How to improve your credit score is one of the most common questions Canadians ask when it comes to their personal finances. Unlike your budget and spending, you have no real control over your credit score. Yes, there are various things that you can do that will increase or decrease your credit score, but since your credit score is determined by the credit reporting bureaus, you may not see immediate results.
As long as you maintain good credit habits, your credit score will usually be in good standing. That said, it’s perfectly normal for your credit score to go down at times based on your regular credit use. If you want to know how to improve your credit score, you need to understand how credit scores work.
What is a credit score?
Your credit score is a number between 300 and 900. The higher your number, the more creditworthy you are. This is important because any lender will look at your credit score and your other personal information to determine if they should lend you money.
If you ever need any kind of loan in the future such as a mortgage, car financing or a line of credit, you’re going to need a good credit score. Even applying for some credit cards require a good credit score. Keep in mind that having a good to excellent credit score can work to your benefit as lenders may offer you lower interest rates or better products.
It’s worth noting that the term FICO score is sometimes used in Canada when referring to credit scores. Your FICO score did start from the U.S. which is why you may find resources that seem to appeal to Americans if you’re searching the term. Some banks also use the term Beacon score which is the same as credit score as far as consumers are concerned.
How to get your free credit score
Before you can take the steps to improve your credit score, you need to know what your credit score is first. Fortunately, you can get your credit score for free with Borrowell. Checking your free credit score will not affect your credit score so you can check as often as you like. That said, checking every day is not something healthy to do.
Getting your free credit score is also safe as it’ll come directly from TransUnion or Equifax. You’ll be asked a series of questions to verify your identity before your credit score is provided.
It’s important to understand that your free credit score is different from your free credit report. Your credit score is simply a number to determine your creditworthiness. As for your credit report, it’s a detailed look at what types of credit you currently have open or have applied for in the last seven years.
Who are the credit bureaus?
In Canada, there are two credit bureaus: TransUnion or Equifax. Since they’re two different companies, you’ll have two different credit scores. To make things even more annoying, not all forms of credit report to both bureaus. That means a credit card you have may report to TransUnion but not Equifax.
It’s a good habit to get your free credit score with each of them at least once a year. You’ll also want to order your free credit report from each every year too so you can check for any errors or suspicious activity.
If you do see any errors on your report, you need to investigate it right away. Sometimes it can be a simple mistake, but it can also be a sign of fraud. Opening a dispute and getting things straightened out can take time which is why you want to catch these things early so there’s no additional damage to your credit score.
What is a good credit score?
As noted above, your credit score is a number that falls between 300-900. There are five distinct ranges that pretty much sum up how your credit profile is viewed by many lenders. Unless your credit score is considered excellent, you should always be striving to improve your credit score.
Here’s what you need to know about where your credit score falls.
760+ | Excellent – Although the highest credit score is 900, no one has a perfect score. As long as your credit score is 760+, your credit score is excellent so you’ll get access to the best products, interest rates and terms. To be clear, it doesn’t matter if your number is 761 or 899, it’s viewed as the same to lenders. Getting your number this high means you’ve been using a variety of credit products responsibly for some time so good on you.
725 to 759 | Very good – Falling in the very good range may disappoint some people since it’s not excellent, but you’ll likely still have no problem qualifying for the best rates. So why isn’t your credit score higher? It’s possible you have a high credit utilization ratio or that you’ve applied for a few credit cards recently that may have dropped your score down.
660 to 724 | Good – The good range is where things become a little bit complicated. It’s not like lenders will give you an instant no, but they may look at your additional information such as your income and debt-to-income ratio a little closer. It’s also possible that you won’t get the best rates. You probably had a few minor credit issues in the past which is why you only have a good standing so making sure you have good credit habits moving forward is a good idea.
560 to 659 | Fair – The term fair might be a bit generous as this is where people start to encounter problems when trying to get a loan or credit card. Some credit card providers won’t even consider you for some of their products if your credit score is far. Getting a loan is still possible, but you’ll unlikely get the best rates and you might even need a co-signer.
300 to 559 | Poor – Unfortunately, if you have a poor credit score, the odds of you getting approved for any type of credit or loan is low. Keep in mind a low credit score could also scare off potential landlords and even employers. Your goal right now should be to improve your credit.
How is a credit score calculated?
Okay, now that we know what is a good credit score, you’re probably wondering how is a credit score calculated. It’s based on just five different factors, each having its own weighting. Once you know the following factors, you can easily take the steps to improve your credit score.
Payment history | 35% – When it comes to figuring out how is a credit score calculated, your payment history counts for a whopping 35%. This should be obvious as lenders want to make sure that you’ve actually been making payments on time. As long as you’re paying your bills on time (preferably in full), you’ll be in good standing. Even if you miss one payment, it usually won’t be a big deal as lenders know sometimes you forget. When you miss two payments in a row, that’s where you’ll start running into trouble.
Amount owed | 30% – As you can imagine, the credit bureaus would be concerned about the amount of credit you’re using relative to what you have available to you. This is known as your credit utilization ratio. The lower the number, the better your credit score.
