Credit Improvement Strategies
Unfortunately, improving your credit isn’t an overnight process. In fact, your credit report keeps track of missed payments up to 7 years in the past. In order to improve your credit, you’ll have to adopt a long-term credit improvement strategy.
To improve your credit, you first have to understand how your credit score is calculated.
Canada has two credit bureaus: Equifax and Transunion. These are the two companies responsible for your credit score. Every month, the institution lending you money sends information on your account to the credit bureaus. When you miss a payment, the lender reports it to either of the agencies. This is known as “lender reporting.” Equifax and Transunion then update their database, and your credit score changes accordingly. Miss a payment, receive a lower score.
Think of your credit score as a gauge of how much a company thinks it can trust you to pay back the money that you borrowed. A high score means they know you’ll pay it back, a low score means they’re unsure.
Every time you miss a payment, your lender reports it, as mentioned above. If you miss two payments in a row, your account is reported as 60 days overdue. The more missed payments you have in a row, the more your credit score will fall. Remember, these missed payments affect your credit history for up to 7 years. That means a string of missed payments you made in 2008 continues to haunt you through 2015. Check out this piece on missing payments and your credit score.
No one wants to be on the receiving end of a phone call from collections. If you are, that’s a bad sign – it means the lender has sold your account to a collection agency. This drastically impacts your credit score. You’re not only seen as someone who’s missed a few payments, you’re seen as someone who the lender expects may never pay back the full debt.
In order to build good credit, you need to show you can pay your debt consistently – which is impossible if you avoid going into debt completely. Each time you apply for a loan, the lender checks your total debt load to see if you can afford to borrow the money. The more debt you have, the higher risk you are – which adversely impacts your credit score. Also keep in mind that your credit score is not just determined by the total amount of debt, but by the amount of potential debt.
For example, all things being equal: if you have two people who both have $1000 of credit card debt, but one has a limit of $5000 and the other has a limit of $1000, the person with the $5000 limit will have a better credit score – because they’re not using all of the credit available to them.
Improving Your Credit
Improving your credit score is all about asset management. Essentially, you need to lower the percentage of total debt you’re using. Here are some ways to do that:
1. Apply to have your credit limit raised. Remember, you need to lower the total percentage of debt you’re using. If you can’t lower the amount of credit you’ve already used, you can also raise the limit on the credit you have. For example, if you owe $500 on a credit card with a $500 limit, you’re using 100% of the debt available to you. However, once you raise the limit of that credit card to $1000, you’re only using 50% of the debt available – improving your credit.
2. If you’re not using a credit card account, keep it open. Remember, you want to lower the total percentage of credit you’re using. Let’s say you have two credit cards: one that has $500 debt on a $1000 limit, and another that has $0 debt on a $1000 limit. In total, you’re using $500 of a possible $2000 – or 25%. If you close the credit card you’re not using, you now have $500 of a possible $1000 in use – or 50%. This will hurt your credit score.
3. Continue to use your credit cards. Unused credit cards will be closed as credit card companies aren’t making money from them. Make sure to use each credit card at least once a month, even if it’s just for a cell phone bill. Pay off that credit card as soon as the bill arrives. This keeps the credit card active.
4. Ensure there are no mistakes on your credit reports. If you find any, check out this strategy to get those errors removed.
Remember, building credit is a life-long process. If you adopt these strategies, within a handful of years you can go from bad credit to good.
For an easy to way rehabilitate your credit read up on credit rehabilitation loans and go here if you are interested in learning more about how your credit score is calculated. You can also check out our credit learning center for more information.