When you’re a student, it’s hard to think about life beyond your next deadline. But that doesn’t mean you shouldn’t start planning for your future. Building your credit score is something to start thinking about now.
Take a minute and imagine your future: In 10 years, do you plan to own a car? A house? Do you want to travel the world? What about kids?
While these things may seem far away, the time comes faster than you think—trust me.
Now think about how you’re going to afford these things. It’s possible you will make enough money to pay with cash. That would be nice, but it’s more likely you will need access to credit to finance these and other major purchases. While not necessary for everyone, credit can be extremely helpful for making your financial dreams a reality.
Before getting ahead of yourself, though, you have to understand how credit works, and how it can help you so that you use it wisely.
What is credit and why do you need a good credit history?
Credit is, essentially, borrowed money. Banks or other financial institutions lend you money and you have to pay it back in the future with interest. Different from debit, which is linked to the amount of money you actually have in your bank account, credit comes in many forms including:
- A credit card for everyday purchases
- A student loan for university or college
- A car loan
- A mortgage to buy a house
- A line of credit for big purchases like a trip abroad
It’s important to start building a credit history now so that when the time comes and you need a credit card or a loan, you can easily get one.
What is a credit score?
Your credit score is a number that banks and other financial institutions use to determine whether you’re likely to pay your bills on time.
Based on your history of credit, bill payments, and other financial information, credit companies assign you a number that reflects your “creditworthiness.” The higher this number is, the higher your credit score is—and the more willing they will be to lend you money in the form of credit cards and personal loans, and the lower your interest rate will be when paying them back.
If your credit score is low, you might find it difficult to borrow money when you need it. Or you might have to pay a higher interest rate when it comes time to make payments.
How your credit score is calculated
In Canada, your credit history is tracked and your credit score calculated by two companies: Equifax and TransUnion.
These companies most likely have a wealth of information about you already—everything from your address and birthday to your financial history and banking information, including when you’ve asked for a loan and how much debt you have. They use this information to determine your credit score.
Your credit score is calculated based on a number of factors:
- Payment history: Whether you’ve paid your bills or made loan payments on time, or missed any payments. Missing payments reflect badly on your creditworthiness.
- Current debt: How much money you owe.
- Length of history: How long you’ve been building credit for. The shorter your credit history, the less they know about you and the less confident they may be in your ability to pay back what you've borrowed.
- New inquiries: Each time you check your credit report or a company makes an inquiry on your behalf, this is noted on your credit report. Too many inquiries for credit in a short time looks bad because it can seem like you’re desperate for cash.
- Types of credit: Do you have a credit card loan? A line of credit? A mortgage?
Each credit reporting company has their own method for calculating your credit score based on the above information.
How to build a good credit score
Students face a “chicken-and-egg” problem: To get access to credit, you need to have a good credit score, but to get a good credit score you need to demonstrate that you’re trustworthy with credit.
There are a number of low-risk ways to build your credit from scratch:
- Get a bank account and deposit money: This shows that you’re responsible for managing your own money.
- Find a job: This shows that you have income coming in.
- If you have a credit card*, make some purchases from time to time: This shows you know how to use credit and are responsible with it.
Note: You don't need a credit card to build your credit score.
To build a high credit score, make sure you do the following:
- Pay your bills on time and in full
- Pay your debt down as quickly as possible
- If you can’t pay it all down, at the very least make sure you make your minimum payments every month
- Limit the number of times you apply for new credit (read: don’t go around shopping for credit cards)
Get your credit report once a year
It’s a good idea to check your credit score at least once a year so that you know where you stand, but also to make sure that your information is up to date. Mistakes on your credit report can haunt you for years, so you want to catch them early on.
Both Equifax and Transunion make you pay to access your credit score, but Equifax offers one free credit report per year. A credit report demonstrates your financial reliability. You can request one by mailing in this form for Equifax.
The future is (almost) here
I know this is a lot of information to take in, on a topic that’s likely NOT at the top of your mind when you’re in the thick of things with schoolwork.
Nonetheless, it’s something you should start thinking about. Your future will arrive sooner than you think and it’s best to be ready for it.
If you ever need any advice or help, connect with your Enrolment Services Advisor. ES Advisors also run workshops from time to time to help students stay on top of their finances. Check the Financial Wellness workshops page for any upcoming workshops.