Length of credit history | 15% – Although it counts for just 15% of your credit score calculation, the length of your credit history still matters. In an ideal world, you would have started building credit early by signing up for a cell phone plan or getting a no fee credit card in your own name. Simply getting those at a young age will help you. For those who have relied on family cellphone plans or a joint credit card, they may find out later in life that they have no credit history which would mean their credit score is low even though they may been using credit responsibly.
Types of credit | 10% – Having different types of credit available shows the credit bureaus that you can manage your money well. For many people, the types of credit they use may just be a credit card and monthly payments such as your cell phone bill. Once you introduce other forms of credit such as a student loan, mortgage, line of credit, etc., then credit bureaus have a clear picture of how you handle your money. That said, since the types of credit only count for 10% of your credit score, there’s no need to apply for different types of credit just to increase your score.
New credit | 10% – Although new credit applications only count towards 10% of your credit score calculation, it’s the one thing you have control over. Whenever you request more credit, a “hard inquiry” is performed which results in your credit score 10 points. This normally isn’t a big deal but if you apply for a few credit cards in a short period of time, you could see a decent drop in your credit score.
Remember, there are two credit reporting bureaus in Canada. It’s not unusual for your credit score to be different with each bureau since they have different reporting criteria. That said, if there is a major difference between the two, you should investigate a little just to ensure everything looks right.
How to improve your credit score
By now, you should know what a good credit score is and how is a credit score calculated. With these two things in mind, it’s actually pretty easy to improve your credit score. It may not happen right away, but your credit score will definitely go up if you do the following.
Get a secured credit card – If your credit score is in the poor range, the best way to improve it is by using a secured credit card. These credit cards require you to put down a security deposit which can’t be used to pay off your balance. You’ll be given a low limit, but as you make your payments, your credit score will go up. Once you get into fair standing, you can try applying for a travel or cash back credit card to earn more rewards.
Pay your bills on time – This should be obvious, but pay your bills on time. I’m talking about all your bills, not just your credit card bills. For example, let’s say you have a bill from a store that you’ve been neglecting, that store could potentially send what you owe to collections which would greatly affect your credit score. Always pay your bills on time and try to pay off the entire bill. At the very least, always pay at least the minimum amount.
Lower your credit utilization ratio – Even if you pay your bills on time every month, a high credit utilization ratio can negatively affect your credit score. For example, let’s say you typically carry a balance of $1,000 and you have a credit limit of $2,000. Your credit utilization ratio would be 50% which is high.
To lower that, you could use your credit card less or get a credit limit increase. Alternatively, you could get a new credit card. Let’s say you do go the new card route and you get one with a limit of $2,000, your total credit available would now be $4,000 and your credit utilization ratio would drop down to 25% which is much better.
Don’t cancel your oldest credit card – Since the length of your credit history affects your credit score, you’ll want to keep your oldest credit card active. You don’t even need to make any purchases with it, you just need to keep the account open. If you’re not using the card, and it currently has an annual fee, ask your provider to product switch you to a no fee card as it won’t affect your credit history and you won’t have to pay any yearly fees.
Monitor your credit – Even if you’re doing everything right and you have an excellent credit score, you still need to monitor your credit for any errors or fraud. The last thing you want is to be a victim of identity theft as it can ruin your credit score. Checking your credit card statements every month and getting your credit report every year will help you catch any potential fraud before it becomes a bigger problem.
Avoid too many credit applications – There’s nothing wrong with applying for new credit, but since it results in your credit score dropping 10 points with every application, you’ll want to limit how often you do it. If you plan on getting a mortgage soon, make sure you’re not applying for too many credit cards in advance as potential lenders will wonder why you’ve been requesting access to so much credit.
How to rebuild your credit history
For those who have gone through bankruptcy or have had some debt go to a collection agency, rebuilding your credit will be a long process. First off, understand that any account in collections will remain on your credit report for seven years before it drops off. That means a mistake you made almost a decade ago could still haunt you.
That may not give you a lot of hope, but there are a few things you can do to put you back on the right track.
Get professional help – If your debt is getting out of control and you’re stressed out all the time, it’s probably worth speaking with a licensed insolvency trustee who can see if it makes sense to declare bankruptcy or to get a consumer proposal.
Contact the collection agencies – If you’re in a position to make payments, contact the collection agency that currently owns your debt. Negotiate a settlement that works for you and start making payments. Make sure you get proof of your payments and ensure that your debt is shown as paid in full to the credit bureaus when you make your last payment.
Start using credit again – Some people who are in debt may have sworn off credit cards since abusing them may have ruined their credit score in the first place. While understandable, using one of the best credit cards for bad credit may be the only way to start rebuilding your credit history. You could also consider using a prepaid credit card first to prepare you before you move onto a secured credit card since you can only spend money you have loaded onto the card.
Don’t rush things – Rebuilding your credit history takes time so don’t expect to see results overnight. If you ever come across an advertisement that says they can fix your credit score right away for a low price, avoid it as it’s for sure a scam.
Check your credit score – Normally I wouldn’t advise checking your credit score on a regular basis, but if you’re starting the process of rebuilding your credit, checking once a month doesn’t hurt as you can see your progress. Remember, you can check your credit score for free with Borrowell.
Learning what is a credit score and how to improve your credit score are important things on your path to financial independence. As I’m sure you know by now, credit scores don’t need to be something scary as you do have some control over how you rank.