Building Credit 101: A Young Adult’s Guide to Financial Freedom

Introduction: Why Credit Matters

Growing up, credit wasn’t a priority for my parents. Neither of them paid much attention to their credit scores, but everything changed when my parents got divorced. My mum suddenly had to navigate life independently, and things quickly spiraled. She found herself buried in debt, struggling with accumulating interest, and facing a credit score that took years to rebuild.

On the other hand, my older brother fell into a different trap. As soon as he became an adult, he set out to buy all the things we couldn’t afford growing up—luxury items, a fancy condo, and a nice car. It felt like he was trying to fill a void with material possessions. But now, he’s in a tough spot: struggling to get approved for a loan or even secure an apartment, even considering declaring bankruptcy.

It doesn’t take much to fall into financial trouble when it comes to credit. Watching my family’s experiences has been eye-opening. I’ve been fortunate to avoid dire situations myself, but there have been moments when I’ve felt my spending getting ahead of me, which has made me panic or anxious at times.

That’s why I created this guide—to help you understand credit, how it can benefit you now and in the future, and practical tips to avoid common mistakes. Credit, when used responsibly, is a powerful tool that can open doors to financial stability and independence.

My name’s Alex, and I write the Young Entrepreneur newsletter to help young adults navigate the parts of life that school doesn’t always prepare us for. Credit is just one piece of the puzzle, but it’s an important one. Let’s dive into how to make it work for you and set yourself up for a solid financial future.

While you’re here, feel free to check out some of my other posts for more tips and insights to help you tackle the challenges of adulting with confidence!

Understanding Credit Scores

Credit scores in Canada, as in most other countries, range between 300 and 900. This number reflects your creditworthiness, essentially answering one critical question: Can you be trusted to borrow money and pay it back responsibly?

It’s pretty straightforward—the higher your score, the better. Credit scores are calculated based on several factors, including how consistently you pay your bills, how much of your credit limit you’re using, and how long you’ve been using credit.

A strong credit score can open doors: it helps you secure lower interest rates on loans, qualify for better credit cards, and even makes renting an apartment easier. On the other hand, a poor credit score can close those same doors, making borrowing more expensive or even impossible in some cases.

Take buying a car, for example. If your credit score is low, you may struggle to get financing, or you’ll end up with a high interest rate. But if your score is excellent, you’re not only likely to get the best interest rate, but you might even score perks like free tires or floor mats from dealerships trying to win your business.

Think of your credit score as a financial trust meter. The higher it is, the more confidence lenders have in you. Building or maintaining a good score isn’t complicated, but it does require understanding how it’s calculated and what steps you can take to keep it strong.

How To Start Building A Credit Score

Building your credit score is an essential step towards financial independence, and luckily, there are multiple ways to do it. Whether you're just starting out or looking to improve your score, here are some effective methods to build credit.

1. Get Your Own Cell Phone Plan
   One of the simplest ways to start building credit is by taking ownership of your expenses—starting with your cell phone plan. Having a plan in your name and consistently paying the monthly bill shows creditors that you’re responsible. It’s especially useful for young adults or newcomers to a country, offering a quick and effective way to begin building your credit history.
   Pro Tip: If you’re new to managing a cell phone plan, check out my post here for tips on choosing the right plan!

2. Use Credit Cards Responsibly
   Credit cards are one of the most common tools for building credit, but they come with their own set of rules:

3. The 30% Rule: Only use up to 30% of your credit limit to keep your credit utilization low. For example, if your limit is $1,000, aim to stay below $300 in spending each month.

4. Timely Payments: Always pay your balance in full before the billing cycle ends to avoid interest and maintain a good score.

5. Develop a Routine: Personally, I like to clear my credit card balance every payday to avoid letting things pile up.

6. Consider a Secured Credit Card
   If you’re starting with no credit or recovering from a poor score, a secured credit card is a great option. You provide a deposit as collateral, and the card works just like a regular one—helping you build credit while minimizing risk.

7. Pay Your Bills on Time
   It might seem basic, but timely payments on any bills (utility, internet, rent, etc.) go a long way in establishing trust with lenders. Set up autopay or reminders to ensure you never miss a due date.

8. Monitor Your Credit Report
   Keep an eye on your credit score by regularly checking your report. Services like Equifax or TransUnion offer free credit checks and can help you track your progress while spotting any errors that might hurt your score.

