One of the most important aspects of your financial life is your credit score. As a savvy consumer, you need to know how to get your credit report and how to calculate your credit score. Once you understand where you stand, you can take steps to improve your situation.
It's vital that you take steps to improve your credit score. The difference between fair credit and good credit can mean thousands of dollars in interest saved over the course of a loan. If you can improve your credit rating so that it is considered excellent, you can get the best terms on many of your financial products and services, from mortgage loans to insurance policies.
Tips for Improving your Credit Score
If you want to improve your credit score, it's a good idea to approach your efforts systematically. Here are some tips that can help you improve your credit score:
- Pay your bills on time. Payment history is the most important aspect of your credit score. Late payments are one of the biggest hits to your credit score. If you pay late repeatedly, you are likely to see a rapid decrease in your score.
- Keep your debt balances low. Don't max out your credit cards. When you are close to your available credit limit, it sends up red flags and can lower your score. Try to keep your balances lower than 50% of your credit limit. It's even better if you can keep it to 30% of your credit limit.
- Maintain a long credit history. The further back your credit history goes, the better. When you can show that you have a long history of using credit (especially if you use it responsibly), you can boost your score. You might not want to close a paid off credit card that you no longer use if it’s your earliest source of credit. Put a charge on it on occasion to keep it active and then pay it off immediately.
- Have various types of credit. You don't want all of your credit to be in one category. Mix it up a little. Some different types of credit include credit cards, credit lines, car loans, RRSP loans, and mortgages. The variety of revolving credit and installment credit can help reinforce your credit history, and show that you can handle different credit situations.
- Don’t apply for more credit than you need. The more credit applications you have in your recent history, the more credit hungry you look, and the lower your credit score will be.
Following these steps should help you improve your credit score fast, although “fast” is usually a relative term. It usually takes at least 60 days to see any improvement, and it could take longer (90 to 120 days or more) to see substantial improvement.
You Need to Use Credit to Get a Credit Score
You're responsible with your finances. You don't use credit cards, preferring to pay with cash. A debt-free lifestyle means that you are in charge of your finances, and your money is working for you — rather than working for someone else. It seems like you should be rewarded for such behaviours when you apply for a mortgage. Unfortunately, that's not the way it works. If you are living debt-free, then you may find that your credit score isn't as good as it could be, and it could mean a higher interest rate on loans you are approved for.
The main thing about a credit score is that it is used to measure your credit worthiness. This means that there needs to be information on how you use credit. If you don't make use of credit, then there is no data for the score. If you look at the five general factors that determine your credit score, it becomes apparent why debt-free living doesn't help your score.
Since the most important factor is your payment history, you need to be making payments on something in order to have a good score. The next important factor is your credit utilization — how much of your available credit you are using. If you don't have any credit accounts at all, your credit utilization will end up being a negative item, dragging down your score.
Other factors include the length of your credit history, the types of credit that you have, as well as new credit applications. It seems unimportant to worry about your credit score, but it could affect more than just the interest rate on a loan that you might get. Landlords, insurance companies and cell phone service providers might all check your credit score, and what they find can have consequences. This is especially true if the insurance company charges you a higher premium because of your credit history (or lack thereof).
So, Do You Have to Go Into Debt for a Good Score?
It may seem backward that you have to get into debt in order to have a good credit score, but the whole system is designed so that you have to use credit. The good news is that there is no reason to live a debt-ridden lifestyle if you want good credit. You do need to use credit to build a good score, but that doesn't mean that you have to live in a debt cycle.
You can use credit cards to help build a good credit score. If you use your credit carefully, paying off your balance quickly, you can begin to build a history. Additionally, something basic like a car loan can be of use. Try to borrow as little as possible, and pay it back quickly. You will minimize the interest you pay while establishing a credit history.
For now, your credit score is a necessary evil. You can take steps to build your credit without getting into debt, but you need to concede to using a credit card (responsibly!) on occasion.
You're on Your Way to Improving Your Credit Score
Once you establish good credit habits 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.