the length of my credit history. I have only been using credit cards as a means to build my credit until recently when I applied for student loans so using all of my credit cards every few months is really important for my score.

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Debit to Credit Utilization Ratio

You may have been told in the past that it looks good to creditors when you spend right up to the limit on your credit card and then pay it off to show you can pay back your loans, but this is not the case. If you are constantly spending right up to your limit, you are actually seen as a high risk to the lender because if you have more debt, you may have a hard time paying back the loan.

It’s best to keep your debit to credit utilization ratio at 30% or below. All this means is that if you have a $1,000 limit on your credit card, you should spend no more than $300. If you usually spend the full $1,000, consider paying the credit card back down to $0 or $1 every time you reach $300. You could also increase your limit to $3,000 but it’s best only to apply for more credit when you really need it.

Another aspect of credit utilization I want to mention is making sure you are actually using your credit cards. Having a low utilization is great but having zero utilization might hurt your score. If you don’t use your cards every few months, it may be flagged as inactive and be closed by the lender. This can impact your score because there is credit history being removed from your report. I still try to use my student credit card every few months for random purchases here and there to keep it active on my report.

 

Inquiries

There are two types of credit inquiries to be aware of: hard and soft.

A soft inquiry won’t affect your credit score but a hard inquiry may impact your score and stay on your credit report for a good long while.

You taking a peek at your credit score will not affect your score because this is a soft inquiry. Some examples of soft inquiries:

• Checking your credit score

• Pre-qualifying for a credit card offer or limit increase

• Pre-qualifying for insurance quotes

• Background checks

Learn more at How To Check Your Credit Score

Credit checks from anyone other than yourself, usually financial institutions making lending decisions, are considered hard inquiries. Some examples of hard inquiries:

• Credit card applications

• Student loan applications

• Auto loan applications

• Apartment rental applications

• Mortgage applications

• Personal loan applications

These kinds of inquiries may cause a slight decrease in your score and stay on your credit report for months to years. Lenders don’t want you applying for too much credit at the same time so when you apply for a new credit card, this will result in a drop in your credit score. If you apply for lots of credit at the same time lenders see it as risky because it seems like you’re getting ready to take on a lot of debt and they’ll be worried you won’t be able to pay them back.

 

Unpaid Bills & Tickets

Think twice before ripping up those parking tickets… please take the time to dispute it or just pay it and get it taken care of. Missed bills and payments can be reported to the credit bureaus or sent to collections and this might seriously hurt your credit score. This is not an exhaustive list but here are some examples of random bills that can affect your score:

• Parking tickets

• Rent payments

• Cellphone bills

• Loan payments

• Gym memberships

Showing good habits of paying these bills on time will help boost your credit score.

 

Final Thoughts 

It’s honestly incredible that we’re able to leverage money to help us build wealth these days. Imagine if everyone had to save up the entire value of a home before they were able to purchase it… and imagine if doctors had to save up the full $100,000+ of tuition all by themselves before being able to go to and pay for medical school. If used responsibly, credit can be an amazing tool to help you reach your goals.

If you choose to use credit, make sure you stay on top of what you owe and remember to:

• pay your credit card bills in full every month

• keep in mind that different kinds of credit will help build your credit score

• keep your credit utilization below 30% on your credit cards

• be aware of hard inquiries that may impact your score

• pay all of your bills on time

If you can do all of these things, you will be well on your way to a skyrocketing credit score.

 

“If you don’t take good care of your credit, then your credit won’t take good care of you.”

Disclaimer: I am not a certified financial planner or investment advisor. The ideas posted on this website are my own opinions on how I manage my personal finances. The content is specifically for educational and informational purposes and is not considered professional financial advice.

 

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