Building a Good Credit Score

I write about debt a lot. It’s not that I particularly enjoy writing about debt, it’s unfortunately just a subject that many people can relate to– Canadians have record debt levels after all. We get so focused on debt, that sometimes we forget about other things, such as having a good credit score.

Credit is probably the reason we got into debt in the first place, so it’s understandable if we’ve been avoiding credit while paying down debts. It’s also not just those in debt who’re avoiding credit, many of us have switched to cash only to help keep our budgets balanced. It doesn’t matter what situation we’re in, it’s important to try and maintain a good credit score.

The main reason we want to have a good credit score is because the majority of us are eventually going to need a major loan. There’s no chance we’ll be approved for a mortgage or line of credit unless we have a good credit score.

Understanding our credit score

We’re assigned a credit score based on our credit history and our standing really falls into 5 different categories.

The best way to build a good credit score is to use our credit cards on a regular basis and pay our bills on time. Technically speaking, we don’t need to pay off your full balance every month to get a good credit score, but obviously we want to avoid the insane interest charges.

Using our cards regularly doesn’t even mean every day or 3 times a week. Credit bureaus just want to see that we’re using credit responsibly, so even if we’re  making just one purchase a month and paying it off immediately, that looks good in their eyes. Some of us falsely assume that just having a credit card is enough, that’s simply not the case. We do need to make regular transactions so the credit bureaus see the activity on our accounts.

The majority of Canadians have a credit score over 600, so there’s no real need to obsess over what our exact credit score number is. What does matter the most is not missing payments. Our creditors might forgive one missed payment, assuming it was an honest mistake, but miss 2 payments and our credit score will take a major hit.

Using credit effectively

Building a good credit is based on a few different factors and one of those factors is our credit utilization. For example, let’s take 2 people with credit cards that both have a $5,000 limit. Person A carries a balance of $4,500 until his/her statement arrives and immediately pays off the full balance. Person B, on the other hand has a balance of just $500 but only makes the minimum payment.

In this scenario Person A has a utilization of 90% ($4,500/$5,000), while Person B has a utilization of 10% ($500/$5,000). As weird as it sounds, Person B will probably have a higher credit score than Person A because they have a lower credit utilization ratio.  Now this doesn’t mean you should carry a balance, just understand credit bureaus have to gauge risk and generally speaking people with a high utilization ratio are more likely to default, hence the lower score. If we’re similar to Person A, it may be worth our while to increase our credit limit or to apply for another card.

Another easy way to increase our credit score is to have more than one card. Having one card used to be enough, but now credit bureaus want to see how we manage the credit available to us. Even though I stated that credit bureaus like to see activity, we might not have to use all our cards. If one of our cards is older and we’ve since applied for a newer and better card, then it’s okay to simply “retire” that old card. Don’t cancel that old card, simply keep it in a box and use your new card, the credit bureaus like to see a long history so it’s worth keeping some old cards “active.”

Final word

Despite what we may have heard, carrying a balance is not necessary to get a good credit score. Credit bureaus don’t care if we make full payments or minimum payments. As long as we make our payments in full and on time, we’ll be fine– plus we won’t have to pay any interest charges.