Did you know that almost three-quarters of Canadians have used a payday loan in the last year or have some type of outstanding debt? On top of that, nearly one-third of Canadians believe that they are carrying too much debt.
Buying things on credit has become a way of life, but it’s important to use credit wisely. Not only is carrying debt you feel you can’t repay an incredibly stressful experience, but it can also have a negative impact on your credit score.
Having a good credit score is important for many aspects of life, including whether you’re approved for things like rentals, car loans, and mortgages, as well as the interest rates you pay on money borrowed.
Are you wondering how to improve your credit score? Let’s take a look at everything you need to know.
How Is Your Credit Score Calculated?
There are a number of factors that determine what your credit score is. FICO uses the following criteria.
Payment History
This is the most important factor when it comes to your credit. Making up 35% of your credit score, this is reflective of whether or not you have made payments on time as well as if you have missed payments entirely.
The Amount of Debt You Carry
30% of your credit score is determined by the amount of debt you are carrying. We will discuss this in more detail later in the article, but it has to do with the percentage of the credit available to you that you use rather than the dollar amount of money you’re borrowing.
For example, if you are using $5,000 of a $5,000 credit limit, this isn’t great for your credit. However, if you’re using $5,000 of a $40,000 credit limit, that is much more favorable.
Length of Credit History
15% of your credit score consists of the length of your credit history. Basically, the longer your credit history is the better off your credit is.
New Credit History
Approximately 10% of your credit score is determined by the recent activity on your credit history. This includes things like credit checks and new accounts that have recently been opened.
Types of Credit
The last determining factor is the types of credit that you have, which makes up 10% of your credit score. This has to do with having a diversity of types of credit rather than just a credit card or just a car loan.
Monitor Your Payment History
The most important factor that determines your credit score is your payment history.
Your credit health can suffer if you don’t pay your bills on time. For this reason, it’s essential to prioritize never missing a payment. If you cannot pay the full amount that you owe, make sure that you are paying at least the minimum payment by the due date.
Setting up automated payments for your bills can help to make sure you don’t accidentally forget to pay some bills in a way that negatively dings your credit.
The best thing to do when you’re concerned you won’t be able to pay a bill on time is to contact the lender immediately. Also, if a bill is in dispute, you still do not want to skip a payment that can affect your credit.
Use Your Credit Wisely
It’s important to not go over your credit limit. Your credit score can be lowered if you borrow more than the authorized limit.
In general, you don’t want to use more than 30% of the credit available to you. This is because if you use most of your available credit, you will be seen as a greater risk to lenders. This is the case even if you always pay the full balance by the due date.
Lengthen Your Credit History
Another factor that impacts your credit score is your credit history. The longer that you have a credit account open and active, the more helpful it is to your credit score. If you have credit accounts that are fairly new, it can lower your score.
For this reason, it can be a good idea to keep older accounts open even if you no longer have the need for them. To keep them active, you will want to use them from time to time. However, if there is a fee for your credit account, it could potentially make sense to close the account if you no longer need it.
Limit the Number of Times Your Credit Is Checked
Everyone has to apply for credit every once in a while. However, every time that your credit is checked by a lender or another party, it is recorded as an inquiry on your credit report.
If there are too many inquiries listed on your credit report, it can make lenders nervous. This is because it comes off as though you might be trying to live beyond your means or are otherwise urgently seeking credit in a way that makes your financial situation seem unstable.
You can control the number of credit checks in your report by applying for credit only when you really need it. Also, when you are shopping around for a mortgage or a car, you can get your quotes within a two-week period in a way that all of the inquiries are treated as one single inquiry.
It’s also important to know the difference between “hard hits” and “soft hits.” Hard hits occur when you apply for a credit card and sometimes when you apply for a rental or a job.
On the other hand, “soft hits” are credit checks that are in fact on your credit report but they aren’t visible. They don’t affect your credit score. This might be when a business asks for your credit report in order to update their records for an existing account or when you request your own credit report.
Diversify Your Credit
If you have only one type of credit product, your score might be lowered. For this reason, it’s a good idea to have a diversity of different types of credit. This might mean having a line of credit, a credit card, and a car loan.
While it’s good to have several different kinds of credit, it’s most important that you always pay back the money that you borrow.
Pay Off Delinquent Bills
When you have delinquent accounts, your missed payments will be on your credit report. While paying off these accounts will not remove those dings on your report, it can still make you more favorable in the eyes of lenders.
Are you trying to learn how to be smart about money? You can learn more here.
Pay Bills on Time
It’s worth repeating this one: make sure you always pay your bills on time. If you aren’t able to make the full payment, make sure you at least make the minimum payment on time.
If you struggle to pay your bills on time, check out these tips.
Look For Inaccuracies
Sometimes the information that the credit reporting agencies receive is incomplete or completely inaccurate. It is fairly simple to dispute any inaccuracies you find. It’s possible that an inaccuracy is causing your credit score to be lower than it should be.
Keep a Low Balance
When you carry a high credit balance, it is harmful to your credit score. As mentioned earlier, it’s best to keep your credit utilization ratio below 30%. A credit utilization ratio is a measurement that shows how much of the total credit you have access to you are using.
There are a number of ways to keep your credit utilization ratio low. One way is to ask for a credit limit increase. This is because the higher your credit limit is, the lower your utilization rate will be in the same amount of money.
Another way is to more frequently pay down your balances. Your balances with credit card issuers are reported to credit reporting bureaus once a month. When your balance is lower, it’s more favorable to your score.
Consolidate Your Debt
If you are struggling with paying down a significant credit balance, you might consider consolidating your debt. There are low-interest balance transfer credit cards that you can transfer your debt to. The low-interest rates on these cards could save you thousands of dollars over time, as you would otherwise be paying steep interest payments.
However, there’s a catch. You will want to pay all or most of your debt when you are in the low-interest introductory period of the balance transfer card. If you don’t, you’re just kicking the can down the road.
You also can apply for a personal loan and use that to consolidate debt if there’s a favorable interest rate.
You Can Improve Your Credit Score!
While it can take time, you can always improve your credit score. It simply takes some organization, some discipline, and ultimately some time.
If you have bad credit, there are still loan options available to you. With any loan you take out, it’s important to be clear of any interest rates and charges that you might be expected to pay. You can learn about bad credit loans in Canada here.