I wish someone had sat me down and told me how credit scores worked when I was in high school. Maybe then I could have dodged all the misconceptions that have had me cowering in fear of my credit report for the last decade.
Like many people trying to gain financial independence in their early 20s, I applied for my first credit card strictly so I could buy things I wanted and pay them back later.
I had no idea what interest was or what kind of impact ignoring payments could have on my financial future. I was just a 20-year-old with a credit card looking to have as much fun off my bank's dime as possible.
Flash forward to the present day, and my credit score is in dire straits, and my relationship with credit cards is one of fear and disgust, or at least it was until I finally sucked it up and talked to an expert.
I recently reached out to the Toronto branch of the Credit Counselling Society to get the answers I need to get myself out of the dark and back on the path to financial stability.
To say it was an eye-opening conversation would be an understatement, so I've compiled a list of takeaways that I think could dispel some of the biggest misconceptions out there about debt and credit.
Get a credit card even if you have bad credit
Capital One's website.
I always thought that people with bad credit scores, like myself, should avoid getting a credit card to prevent making the situation worse. This assumption made it an easy decision for me since I also assumed that I would never qualify for one anyway. However, within the first few minutes of my call with Sue, my credit counsellor, I realized how misguided that assessment was.
I learned that not only should I have a credit card and use it regularly, but there are also plenty of options available for people in my exact situation and standing.
Sue explained, "With Capital One if you don't qualify for their regular credit cards, you could qualify for their secured [Mastercard]. This is where you pay [a $59 annual fee] and then you get the card and use it, pay it, use it, and pay it. They just hold that as security."
Secured credit cards require cash deposits as collateral, offering individuals with poor credit the opportunity to rebuild their score by using the card for purchases and making timely payments. The deposit is refunded when the account is closed.
Capital One’s security deposits can range from $75 to $300, depending on a person’s situation.
Other banks that offer secured credit cards include the following:
- TD Canada Trust: TD Secured Credit Card
- RBC Royal Bank: RBC Cash Back Secured Mastercard
- Scotiabank: Scotiabank Value Visa Card
- Home Trust: Home Trust Secured Visa Card
"And generally, if the account is handled well after a year, they'll usually look to remove that security. So then it's no longer a secured card," Sue added.
Wielding a credit card responsibly is one of the easiest ways to improve your credit score. So, it turns out my righteous "screw this process, I'm going off-grid" approach was just as foolish as the mistakes I made when I actually had a credit card. Whoops.
Sue said, "It is always good to have some sort of credit on there. You should use it [and] allow it to go to billing so that they request a payment. Then you make a payment or pay the balance. That's what helps build your score over time."
Credit scores reset after six years in Canada
Why didn't anyone tell me this when I was in school? Seriously. I would have had a lot fewer sleepless nights if at least one teacher in my life had shared this truth with me before Sue. Oh well, better late than never, I suppose.
Just like everything else in life, your credit score is not permanent. It resets every six to seven years, although the exact timing can vary depending on the following factors:
- The category your financial information falls under.
- Your specific province or territory.
- The credit bureau responsible for generating your report.
All the negative data (such as late payments, accounts in collections, bankruptcies, etc.) that credit bureaus like TransUnion and Equifax have on you will eventually be wiped clean, and the best part? You don't even have to do anything.
Now that's a light at the end of the tunnel if there ever was one.
"Once that derogatory information, like the old credit card, drops off your credit report, which happens six years from the date of the last payment, your score should start to go up," Sue told me. "If you have things that are reporting every month, such as using and paying your credit regularly, that generates the good credit rating that you want. And when the old negative information drops off, [your score should improve]."
Don't pay off your credit card immediately
Out of all the information I gathered from my consultation this one stood out to me as the one most contrary to popular belief.
I can't tell you how many times I've overheard someone brag about how they always pay off their credit card right away. I used to marvel at how responsible and put together these people in my life seemed to be, but as it turns out, despite their superior organization, they were just as misinformed as I was.
Paying off your credit card as soon as you use it might seem like a good idea in the short term, but all you're doing is preventing that data from going to billing and robbing yourself of the opportunity to improve your credit score.
"Some people use [their credit card] and then pay it off the next day, which actually does not help your credit score because [it's not] requesting a payment each month," Sue explained. "You want to let it go to billing so it is requesting the payment [and pay that balance by the due date."]
"This is what generates what we call an R1 which is a rating from one to nine. [The] R1 is paying on time and as agreed. [That's] what you want on your credit report every month from that credit card company [that] will actually help you build your score," she added.
It takes time to rebuild your score
Learning to focus on the long term is an essential part of maintaining good credit. As we established above, rushing to pay off your debts in the hope of building up your credit score gets you nowhere. So, patience is definitely the virtue you want to be leaning into most when it comes to rebuilding your reputation amongst credit bureaus.
So, how long does it actually take?
That's a tricky question to answer. According to the Credit Counselling Society, people should expect to wait around a year to see improvements in their credit score. However, that timeline only applies to individuals who are paying off their credit cards and loans on time.
People can also get a significant boost if some of their old debts are written off during the year, but as you can see, most of the best approaches to improving your credit involve playing some kind of waiting game.
As per Loans Canada, credit scores typically range from 300 to 900, and the closer your score is to 900, the lower the perceived risk as a borrower, which can provide opportunities for accessing affordable credit products and loans when needed in the future. While the average Canadian credit score is approximately 650, which is generally considered fair, certain lenders may view it as a good score.
The average Canadian has a surprisingly high amount of debt
I was feeling slightly better about my debt problems after my phone call with the Credit Counselling Society, so I decided to do some additional research and delve into the average debt of Canadians. The data I discovered truly shocked me.
According to the latest study conducted by Statistics Canada, the average non-mortgage debt of a Canadian under the age of 35 in 2019 amounted to $19,600. While this figure may not appear significant to some, as someone who has been tormented by a debt of less than $10,000 for years, I can confidently say that seeing this number completely altered my perspective on my financial situation.
Unsurprisingly, $19,600 is far from the highest debt most of us will find ourselves in during our lifetime, with that number increasing exponentially as people enter in their 40s.
Overall, I hope this article has offered you some guidance as you navigate your own financial journey. Personally, I'm walking away from this experience with a whole new perspective on money — one that was hard to face but, in reality, is just a short phone call away for anyone.
