How to Improve Your Credit Score
Have you recently checked your credit score and are not happy with the result? Do you want to improve your credit but are just not sure how? Your credit report and score can have a significant impact on your ability to borrow money as well as the interest rate you may receive. Find out everything you need to know about your credit and how to improve your credit score.
What’s the Difference Between a Credit Score and a Credit Report?
Although your credit report and credit score are related, there are slight differences between them.
Your credit report is a record of your lending and borrowing history.
It includes personal or demographic information, credit account information, inquiry information, bankruptcies, and collections. There is no number or score with your credit report, just your lending history.
On the other hand, your credit score is a number that’s representative of the information in your credit report. It predicts the likelihood that you will repay your debts and how much risk you are to the lender.
How Are Credit Scores Calculated?
Several factors go into calculating your credit score. And to further add to the confusion, each lending agency and credit bureau (Equifax and Transunion) may calculate your score slightly differently.
Payment History – 35%
The primary influencer on your score is your payment history. This includes paying your debts on time, whether you are just making the minimum payments and if you have ever missed a payment.
Your payment history shows your reliability in paying back your loans. A lender will look for a clean payment history to minimize the risk of default on their loan.
Credit Utilization – 20%
Credit utilization is the amount of used credit you have versus the amount of available credit. For example, if you have a $10,000 limit on your credit card and currently carry a balance of $2000, then your credit utilization is 20% (2000/10000 X 100).
The lower your credit utilization is, the better. Some lenders may not lend to you if your credit utilization is too high.
A general rule of thumb is not to have a credit utilization above 30%.
That doesn’t mean that you should go out and get a bunch of credit cards and not use them. The better course of action is to keep the balances low on all of your loans and credit cards. But if you have a good handle on your credit, increasing your credit limit may improve your credit score.
History of Credit – 15%
How long you have had the credit influences your overall score. Lenders want to see a long history of credit. But that history of credit should also show regular payments without delinquencies. The longer you have had a particular type of credit, the better it will impact your score.
For this reason, it is not a good idea to cancel old credit cards. Canceling your oldest source of credit can harm your score.
Number of Inquiries – 10%
The more inquiries you have on your credit report, the lower your score may be. Inquires can come from credit applications or various lenders checking your credit. There is a difference between hard inquiries and soft inquiries, with the latter having more impact on your score.
A hard inquiry is one that may impact your credit score. Usually, these occur when a lender requests to review your credit as part of a loan application process.
A soft inquiry does not affect your credit score and happens when you request to see your credit report or when a company requests an updated credit report for an existing account you have with them.
Credit Diversity or Public Records – 10%
There is some discrepancy on what impacts the final 10% of your credit score. Some agencies say that it is credit diversity (the different types of credit you have or credit mix), and some say that it is public records (whether or not you’ve had a bankruptcy or insolvency).
Either way, it is good to have credit diversity (don’t go take out random credit to achieve this) and to avoid bankruptcies and insolvencies whenever possible.
How to Get Your Credit Score and Report in Canada?
There are 2 credit reporting agencies in Canada – Equifax and Transunion. Both have credit reports and scores, so it is a good idea to access your information from each credit bureau.
A lender is also not obligated to report your credit history to both credit bureaus. Just another reason to access both to get a clear picture of your credit.
As a Canadian, you have a right to obtain a free credit report once a year from both Equifax and Transunion. Personally, I get one from Equifax and then, 6 months later, one from Transunion.
If you want to review your credit report more than once a year, both credit bureaus have paid plans that would enable you to do this.
Reviewing your credit report is a good idea as mistakes and fraud can happen. Both can have adverse effects on your credit score.
There are a few different ways to get your free credit score in Canada. Because each agency or company that supplies your credit score may have its own method of calculating it, the general number range may be more important than the specific number.
Most of the big 5 banks will let you check your credit score for free once per month through their online portal. You can also use a third-party company such as Borrowell, Mogo, or Credit Karma to check your credit score.
And if you want the most accurate score from one of the reporting agencies, you will have to pay to see your credit score with either Equifax or Transunion.
My suggestion would be to pick one score that you regularly monitor, especially if you are trying to improve your credit score or rebuild your credit. As long as that score is trending upward, you are moving in the right direction. Don’t get too caught up in a point or two either way.
11 Ways to Improve Your Credit Score
Now that you’ve checked your credit report and reviewed your score, you’ve decided you’d like to increase your score. Here are 11 ways to improve your credit score.
