Your credit score may seem like a simple indicator to you, but it can have a huge impact on your finances. Most people don’t give enough importance to their credit scores. Yet having a good credit rating is essential to apply for a car, student or mortgage loan, as well as for renting an apartment or getting a job that involves managing money. If you aren’t careful with your credit rating, you may have to pay a higher interest rate on a loan or credit card account.
A credit score provides information to your future creditors about your creditworthiness and your ability to manage your money well. If your credit rating is low, you may have difficulty getting a loan and lose a lot of money. Fortunately, you can improve your credit rating by changing your habits and adopting financial optimization strategies. Follow the advice in our article on how to improve your credit rating to regain the trust of your lenders.
What is a credit score?
A credit score is an assessment of an individual or an entity’s credit history and its ability to repay debts. It is a 3-digit number between 300 and 900 that represents the reliability of a moral or physical person to meet its financial obligations. It is calculated through a thorough and detailed analysis of the credit file.
A credit score is usually calculated by an agency specializing in credit scoring, which closely monitors the behavior of individuals regarding the repayment of debts (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
- Use of credit (number and type of credit accounts)
- Number of creditors
- Debts
- New credit requests
- If you have filed for bankruptcy and when
Banks as well as lending financial institutions use credit scores to determine an individual’s risk if they decide to extend credit or loan. It helps them determine who can get credit and at what rate.
Analysis of your credit file
Before you consider improving your credit rating, you should first know what your credit score is to get a better idea of your credit level. To do this, you can apply to Equifax Canada or TransUnion Canada. You will need two pieces of identification such as your passport and driver’s license.
Your credit report contains a lot of information. In addition to your personal information, the credit report contains information on your various loans and bank accounts, bankruptcies, bad checks or unpaid debts. However, your file does not show your credit rating. You have to pay about $ 25 to get it. Checking your credit report is an opportunity to identify bad habits that could potentially affect your rating and prevent you from getting 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 and support your request with relevant documents such as your bank statement. You can also contact your creditors directly to obtain more recent information and correct the error.
Tips to improve your credit score
Rest assured, your credit score is not permanent. It changes over time depending on your actions. Here are some tips to improve your credit rating:
1. Monitor your payment history
Your payment history is one of the most important factors for your credit rating 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 deadline is one of the best ways to improve your credit score. If you are one of the people who just pays the minimum credit each month, you need to start doing things differently in order to boost your credit score.
When it comes to credit cards, if you can’t pay the full amount, make sure you pay the minimum amount every month. If you want to avoid this situation, spend what you can repay in the short term.
- Make your payments on time
Another way to improve your credit rating is to pay your bills, cards or lines of credit on time – that is, to pay before the deadline, not on the due day. This applies to small and large amounts since any late payments impact your credit rating.
If you have the habit of forgetting to make your payments on time, set your payments automatically on a certain date. Automatic payments can be applied on personal loans, lines of credit, mortgages, student loans, car loans, etc.
- Eliminate too small or too many balances
If you want to increase your credit rating and have multiple credit cards, try to keep only one or two, preferably the ones you’ve owned the longest and from major creditors. You can also choose which ones have the lowest interest rate or offer more profits. Pay off the balance of other cards that were not chosen without canceling them, starting with the credit cards with the highest rate.
2. Use credit wisely
This is an essential step to follow to maintain or improve your credit rating. It’s about using your credit smarter and above all not using it all. Creditors have a pejorative view of consumers who overuse or abuse their credit. If possible, you don’t exceed your credit limit and don’t use more than 35% of it. You need to combine all of your credits (credit cards, lines, loans) and only consume 35% of your total credit limit.
For example, if you have a credit card with a limit of $ 1,000, a line of credit of $ 6,000, and a loan with a limit of $ 10,000, try to use only 35% or 5,950 $. If you exceed this limit, lenders deem 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 cross 35% of your credit limit, increase your credit limit so that you can continue to use your card without affecting your credit score. This advice only applies to people who are able to control their spending.
4. Limit your loan requests
Asking for credit once in a while is completely normal. However, making repeated requests for loans suggests that you are in dire need of credit or are trying to live beyond your means, both of which make you at risk and are very bad for your credit rating. Make sure you apply for credit only when you really need it and don’t accept a credit card for promotions or freebies. If you want to apply for credit, do so with different lenders and over a two-week period so that these applications are combined and listed as one credit application on your file.
For example, if you apply for a mortgage loan from three different financial institutions during a two-week period, these applications will be considered one. On the other hand, if you make the requests three months apart, three requests will be counted, which is less advantageous for your score. It is also recommended that you do not make more than three loan requests per year.
5. Vary your types of credit
Your credit rating can be influenced by the types of loans you have. Indeed, if you have only one type of credit (for example a credit card), your rating will be considered lower. It is therefore preferable to vary your types of loans (credit card, mortgage loan, consumer loan, etc.). However, you need to be able to manage these different types of loans and pay them back on time. Focus on lines of credit. This type of permanent credit is easier to manage and generally better for your credit rating.
6. Keep your old accounts open
If you don’t have to change banks, credit cards … don’t. Indeed, it is preferable to keep as long as possible the same accounts or cards that you have. This can show stability and accountability to your lenders. In addition, if your long history shows that you are creditworthy and that you repay your loans diligently, that is a positive point in your favor.
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