Is a Credit Card Essential for Building Credit?

Opening a credit card is one of the quickest ways to build your credit profile and credit scores. But it’s not necessarily a requirement, experts say.

Building your credit score takes time and consistent effort. And if you’re starting from scratch as a young adult or a newcomer to Canada, you might wonder if getting a credit card is the only way to unlock your credit health.

The short answer: Credit cards aren’t the only way to build credit, but they’re definitely a popular one.

Credit cards remain a common credit-building tool

An all-time high of 31.2 million Canadians had at least one credit product — often a credit card or personal loan — in the third quarter of 2023, according to a recent TransUnion report. The surge was driven mostly by Gen Z consumers and new Canadian immigrants opening credit accounts, accounting for a year-over-year increase of 35% and 62%, respectively, according to the report.

Canada’s two major credit bureaus — Equifax and TransUnion — calculate three-digit credit scores based on your credit report history of borrowing and repaying money over time, according to the Financial Consumer Agency of Canada. The higher your score, the less risk you pose to lenders. Lower risk borrowers are typically rewarded with better interest rates and borrowing terms.

Credit cards can help solidify your credit history and strengthen your score provided they’re used responsibly and consistently. When you open a new credit card, it can take three to six months of making on-time payments to see movement in your credit scores, says Becky Western-Macfadyen, a financial coaching manager with Credit Canada.

Paying credit card balances in full and on time each month avoids interest charges, and keeping your balance below 30% of the available limit, known as your credit utilization rate, all work toward boosting your credit scores, Western-Macfadyen notes.

Credit cards for newcomers to Canada

Some banks offer newcomer credit cards as a way to help immigrants establish their credit — often paired with chequing and savings accounts. These cards tend to have benefits such as reward points, payment protection and no transfer fees, but read the fine print because some do require annual fees.

A secured credit card is another option for Canadian newcomers. Secured cards require you to pay a cash security deposit to open a credit account. It’s a good way to establish credit without the risk of missing payments or going over your limit.

A secured card can be a “good starting point” for borrowers who don’t have a credit history, says Julie Kuzmic, Equifax Canada’s senior compliance officer of consumer advocacy.

Credit cards for young adults

Some companies offer student credit cards that have lower credit limits and fees, student-focused perks, and are designed to help you build credit. Keep in mind that you may need to prove you’re earning an income to qualify for a student card.

Other ways to establish your credit

Credit cards can open the door to a debt spiral if you aren’t careful — or your financial situation suddenly changes. If you’re hesitant about turning to plastic, there are other ways to establish credit.

Many Canadian internet and mobile phone providers report monthly payments directly to the credit bureaus, so those payments may already be factored into your credit score, Kuzmic says.

Additionally, rent payments can be included in your credit scores, but that involves a more complex process of self-reporting, which may involve fees and specific guidelines, Kuzmic notes.

“There are a few different aggregators of rental payment data that then tend to report directly to the credit bureaus,” Kuzmic says. “There can be a bit of set up required on the part of the landlord in order to be able to send that data in, so sometimes the mechanism that makes the most sense is self-reporting.”

Taking out an installment loan — a car loan, student loan or personal loan — can be another way to build credit without a credit card. Unlike credit cards, which are a type of revolving credit, an installment loan is a lump sum that’s paid back in monthly payments.

You can also ask a parent to be a co-signer on a new card if you can’t qualify for one on your own. Both the primary card holder and the co-signer’s credit is impacted if payments aren’t made on time (or at all), says Western-Macfadyen. This means both parties are on the hook to repay the debt and are legally liable for repayment if the account goes into default, she notes.

“If you’re putting some bumpers in place and keeping [your adult child] safe and you safe, it’s a great way to get them started,” Western-Macfadyen advises.

7 tips for getting your first credit card

If you’re ready to apply for a credit card but you’re unsure of where to start, here is some advice to help you find the right one for your needs.

Do your homework. Research your options and don’t be lured by flashy card offers. It can be tempting to sign up for a bunch of credit cards, especially those promising cash-back rewards and travel points. “Don’t be fooled by the razzle dazzle of the cards,” Western-Macfadyen says, adding, “dDon’t go after the shiny thing, because that’s going to be what gets you in trouble in the long run.”
Start small. Resist the urge to max out your limit right away, and start with a low credit limit or consider a secured card, as you build up good credit-management habits. Focus on paying your balance in full and on time each month to avoid interest charges.
Watch for hidden fees. Read the fine print on credit card offers. Look for annual fees, cash advance fees and balance transfer fees, which can add up fast.
Avoid applying for multiple cards. If you’re not approved for one card, don’t apply for several more hoping for a different outcome. Each time you apply for a new credit card or loan, it counts as a single “hard inquiry” on your credit report, which can temporarily lower your credit score.
Automate monthly payments. Setting up automatic payments helps you avoid missing a due date and incurring late fees. Late payments can sink your credit score quickly and be flagged on your credit report, which might give lenders pause when considering whether or not to lend you money.
Be patient. As noted, it can take three to six months (and sometimes longer) to build your credit score using a credit card. Likewise, you might expect to see your credit report reflect on-time payments on your credit report immediately, but it doesn’t work that way, Kuzmic points out. Credit card companies report their data to the credit bureaus on a monthly basis. So if you pay off your balance in full and go check your credit report the next day, it won’t be reflected on your report until after the monthly reporting period, Kuzmic adds.
Keep tabs on your credit report. Each of the credit bureaus allow you to check your credit report for free each month. (To check your score, you may have to pay a fee.) Your bank or credit card issuer might offer free access to your credit report and score, too. Look for any errors on your credit report and correct them immediately to avoid damage to your credit scores.

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