It’s one of the more perplexing credit score myths I’ve come across: the idea that not having a credit card will improve your score.
This is false, and I find this myth particularly bizarre; it’s like saying you won a baseball game because you decided not to join the team. This makes no sense—to win the game, you have to participate. Being debt-free is great, but using credit isn’t a bad thing; abusing it is what gets you into trouble.
Lenders want to see how you use credit so they can gauge your financial trustworthiness. Having a credit card is one of the easiest ways to establish a credit history and prove that you’re responsible enough to take on bigger debts in the future, such as a mortgage. A high credit score makes you less risky in the eyes of lenders, and means you’re more likely to be extended the lowest interest rates on mortgages, personal and car loans, as well as be approved for rental housing and the best credit cards.
That being said, I understand where credit card phobia comes from. It’s well reported that Canadians are up to our necks in household debt: for every dollar of disposable income, Canadians owed $1.67 in credit market debt in the third quarter of 2016, according to Statistics Canada’s most recent figures. Online, there’s no shortage of bloggers chronicling their cautionary tales of digging themselves out of thousands of dollars of student and credit card debt.
Sure, people have different spending personality types, but having a credit card in your wallet doesn’t automatically rack up debt. Reckless spending is a symptom of deeper issues surrounding money that need to be addressed, and simply avoiding credit cards won’t fix that. Unless you can live off the financial grid by paying cash upfront for all major purchases, you’ll probably need to access credit sometime in your adult life.
If excessive spending is a critical issue for you, keep in mind that your credit card doesn’t need to have a high limit ($500 is perfectly acceptable), and your transactions don’t need to be expensive—your monthly Netflix subscription is enough to start building a positive credit history, as long as you pay it off every month. Once you become more comfortable putting purchases on your credit card and paying them off immediately, you’ll begin to establish a healthy pattern of credit use.
It’s important to be aware that prepaid debit and credit cards will not establish a credit history or improve your credit score. Because they’re like gift cards and come preloaded with cash, they don’t say anything about your ability to borrow and repay debt. If you’re looking to rebuild credit from a past bankruptcy or establish credit as a new resident to Canada, secured credit cards work in a similar way, and your payment record will be reported to the credit bureaus.
If you’re concerned enough about incurring credit card debt to not have a credit card, I would argue that it actually makes you a good candidate for one: it means you’re conscientious and analytical, and you can absolutely harness those traits to develop a healthy relationship with credit. When used responsibly and paid off in full every month, a credit card is a useful tool in your financial life.
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