How to use your credit card to improve your credit score

Your credit card isn’t just a tool to boost your purchasing power. When appropriately managed, it’s also a way to help demonstrate your creditworthiness. Responsible credit card management can help you improve your credit score, which could be used for credit approvals, renting and even some job opportunities. 

This guide will walk you through everything you need to know about using your credit card to build a strong credit score while avoiding some common issues. 

What is a credit score, and why does it matter?

Your credit score is a three-digit number between 300 and 900, indicating your creditworthiness to lenders. The higher your score, the better. 

There are two main credit reporting agencies in Canada: Equifax and TransUnion. This means you probably have two slightly different credit scores. While each company uses its own formula to determine your credit score, the calculation usually includes the following:

• Payment history: Whether you pay your bills on time and in full.
• Credit utilization ratio: The amount of credit you use compared to your total available credit.
• Length of credit history: How long you've been using credit.
• Credit mix: The different types of credit you use (credit cards, auto loans, mortgage, etc.).
• Recent inquiries: The number of times you've applied for credit in the last 12 to 24 months.

Generally speaking, a credit score of at least 725 places you in a very good range. However, your credit score is only one factor lenders consider when assessing your creditworthiness. They also consider your income, outstanding debt and other factors during approval.

Check out this credit score quiz to understand more about how your credit score works.

What is the difference between a credit score and a credit history?

Your credit score is calculated based on your historical data, whereas your credit history is a much more detailed look at the records that determine your credit score. If you—or a lender—were to look at your credit history, you would find every credit account you ever opened, payment dates, balances, credit limits and any missed payments or defaults.

Note that negative information on your credit history, such as late payments or bankruptcy, will usually be removed from your credit report six or seven years after the last activity or discharge.

How to use a credit card to help build your credit score 

Improving and building a strong credit score through credit card use requires time, discipline and smart financial habits. From making timely payments to building a lengthy credit history, these are the essential steps:

1. Apply for a credit card: Choose a credit card that aligns with your spending habits and goals. For example, a cash back card is ideal for those who want easy-to-understand rewards.
2. Use the card regularly for everyday purchases: Use your credit card for purchases like gas and groceries, and then make your payments on time (at least the minimum) to demonstrate responsible credit activity. If you're trying to avoid using too much credit as a part of a bigger strategy to avoid debt, you could also make just a few small purchases on your card every month that you know you'll be able to pay off.
3. Always pay on time: Your payment history is key to determining your credit score, so pay your bills promptly and ensure they are received by your lender on time. It's best to pay off the full balance each month to avoid interest charges, but making at least the minimum payment on time is important for your credit score.
4. Keep your credit utilization ratio low: Your credit utilization ratio is the amount of credit you use relative to your total credit limit. A good rule of thumb is to keep this ratio under 30%, since it shows the credit reporting agencies that you’re not maxing out your credit.
5. Avoid too many applications: Each time you apply for new credit, whether it be a card or a loan for a new car, your credit score decreases by a small amount due to the hard inquiry (when the lender does a formal check on your credit) on your report. Since your credit score recovers over time, try to space out your applications by at least six months.
6. Let your credit history grow: Building your credit score takes time, so don’t expect instant results. Your good credit habits will eventually be reflected in your credit profile, but it may take several months.

Best types of credit cards to build credit in Canada

Whether you’re new to Canada or trying to build your credit for the first time, several cards could suit your situation and goals.

No-annual-fee credit cards

As the name suggests, no-annual-fee credit cards don't charge an annual fee for holding the card. With these cards, you can concentrate on developing good payment habits without worrying about extra costs. Plus, many cards offer perks such as cash back, travel points, or retail rewards — but be sure to double check that the card you are considering has no annual fees.

Tangerine’s World Mastercard is an example of a no-annual-fee Credit Card that also comes with valuable rewards. You receive unlimited 2% cash back in two spending categories of your choice, and you get a third 2% category if you set your rewards to deposit into your Tangerine Savings Account. (All other eligible purchases earn you 0.5% cash back.) The cash you get back is paid automatically each month. The Card also includes mobile device insurance, rental car insurance, extended warranty protection, and more. Terms and conditions apply.

Secured credit cards

People looking to rebuild their credit or who don’t qualify for a traditional credit card may want to consider a secured credit card. These cards require a security deposit that typically becomes your credit limit. Although you can’t use the deposited funds to pay your balance, you'll receive them back if you close your card in good standing.

A security deposit protects lenders in case you cannot pay your bills. As you make regular payments, your lender will report positive activity, boosting your credit score over time. Eventually, you might qualify for a traditional credit card, making a secured card no longer necessary. 

Low-interest credit cards

Paying off your credit card balance in full each month is generally preferred, but this may not be feasible for everyone. If you're in this position, getting a low-interest credit card is a good idea to keep your overall interest costs down.

Traditional credit cards typically charge annual interest rates between 19.99% and 22.99% on purchases (and may have a higher interest rate on cash advances and balance transfers). With a low-interest card, the rates typically range from 8.99% to 16.99%. Because the interest rate is lower, you’ll pay less in interest if you carry a balance. 

How to maintain a strong credit score over time

Maintaining a strong credit score requires smart habits and attention to your spending. You may be able to build and maintain a strong credit score by applying these tips:

• Pay more than the minimum balance: Even if your monthly budget is tight, always try to pay more than the minimum balance.
• Use budgeting tools: A spreadsheet or app to track your spending can help you identify areas where you’re overspending. By making spending adjustments, you could use funds to pay off debt, which could help improve your credit score.
• Set payment reminders or auto-payments: Setting up reminders and auto-payments to pay your credit card account helps ensure you don't miss payments. 
• Watch your utilization ratio: Credit bureaus prefer you to use no more than 30% of your total available credit. Keeping it below that threshold can positively impact your credit score.
• Review your credit score regularly: Checking your credit score periodically (Tangerine Clients can do this easily on the app or website) and your full credit report annually helps you spot any errors quickly. Reporting any inaccuracies immediately ensures your credit profile remains accurate.
• Maintain old credit accounts: Since the length of your credit history influences your credit score, keeping older no annual fee accounts open can be beneficial.

For more tips on rebuilding or improving your credit score, check out these five tips to get your credit score back up.

Build credit with intention and the right tools

Improving your credit score with a credit card begins with selecting a card that suits your financial situation and spending habits. You can improve your credit score over time by making at least the minimum payment on your bills on time, maintaining a low credit utilization ratio, and practicing discipline.

Once you’ve built a solid credit history, consistently paying off your bills on time and regularly reviewing your credit profile are important. Tangerine Bank's no annual fee credit cards and tools can help you start or improve your credit journey.