Why Credit Matters (Even When You’re Young)

Your credit score matters. Even if you’ve never borrowed money (or don’t intend to), your credit score could affect your future financial activities. It’s important to be aware of why it matters and what you can do to make sure it has a positive effect.

Why Does It Matter?

Maybe you don’t think your credit score matters because you don’t plan to get a loan or any sort of financing. You’re not looking for a lender.

Maybe you’re one of those rare people who live primarily on a “cash only” basis, making purchases only when you can pay for the item in full (even on bigger items like vehicles and houses).

Your credit score still matters.

Take into consideration things like utilities or rent. Any time you need to obtain a new service, such as electricity or natural gas, internet or phone service, the utility company will likely check your credit rating before opening a new account for you. Even landlords may request a credit check before approving you as a tenant.

Even if you have no intention of carrying any debt personally, what if you decide to start a business? Starting a business requires a substantial amount of money, and few can do it successfully without some form of financing.

If you have no credit history, there is nothing for future lenders to base a decision on. They have no unbiased answers to their questions about whether you can be trusted to manage money responsibly.  Especially in today’s world with online banking, judgments on your credit-worthiness are typically made by facts on a screen, not by personal relationships.

When a lender (or utility company, etc.) looks at your credit report, they will use that information to determine the rate at which you can borrow money, or if, in fact you can. The better your credit score, the lower your borrowing costs.

Your credit score influences any major purchase you might make that requires any type of financing at all. Any time you want to purchase a vehicle, a home, a piece of furniture, a TV or a computer on a monthly payment plant, your credit report will be checked first.

What Is Your Credit Score?

Most utility companies, phone companies, bank or financing companies, and various others report your payment history to the major credit-reporting agencies. So even if you’ve never taken out a car loan or used a credit card, simply using a cell phone plan or requiring utility services for your home will result in a credit score because you will be required to make regular payments.

Your credit history is recorded in files (called credit reports) that are maintained by at least one of Canada’s major credit-reporting agencies: Equifax Canada and TransUnion Canada.

It can be compared to a school report card – Your final mark is determined based on all of your assignments and tests for the year. In the same way, your credit score is determined on the history of your money management.

A credit report gives lenders an unbiased picture of your credit history (how you’ve handled money in the past). It is one of the main tools they use to determine whether or not to give you credit/lend you money. It shows how good you are at managing other people’s money.

What Does the Credit Score Mean?

When a potential lender looks at your credit report, they’re really looking for the answer to a few questions:

  • Do you pay your bills on time? Do you tend to pay late?
  • Have you ever bounced payments?
  • Have you had any bankruptcies?
  • Have you mismanaged debt?
  • How long have you had any existing credit?
  • Have you maxed out any existing credit?
  • Have you ever had credit that was closed at the creditor’s request?

Basically, your credit score shows whether or not you handle debt responsibly.

Building Your Credit History

Even if you have no intention of holding any debt, it’s in your best interest to work at building a healthy credit history.

It’s important to do this with intention and to start early because it takes time to build a history. It takes time to prove you are reliable and can be trusted. You can’t just start this process and expect a high credit rating immediately – length of time matters and affects your score. So even if you’re young, it’s not too early!

So how do you begin to build that credit history?

Small Credit Card

The simplest way is to get a small credit card (or even a bank-managed pre-paid credit card – NOT a gift card) and pay it off every month in full before the due date. Do not carry a balance on the card. Show that you are not overspending every month.

If you can’t pay off the whole balance, at the very least, make the minimum payment before the due date. (It takes a couple of days for banks to process your payments, which is why it’s always best to pay early.)

Even if you know you’ll be able to pay off the balance in full, but not until a few days after the due date, don’t wait! Make the minimum payment in time for the due date and pay the balance after the due date. You never want to miss the paying minimum payment on time.

In this day and age, credit cards have almost become a necessary evil. Without one, it’s difficult to rent a car, for example. So it really is to your advantage in several ways.

We often hear, “I don’t have any credit cards because I don’t believe in them.” You have a right to make that decision. However, you must understand that a creditor’s perspective tends to be that people with that mindset are usually the ones who have had difficulty managing a credit card in the past. The assumption tends to be that you’re not responsible with them. It’s not a judgment on you personally – it’s a judgment based on historical experience.

Small Loan

After managing a small credit card successfully, consider taking out a smaller car loan or bank loan and pay it back – maybe even early.

Cell Phone Plans & Utility Bills

Make sure you manage your bills properly, paying them off in full and on time. Late or missed payments are reported to the credit bureaus.

Prove Yourself

We are not advocating for carrying debt. This is simply about proving that you can manage your money wisely. Just because you have a credit card doesn’t mean you have to have debt. When you’re paying it off every month, you’re building your credit history AND remaining free of debt at the same time. It’s a win-win!

For more information about Credit, refer to our other articles: