Learn Credit Score in Canada How to Improve Your Credit Score

How to Improve Your Credit Score

Credit scores are important indicators of your financial position. They will determine whether you are worthy of credit and will impact the outcome of loan applications.

A credit score in Canada is a number between 300 and 900 that will display your creditworthiness. This score, issued by credit bureaus such as Equifax and TransUnion, will give lenders an understanding of the risks involved when providing you with loans. The higher your score, the better.

What is considered a good credit score? A great score ranges between 741 and 900, while anything above 670 is generally seen as low-risk.

Why It is Important to Improve Your Credit Score

Current and potential lenders will access your credit score to evaluate the risk involved in providing loans. Your employer or landlord may also request credit reports to assess your financial stability.

Increasing your credit score will have the following benefits.

Reduces Interest Rates

TThe higher the credit score, the lower the interest rates. Lenders will assign interest rates based on perceived risk, so being in a position of good credit will dissuade their worries. The impact of interest rates is accumulative as you repay your loan over time, so even a small difference will benefit you greatly.

Improves Access to Credit Cards and Loans

Your credit score determines whether a credit card issuer or lender will approve your application. A high credit score exhibits your money management ability, so creditors are more likely to trust you.

Increases Housing Options

Having good credit will show your landlord that you can pay back your rent. A high credit score also improves the probability of securing good mortgage loans with low security deposit requirements.

Credit report with the credit score of a person

Steps to Improve Your Credit Score in Canada

Improving your credit score can enhance your overall financial well-being.

There are numerous credit score systems out there, but credit reporting agencies tend to follow the same evaluation pattern. The below chart portrays the factors that contribute to a credit score and how important they are. Payment history, credit utilization (amounts owed), length of credit history, new credit, and types of credit will be focus areas when trying to boost your credit score. The following steps will show you how to achieve this.

1. Access and Evaluate Your Credit Report

A credit report is a detailed summary of your credit history, including accounts you’ve opened or closed and unsecured personal loans. Your lenders send this information to the credit bureaus, who will compile them into a report. These reports are then converted into credit scores.

The first step to improving your credit score is to know how well you are currently doing. Checking your credit report gives you an understanding of the areas where you can improve. For example, if you notice that your bill payments have been dragging your credit score down, you can choose to spend more time fixing this.

To access your credit report, request a free copy from your credit bureau. For TransUnion, you can request a free consumer disclosure instead of a credit report, which comes at a fee. A credit report is accessible to lenders and represents an abbreviated version of the consumer disclosure. However, the consumer disclosure doesn’t include your credit score. You can request your free credit report from Equifax in person, through the phone, or by mail.

2. Increase Reliability by Paying Bills On Time

Your payment history takes up 35% of your credit score, so pay your bills on time to secure a good credit position. This shows credit bureaus that you are reliable, thus raising your creditworthiness. When managing your bills, always set a reminder so you can pay them diligently. Make sure to keep a filing system to improve organization, which will also be useful if you ever need to dispute an inaccuracy in your credit report.

You can also opt for automated bill payments, where your bank immediately pays your bill for you. This way, you won’t miss any payments.

3. Improve Your Payment History

Your payment history shows all your debt payments, including credit card loans and installment loans. It includes information about whether you’ve repaid the debts on time and if you have any delinquent payments.

To raise your credit score, keep monitoring your payment history, and see if there is anything you can amend. If there is a debt that you haven’t repaid, you can contact your lender and negotiate your repayment period.

Couple paying their bills to improve their credit history

4. Reduce Your Credit Utilization

Credit utilization describes how much credit you’re currently using compared to the limit. This is represented by “Amounts Owed” in the above chart and is worth 30% of your credit score. The lower your credit utilization, the better. This shows potential lenders that you’re not overspending.

The rule of thumb is to keep your credit utilization below 30%. Anything above this will seriously impact your credit score. As much as possible, aim for a credit utilization of 5% to 7%.

5. Increase the Length of Your Credit History

The length of your credit history shows how long your credit accounts have remained open. Longer accounts are well received by credit reporting agencies because they show that you have a history of managing credit and are more likely to be reliable.

If you have bad credit or next to no credit, you can improve your credit history by applying for an instant loan online which may help you build credit. Otherwise, you can apply for a secured credit card.

6. Keep Credit Inquiries at a Minimum

Credit inquiries fall under “New Credit” and are worth 10% of your overall credit score. Credit inquiries are divided into soft credit checks and hard credit checks. Soft credit checks are inquiries that are not related to lending. For example, this occurs when your employer requests access to your credit report. These inquiries will not affect your credit score.

Hard credit checks occur when lenders send an inquiry to the credit bureau to access your report. The reporting agency will list this kind of inquiry on your report because it shows that you are applying for a loan

Higher credit inquiries mean a higher number of loan applications, which may concern prospective lenders and reduce your credit score. If you need to borrow more money, don’t apply to several accounts at once because this will raise the number of reported credit inquiries.

7. Include Different Types of Credit

Using different types of credit lines shows that you can effectively manage a range of accounts, increasing your creditworthiness

At the same time, don’t apply for quick loans for the sake of showing diversity. Types of credit are only worth 10% of the total credit score, as shown in the chart. This means that its effects are quite minimal and opening more credit accounts can instead hurt more important aspects of your score, such as your credit history.

8. Request Higher Credit Limits

To prevent a high credit utilization ratio, you can not only reduce your credit usage but also request higher credit limits. This will automatically lower the proportion of credit you currently use, which will reflect favorably in the credit report.

For example, if you are using $1000 and have a credit limit of $2000, this will seem less concerning when your credit limit increases to $3000. At the same time, make sure to keep your credit balance low to ensure that this move is effective.

9. Repay Debts Where Possible

Repaying revolving debts from credit cards, for instance, will reduce your credit utilization ratio and boost your credit score.

It’s important to note that closing your line of credit accounts may cause your credit score to drop temporarily. For example, repaying your installment loan (typically used for mortgages and car loans) will reduce your credit mix because you will have fewer types of credit listed on your credit report.

Don’t feel dissuaded by this. You can keep your accounts open even after repaying your loans. This will help maintain your credit history and credit mix scores, although you may have to continue paying interest rates.

10. Use Credit Monitoring to Track Your Progress

A credit monitoring service assists you in tracking changes in your credit report and credit score. Equifax offers credit monitoring and access to credit scores for $19.95 per month, while TransUnion offers them for $24.95 per month. There are also other monitoring services to consider.

Monitoring your credit allows you to identify any changes and whether these changes are a result of your activities or if there is a possibility of credit fraud or identity theft. Staying in the loop of how well your credit score is doing will show you how much more you can improve.

Couple paying their bills to raise their credit

11. Dispute Any Inaccuracies on Your Credit Report

Once you have access to your credit report, go through it, and verify the information. If there is anything that doesn’t seem accurate, you can dispute it. This will benefit you because it prevents your score from being pulled down by arbitrary inaccuracies.

12. Use a Secured Credit Card

A secured credit card involves a cash security deposit, which provides collateral for the card issuer if you fail to repay your debt. Using this type of credit card will show the credit bureaus that you can manage your loans and are paying them back on time. This enhances your trustworthiness.

To improve your credit with a secured card, use it sparingly, keeping in mind your credit utilization ratio.

How Long It Takes to Increase Your Credit Score

You can improve your credit score in the span of one to two months. Achieving good credit within 30 days may seem tough, but it’s possible. The best way to do this is by reviewing your credit report regularly and disputing any inconsistencies.

Make sure to prioritize paying your bills on time to improve your payment history. Where possible, repay your debts and reduce your credit utilization ratio.

If you are rebuilding your credit score after a bankruptcy, the process will take longer. Both Equifax and TransUnion include first-time bankruptcies in credit reports for 6 years. Don’t get discouraged when your credit score takes a while to improve. The most important step is to find employment, increase your savings, and process your payments diligently.

When to Improve Your Credit Score

It’s always a good time to build your credit score to access better interest rates and loan terms. Don’t wait until your credit score reaches a concerning level to start doing something about it. Maintaining great credit will show your lenders that you are always reliable, especially when applying for a loan.

Keep an Eye on Your Credit Score

Your credit score is an important marker of your current financial situation. A good credit becomes the key consideration for financial institutions and lenders when providing you with access to certain services. Monitor your credit more closely to stay on the right track.

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