One of the most important aspects of your financial life is your credit score. Your credit score follows you forever and it will play a huge role in how insurance companies, banks and other lending institutions categorize your worthiness as a customer.
It’s vital that you take steps to improve your credit score, because any credit such as a car loan or mortgage financing may be more expensive (a higher interest rate), or its unobtainable.
What does the Credit Score actually tells you?
The credit score is an assessment of your financial health, at a specific point in time. It indicates the risk you represent for lenders, compared with other consumers. This is done by converting certain aspects of your credit repayment history to a number based on a formula called the “FICO formula”. The result of this is known as a Credit Score.
When you get your Credit Score, you will see a number between 300 and 900 at the top – this is your score. The average score is in the mid-700s at present. You will also receive an interpretation of your score, and this will be more useful to you than the number itself. It will explain why your score is at its current level.
If your scores are above 760, you’re probably already getting the best rates. If they’re anywhere below that mark, though, they could stand some improvement.
Here are the main factors that make your credit score lower:
- Too much credit. Having too many credit cards can hurt your score. If you have several consumer accounts try to consolidate those balances and close the accounts.
- Your account balances are too high: As a rule of thumb keep your credit card balances below 35% of the available limit. High balances ongoing will negatively affect your credit score.
- You have late payments, or are behind on making minimum payments
- Legal judgements for non-payment of bills, child support, etc.
- Bankruptcy or consumer proposals
- There is not enough recent revolving account information on your credit report. Using your credit cards regularly and paying them on time builds your score higher.
So you’ve had a few problems getting the bills paid lately, and you’re wondering what you can do to repair the damage to your credit. Or maybe your credit is OK, but you’d like to make it better. After all, the better your credit, the less you pay in interest and, typically, for insurance.
Here are some tips on how to improve your credit score:
- Get a credit card if you don’t have one: Don’t fall for the myth that you have to carry a balance to have good scores. Having and using a credit card or two can really build your scores. If you can’t qualify for a regular credit card, consider a secured credit card, where the issuing bank gives you a credit line equal to the deposit you make. Look for a card that reports to all three credit bureaus.
- Add an installment loan to the mix: You’ll get the fastest improvement in your scores if you show you’re responsible with both major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans). If you don’t already have an installment loan on your credit reports, consider adding a small personal loan that you can pay back over time. Again, you’ll want the loan to be reported to all three bureaus, and you’ll probably get the best deal from a community bank or credit union.
- Always pay your bills on time. Although the payment of your utility bills, such as phone, cable and electricity, is not recorded in your credit report, some cell phone companies may report late payments to the credit-reporting agencies, which could affect your score.
- Try to pay your bills in full by the due date. If you aren't able to do this, pay at least the required minimum amount shown on your monthly credit card statement.
- Try to pay your debts as quickly as possible.
- Don't go over the credit limit on your credit card. Try to keep your balance well below the limit. The higher your balance, the more impact it has on your credit score. You often can increase your scores by limiting your charges to 30% or less of a card’s limit; 10% is even better. If you regularly use more than half your limit on a card, consider using other cards to ease the load or try making a payment before the statement closing date to reduce the balance that’s reported to the bureaus. Just be sure to make a second payment between the closing date and the due date, so you don’t get reported as late.
- Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short period of time, this may have a negative effect on your score. However, your score does not change when you ask for information about your own credit report.
- Make sure you have a credit history. You may have a low score because you do not have a record of owing money and paying it back. You can build a credit history by using a credit card. The older your credit history, the better. But if you stop using your oldest cards, the issuers may decide to close the accounts or stop updating them to the credit bureaus. The accounts may still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts.
- If you’ve been a good customer, a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing, and your chances for a “goodwill adjustment” improve the better your record with the company (and the better your credit in general). But it can’t hurt to ask.
Following these steps should help you improve your credit score within months. Once you establish good credit habits, though, and follow them consistently, you will be able to improve your credit score, and then maintain this higher score. You’ll get access to better financial products and services, and even save money over time.
To find out more about credit scores and reports, you can also visit the Financial Consumer Agency of Canada website and download or request a free copy of their guide, Understanding Your Credit Report and Credit Score. This guide provides practical, straightforward information on how to obtain and understand your credit report and score, as well as how to build and maintain a good credit history.
To find out your credit score, contact Canada's two most popular credit-reporting agencies: Equifax Canada and TransUnion Canada. These agencies can provide you with an online copy of your credit score as well as a credit report - a detailed summary of your credit history, employment history and personal financial information. (You can request your credit report by mail for free but your score is not included. If you request your credit report online a fee is charged and your credit score is included.)
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