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What is a Credit Score?

A credit score is an evaluation of an individual's or entity's credit history and their ability to repay debts. It is a 3-digit number between 300 and 900 that represents the reliability of an individual or legal entity to meet their financial obligations. It is calculated through a thorough and detailed analysis of the credit file.

A credit score is typically calculated by a specialized credit rating agency, which closely monitors individuals' debt repayment behavior (bank loans, credit cards, lines of credit, etc.). In Canada, Equifax and TransUnion are the two credit reporting agencies.

Some of the factors that make up a credit score are:

• Payment history
• The age of your accounts
• Credit utilization (number and type of credit accounts)
• Number of creditors
• Debts
• New credit applications
• If you have filed for bankruptcy and how long ago

Banks and lending financial institutions use credit scores to assess the risk an individual poses when deciding whether to grant them credit or a loan. It helps them determine who can obtain credit and at what interest rate.

Credit file analysis

Before considering how to improve your credit score, you must first know your current credit score to gain a better understanding of your creditworthiness. To do this, you can submit a request to Equifax Canada or TransUnion Canada. You will need two pieces of identification, such as your passport and driver's license.

Your credit file contains a significant amount of information. In addition to your personal details, the credit report includes information on your various loans and bank accounts, any bankruptcies, bounced checks, or unpaid debts. However, your file does not directly show your credit score. You typically need to pay around $25 to obtain it. Reviewing your credit file offers an opportunity to identify poor habits that could potentially affect your score and prevent you from securing a loan.

If you find an error in your file and wish to correct it, contact Equifax Canada or TransUnion Canada as soon as possible, supporting your request with relevant documentation such as your bank statement. You can also communicate directly with your creditors to obtain more recent information and correct the error.

Tips for improving your credit score

Rest assured, your credit score is not permanent. It evolves over time based on your actions. Here are some tips to adopt to improve your credit score:

Monitor your payment history

Your payment history is one of the most crucial factors for your credit score, as it accounts for 35% of your score. To improve your payment history:

• Make your payments in full

Paying your bills in full before the due date is one of the best habits to adopt to improve your credit score. If you are among those who only pay the minimum on your credit accounts each month, you must start doing things differently to boost your credit score.

Regarding credit cards, if you cannot pay the full amount, ensure you pay the minimum amount every month. To avoid this situation, only spend what you can realistically repay in the short term.

• Make your payments on time

Another way to improve your credit score is to pay your bills, credit cards, or lines of credit within the required deadlines, meaning you should pay before the due date, not just on the due date. This applies to both small and large amounts, as any payment delay impacts your credit score.

If you tend to forget to make your payments on time, set up automatic payments for a specific date. Automatic payments can be applied to your personal loans, line of credit, mortgage, student loan, car loan, etc.

• Eliminate small or numerous balances

If you wish to increase your credit score and you have multiple credit cards, try to keep only one or two, preferably those you have held the longest and that are from major creditors. You can also make your choice based on which cards offer the lowest interest rate or provide more benefits. Pay off the balances of the other cards you choose not to keep, without canceling them, starting with the credit cards that have the highest interest rate.

2. Use credit prudently

This is a crucial step to maintain or improve your credit score. It involves using your credit more wisely and, most importantly, not using it to its full extent. Creditors view consumers who overuse or abuse their credit negatively. Whenever possible, you should not exceed your credit limit and not use more than 35% of it. You will need to combine all your credit facilities (credit cards, lines of credit, loans) and only use 35% of your total credit limit.

For example, if you have a credit card with a $1,000 limit, a $6,000 line of credit, and a loan with a $10,000 limit, try to use only 35%, which would be $5,950. If you exceed this limit, lenders will consider you a higher risk, even if you pay your full balance before the due date.

3. Increase Your Credit Limit

If you are about to exceed 35% of your credit limit, consider increasing it to continue using your card without negatively impacting your credit score. This advice applies only to individuals who are able to control their spending.

4. Limit Your Credit Applications

Applying for credit occasionally is completely normal. However, making repeated loan applications suggests an urgent need for credit or an attempt to live beyond your means. Both scenarios classify you as a high-risk individual and are very detrimental to your credit score.

Ensure you only apply for credit when it is genuinely necessary, and do not accept credit cards merely for promotions or gifts. If you intend to submit a credit application, do so with various lenders within a two-week period. This allows these inquiries to be combined and recorded as a single credit application on your file.

For instance, if you apply for a mortgage loan with three different financial institutions within a two-week period, these applications will be treated as a single inquiry. However, if you submit these applications three months apart, three separate inquiries will be recorded, which is less beneficial for your score. It is also advisable not to make more than three loan applications per year.

5. Diversify Your Credit Types

Your credit score can be influenced by the types of credit you hold. If you only have one type of credit (for example, a credit card), your score may be considered weaker. Therefore, it is preferable to diversify your types of credit (credit card, mortgage loan, consumer loan, etc.). However, you must be able to manage these different types of loans and repay them on time. Prioritize lines of credit, as this type of revolving credit is generally easier to manage and more advantageous for your credit score.

6. H3: Keep Your Old Accounts Open

If you are not required to change banks or credit cards, avoid doing so. It is indeed preferable to keep the same accounts or cards for as long as possible. This demonstrates stability and responsibility to your lenders. Furthermore, if your long credit history shows that you are creditworthy and consistently repay your loans, this is a significant advantage for you.

Do you need assistance to alleviate your financial problems?

Unsure how to get rid of your debts? Groupe Serpone is a firm of licensed bankruptcy and insolvency trustees. Our team specializes in the process of personal bankruptcy and commercial bankruptcy, debt consolidation, or consumer proposals. We offer a comprehensive, tailored service that begins with a financial analysis, followed by negotiations with your creditors to eliminate your debts.

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