Pay All Your Bills in Full on Time
This helps to show lenders that you will reliably pay your debts in the future.
Pay off Debt
The more debt you have, the higher your credit utilization and the lower your credit score.
Keep Credit Card Balances Low
Each month, you never know when Equifax calculates your credit score or your information reported to the credit agencies. It could be just after you maxed out your credit card or after you’ve paid it off in full. The higher you keep a balance on your credit card, the higher your credit utilization will be and, therefore, possibly the lower your score.
Be Mindful of Applying for New Credit
Every time you apply for new credit, it could impact your credit score. Only apply for credit when necessary, especially when you’re trying to improve your credit score.
Should I Close My Unused Credit Cards?
If you have unused credit cards, especially if you’ve had them for a long time and do not have an annual fee, do not close them. Closing old credit cards can adversely impact your credit history. A better idea is to keep the card open and use it periodically to show that it’s active. Just remember to always pay it off in full on time.
Be Aware of Credit Inquiries and Applications
In Canada, someone cannot pull your credit report without your knowledge. In some places, you have to sign that you approve of the credit inquiry. Be aware of how many queries or applications are happening on your credit at any one time. The more queries and applications, the more significant impact they may have on your credit score, and not in a good way.
Dispute Inaccurate Information on Your Credit Report
The information on your credit report impacts your credit score. If you find a mistake or fraud (just another reason to check your report regularly), make sure to dispute it through the reporting agency. Both Equifax and Transunion have processes to dispute claims on your credit report.
Alert Lenders When You Move
From time to time, a lender may send you a statement or bill by mail, yes, even in this age of technology. If you have moved and not informed your lender, you may not receive that bill or statement. And maybe you aren’t even aware of it, therefore, letting the bill go unpaid.
Check Your Accounts Online
It’s a good idea to monitor your lending accounts online. An even better idea is to set up automatic payments so that you never miss a future bill payment. Checking your accounts online can also alert you of fraudulent charges, especially on your credit cards.
Consider a Secured Credit Card
A secured credit card is a type of prepaid credit card. The money you have to spend on the card is yours, so it’s not like your typical credit card. But the benefit of a secured credit card is that it is reported to credit bureaus and can positively affect your credit score. Because your money preloads or backs the card, it is next to impossible to overspend.
Don’t Apply for a Bunch of New Credit All at Once
Doing so can send a message to lenders that you are desperate and need credit to make ends meet. Lenders would see this as a greater risk of delinquency, and this can negatively impact your credit.
How Specific Actions Can Affect Your Credit Score
Specific actions that you take related to your credit can either positively or negatively impact your credit score.
The following actions may cause a temporary (or long term) dip in your credit rating:
- Closing your oldest credit account
- Applying for a new credit product (loan, credit card, etc.)
- Filing for bankruptcy.
But all is not lost. The following specific action can have a positive impact on your credit rating:
- Paying off debts
A missed or late payment may cause a slight dip in your credit rating, but that depends on your overall credit history. If you have multiple credit products and have only missed one payment one time, it is unlikely that one missed payment will have a considerable impact. But if you have a history of missed payments, then one more could have a more substantial impact.
How to Rebuild Your Credit
Improving your credit score and rebuilding your credit go hand in hand. Here are a few extra things you can do to rebuild your credit.
- Pay off your debts – this is especially important before your debts start going to collections. Once they are at collections, they have a different impact on your credit. Do whatever you can do to pay all your debts off before they go to collections.
- Use a secured credit card – if you have issues with your credit, you may find it challenging to get approved for any lending type, including credit cards. Your own money backs a secured credit card, and the card can increase your credit rating.
- Become an authorized user on someone else’s credit card – if you have a loved one who is willing to put you as an authorized user on their credit card, this can help rebuild your credit. Just make sure that both of you are always ensuring the credit card bill is paid in full every month.
- Pay your loans diligently – make a habit of always paying at least the minimum payment on all of your loans. Even one missed payment can affect your credit. Once you have paid the minimum payments, use that to pay down your loans even more if you have any extra money left over.
- Dispute inaccuracies – inaccuracies or mistakes on your credit report can affect your overall credit rating. Set a reminder in your phone to review your credit report at least once annually. And if you find inaccuracies or mistakes, make sure to dispute them with the credit reporting agencies.
And remember to be patient. Rebuilding your credit takes time. But every positive step you can take now will eventually improve your credit score and lead to better borrowing interest rates in the future.