Applying for a credit card or bank loan in Canada can be frustrating, especially when you're met with a high-interest rate or even a denial due to a low credit score. Credit score improvement can boost your chances and help you secure better loan rates and credit card agreements, but the strategies to do so can be challenging to put into practice.
Improving your credit score requires personal changes that can be challenging, but they are important for enhancing your financial well-being and increasing your access to loans when you need them the most. For example, you may need:
- Home or auto repairs
- Unexpected medical expenses
- Unplanned travel expenses
- Mortgage refinancing
- Costly automobile replacement
- Life emergencies
Ultimately, understanding how to manage your money and prioritize your needs can play an important role in shaping your credit score and financial outlook.
Understand How Your Credit Score is Calculated
Your credit score may seem like a mysterious or even random number. Actually, it reflects how well you are managing your money and debt. It is influenced by factors that are quite simple. As such, it is crucial for obtaining better loan rates, mortgages, and credit cards in Canada.
Understanding how lenders calculate your score gives you insight into what they see when they check your credit report. Think of your credit score as a recipe with various ingredients, including:
- Payment history
- Credit utilization
- Credit history
- Public records
- Credit inquiries
Your payment history is the most important factor—it influences about 35% of your credit score. How you manage payments for credit cards, car loans, student loans, mortgages, and other bills impacts your payment history. Late or missed payments can lower your score, so it’s critical to make at least your minimum payments on time.
The amount of your available credit that you've used—"credit utilization"—also impacts your score. Ideally, keep this under 30%. For example, if your combined available credit on your credit cards and other lines of credit is $10,000, aim to owe less than $3,000 across them all at any given time.
Credit history affects your score as well. Your credit history is the amount of time between your oldest open account and the present. So, even if you no longer use your oldest credit card, keep the account open to maintain your credit history.
Public records and inquiries make up about 10% of your credit score. In these cases, inquiries are the most common factor. Inquiries happen when a lender checks your credit score, usually when you apply for credit with them. These checks are necessary, but they also can lower your score.
Other public records that may impact your score may include:
- Bankruptcy
- Collections activity on delinquent accounts
- Negative records
- Other new credit applications
Good financial habits can boost your score, while poor habits can bring it down. Credit scores range from 300 to 900, and a good score starts at 660.
Use These Techniques for Credit Score Improvement
Credit score improvement may be challenging, but it's more achievable than you might think. To help you out, we've put together a list of five simple ways to boost your credit score starting today.
1. Pay Your Bills On Time
Paying bills on time is widely recognized as an important factor in maintaining a positive credit score. This especially applies to bills associated with credit card and loan debts, which directly impact your credit.
Regular bills, like utility and phone bills, are also important for building credit. While most utility and phone companies don’t report regular payments to credit bureaus, if an account goes to collections, it can hurt your credit score. Late payments can also lead to fees, affecting your ability to pay other bills.
A simple way to avoid these issues is to set up automatic payments that both meet your bill due dates and align with a sufficient balance in the bank account you will use to make payments. If you’re not comfortable with automatic withdrawals, consider using a digital calendar or mobile device to set up reminders, so you can make sure to pay each bill on time yourself.
2. Avoid Using Too Much Credit
Credit scores are partly determined by how much debt you have compared to your available credit. For example, if you have only two credits cards, each with a credit limit of $10,000, and you have $2,000 in debt on each of them, you are utilizing 20% of your available credit ($4,000 / $20,000).
Consider keeping your credit usage at a level that reflects responsible borrowing, often recommended to be below 30% of your available credit. Lenders pay close attention to how much credit you use each month. If you’re using too much credit or often applying for new credit, it may be a good idea to review your budget and cut back on non-essential spending.
3. Limit How Often You Apply for New Credit
Applying for credit cards, loans, or lines of credit can affect your credit score. When you apply, the lender checks your credit report, which counts as an "inquiry" to assess your application. Each inquiry can have a small impact on your credit score, which some lenders may interpret as frequent credit-seeking behavior.
Even so, banks and financial firms are eager to issue new credit cards to consumers. As a result, many new credit cards come with appealing perks. A credit card from a retailer may offer instant approval, zero interest on purchases for a limited time, or discounts at that store. While these offers can be beneficial, they may also have hidden costs, such as high interest rates for purchases made at other retailers—costs that can quickly put you in financial trouble.
4. Use Different Types of Credit Wisely
Having a mix of different types of credit can strengthen your credit profile. But you should only take on credit that you can manage responsibly. When choosing from credit cards, auto loans, personal loans, and mortgages, make sure the payments you must make all fit your budget.
Diversifying credit types, such as responsibly managing loans or credit cards, can reflect positively on your credit profile over time. Keeping your credit healthy shows future lenders that you handle your money well; it builds your credit history and boosts your credit score, helping you get better terms on loans and credit cards in the future.
5. Negotiate Better Loan Rates
A good credit score may help you qualify for more favorable terms on financial products, such as loans or credit cards. Exploring available options and understanding your credit profile can assist in making informed decisions.
Build a Strong Financial Future
Credit score improvement involves more than just increasing the number; it's about managing your money and credit wisely and making smart choices for your future. Small, consistent efforts to manage your finances effectively may contribute to long-term benefits for your credit profile and overall financial health.