How to Improve Your Credit Score
Whether they’re looking to maintain their already good credit, build a good credit history from the ground up or improve a less than stellar credit score, every single Canadian we speak with has one thing in common, they want good credit. And rightly so, your credit score is vital to a successful loan approval and can contribute much to a mortgage application, personal or car loan application, and your overall financial wealth and health. A strong credit score will also reward you with speedier approval times, lower interest rates on your debt, and greater financial flexibility. No wonder good credit tops the average Canadian’s list of financial goals, it truly is the backbone of your personal finances.
Your credit score can, without a doubt, be improved. But at the same time, we understand that it can seem very overwhelming. This is why we believe that the first step to good credit is understanding how your credit score is calculated.
Your credit score is composed of various different factors, namely:
- Your credit history (35%)
- How much debt you have (30%)
- How long you’ve had credit for (15%)
- The diversity of your credit accounts (10%)
- And credit inquires (10%)
Each factor is given a different weight during the calculation of your credit score. Your credit history, basically how responsibly or irresponsibly you manage your credit, reigns supreme and is given the most weight. This is because to have good credit you need to, first gain access to credit, and then use it properly and responsibly.
How Your Credit History Affects Your Credit Score
Like we said above, your credit history is the most important factor in the calculation of your credit score, this means it’s also one of the most important things to keep in mind when you’re trying to improve your credit.
Your credit history tells the story of how you use your credit. Missed a payment 6 months ago during a particularly stressful week at work? It will show up in your credit history and therefore negatively affect your credit score. So, how do you manage your credit history in order to help make up for past mistakes and improve your credit score? Make your payments on time and in full every single payment cycle, without fail.
Here’s the thing that no one really wants to admit. A credit score can be improved but it’s going to take time, as in months if not years (depending on how much it needs to be improved). Paying your credit card bill on time one time will not magically fix all your missed or late payments. But, use your credit card responsibly and then pay it off on time for a year straight and you’ll start to see a difference. Same goes for mortgage and personal loan payments, make those on time all the time and you should be good to go. Overextend yourself financially, start to make late payments and you may have trouble getting back on track. This will without a doubt lead to a bad credit score.
Debt is a Credit Score Killer
The difference between good debt and bad debt is a hotly debated issue, there are a wide variety of different opinions ranging from, certain debt is ok, to no debt is the only type of good debt. Firstly, we want to point out that consumer debt or credit card debt that has been created purchasing unnecessary things, is typically the worst type of debt, we can probably all agree on that. But after that, it really depends on the person and their unique financial situation.
If you can’t pay it back within a reasonable time, if you can’t make the payments on time all of the time and if it’s affecting other aspects of your life, this is without a doubt bad debt. If you have this type of debt then it’s negatively affecting your credit score and you need to deal with it right away. And by “deal with it” we mean, pay it off as soon as possible.
Before you can really start to improve your credit score you should tackle your debt. Create a plan and a budget, and then start using the majority of your income to pay off your debt.
Check out our “Good Debt vs. Bad Debt” article.
The Longer The Better
Great credit scores and healthy finances are built over time, so whether you don’t have any credit history, or have unfortunately developed a bad one, the sooner you get started on rebuilding your credit score the better. When it comes to credit scores, it’s all about your ability to show financial responsibility, over time. So don’t put improving your credit score on hold, start now.
Credit Health is All About Diversity
Going deep into debt to simply try to improve your credit score is never a good idea. A good credit score will come with time but if you’re dealing with debt issues, they need to be dealt with right now.
That being said, a percentage of your credit score is made up by the types of credit accounts you currently have and use. If you’re looking to give your credit score an extra boost, diversifying the types of credit you use can help. Keep in mind that this means applying for an installment loan, for example a personal loan or a car loan. If you know your current financial situation can’t handle this, there are plenty of other things you can do to improve your credit score.
Watch Out For Too Many Credit Inquiries
Did you know that every time your credit report is pulled by a credit company, it actually takes a hit? Before a new creditor or lender will approve you, they need to verify your creditworthiness. Typically, your creditworthiness is determined based on your credit score and credit history, both of which are seen by a potential lender when they pull your credit report. It’s also important to note that not all lenders perform credit checks in order to approve borrowers (for more information on loans that require no credit checks, click here).
Keep in mind that there is a difference between a soft pull or inquiry and a hard pull or inquiry. A soft credit inquiry does not hurt your credit score, while a hard credit inquiry does. A hard pull only takes place when you apply for a credit card or some other form of credit. A soft credit pull takes place when, for example, a bank wants to give you a pre-approval on confirm your identity. When you check your own credit score, you are also performing a soft pull.
The most important thing to remember is that too many hard pulls all within a short amount of time, will lower your credit score. If you are planning on applying for a large loan, such as a mortgage, in the coming months, we recommend that you avoid any hard credit inquiries.
For all the information you want to know about credit inquiries, read this.
How to Stay on Track With Credit Improvement
Since improving your credit score will take time, it can often be difficult to stay on track and keep motivated. To help you stay focused and make the process just a little bit easier for you, consider the following steps:
- Check your own credit. You are entitled to one free credit report each year (from each of the two credit reporting agencies, Equifax and TransUnion), take advantage of this offer and request a copy. Your credit score won’t be included (you’ll need to pay for that) but you’ll still be able to see your credit accounts and whether or not they’re in good standing. You’ll also be able to double-check for errors and then dispute them with the credit bureau.
- Set up automatic payments. If making your credit and loan payments on time is one of the biggest reasons why your credit score is low, setting up automatic payments will definitely help.
- Don’t close accounts. Often people want to cancel their credit cards when trying to manage their finances better and improve their credit scores. While this may seem like a logical idea, it’s actually best to keep your credit cards open. Instead, pay them off and then use them to pay for necessities, like gas and groceries. Remember, the length of time you’ve been using credit is one of the most important factors that affects the calculation of your credit score. Canceling the credit card you’ve had open the longest could have a bad effect on your score.
The number one piece of advice that we want you to take away from this article is, credit improvement takes time. We urge you to be as patient as possible, stay on track and ultimately your hard work will pay off.