By utilizing these methods, you can steadily build a strong credit history that will open doors for future financial opportunities. Remember, consistency is key, and managing your credit wisely today will pay off in the long run.

Common Credit Score Mistakes to Avoid

Building and maintaining a solid credit score isn’t just about what you do—it’s also about what you don’t do. Mistakes can happen, but being aware of the common pitfalls can help you avoid unnecessary setbacks. Here are some key missteps to watch out for:

• Missing Payments: Forgetting to pay your bills on time is one of the fastest ways to damage your credit score. Even a single late payment can have a long-lasting effect. Set reminders or automate your payments to stay on top of due dates.

• Maxing Out Your Credit Cards: Credit utilization—the percentage of your available credit you’re using—is a big factor in your score. If you’re regularly close to maxing out your cards, it can make lenders uneasy. Stick to the 30% rule, and if you can, pay your balance off in full each month to avoid interest charges.

• Opening Too Many Accounts: While it might be tempting to open multiple credit cards or apply for loans, every application adds a hard inquiry to your credit report. Too many inquiries can lower your score and make you look overly reliant on credit. Only apply for new credit when it’s absolutely necessary.

• Ignoring Your Credit Report: Mistakes and fraudulent activity can happen. By regularly checking your credit report, you can catch errors or suspicious accounts early and dispute them before they affect your score. For example, my information was leaked during University through a government tuition funding program—it can happen to anyone, even when it’s not your fault. Stay vigilant!

• Closing Old Accounts: It might seem like a good idea to close old accounts you no longer use, but this can shorten your credit history, which is a factor in your score. If there’s no annual fee, consider keeping those accounts open and active with small purchases from time to time.

Avoiding these pitfalls will keep your credit score healthy and make you a more attractive borrower in the eyes of lenders. Stay proactive, and remember: maintaining good credit is a marathon, not a sprint.

Credit Myths Debunked

Myth: Checking My Credit Score Lowers It
Fact: Checking your own credit score is considered a “soft inquiry” and does not affect your score. In fact, it’s a good habit to keep track of your credit health. Websites like Credit Karma or services offered by banks make this easy.

Myth: Carrying a Balance on My Credit Card Boosts My Score
Fact: This is a common misconception. You don’t need to carry a balance to improve your score. Paying your credit card in full every month helps your score and saves you from unnecessary interest.

Myth: Closing Old Accounts Helps My Score
Fact: Closing an old credit card can hurt your score because it reduces your credit history length and available credit. Unless it comes with high fees, keeping older accounts open is often the better choice.

Myth: My Income Determines My Credit Score
Fact: While your income impacts your ability to manage debt, it doesn’t affect your credit score directly. Lenders care more about repayment habits and credit utilization. However, income does influence the size of loans or mortgages you qualify for.

Myth: I Can’t Build Credit Without a Credit Card
Fact: Credit cards are just one way to build credit. Cell phone plans, student loans, and auto loans also contribute to your credit history as long as you make timely payments!

Myth: Marrying Someone With Bad Credit Will Hurt Mine
Fact: Your credit score is unique to you. However, joint accounts or loans with a partner can impact both of you if payments are missed. A friend of mine learned this the hard way when their partner missed payments on a car lease they shared—it was a tough hole to climb out of, but they managed to fix it together.

Understanding the truth about credit can help you make better financial decisions and avoid falling for common myths. Stay informed, and you’ll be better equipped to manage your financial future.

Conclusion: The Long-Term View

Building and maintaining good credit is not a one-time effort; it’s a continuous process that pays dividends over your lifetime. By starting early and making informed choices, you can set yourself up for financial opportunities that make achieving your goals easier—whether that’s buying your dream car, getting a mortgage, or simply having peace of mind.

To recap, here are three quick tips to keep in mind:

1. Pay on time, every time. On-time payments are the cornerstone of a strong credit score.

2. Keep credit utilization low. Aim to use no more than 30% of your available credit limit.

3. Monitor your credit report. Stay vigilant for errors or signs of fraud to protect your financial health.

Remember, building credit is a marathon, not a sprint. Mistakes might happen, and that’s okay—what matters is how you recover and continue moving forward. With the right knowledge and habits, you’ll be able to navigate the complexities of credit and take control of your financial future, instead of letting your credit take control of you.