Every year, people across the country discover just how valuable the health of their credit score is. Not only can good credit help you gain access to the financial tools and products that you need, but it can also get you reasonable interest rates. In fact, many major banks and other traditional lenders may not approve you for certain products, like mortgages, and vehicle loans, if your credit isn’t up to their standards. If your credit score isn’t great, but your application is approved, you’ll end up paying much higher interest rates than someone whose credit is in good shape.
This is why it is essential that you understand how you are being scored and what the model is that credit companies base this score on. You must take control of your financial future and understand the correlation between your financial well-being and your credit score. While improving your credit score may seem like a long process, the great news is that if you are dedicated and put in the work necessary, you will see improvement over time.
What is a Credit Report?
A credit report is similar to your report card from school. Essentially, it’s one big profile that contains all of your personal information, your credit-related accounts, and transactions over a predetermined number of years. Whenever you open an account for a new credit product or make a transaction using an existing one, it gets recorded in your report.
A record of most transactions (payments, deposits, withdrawals, etc.), including cancelled accounts, inquiries, and other instances usually remains on file for around six years. However, more serious instances, such as delinquencies (bankruptcies, consumer proposals, accounts put in collections, etc.) may remain there longer.
Click here to learn how long information stays on your credit report.
What Qualifies as a Good Credit Score?
Your credit score is a three-digit number, ranging from 300-900. It functions as a collective average, summing up all your transactions as a credit user. The closer your score is to 900, the more creditworthy your current and future lenders will consider you. On the other hand, the closer it is to 300, the more of a borrowing risk your lenders may consider you.
According to TransUnion, one of Canada’s two main credit reporting agencies (Equifax is the second) a credit score of 650 or more is the ideal point where lenders, such as banks and other traditional financial institutions, will consider you a low borrowing risk. And, of course, being a low-risk borrower can open up all sorts of financial avenues for you. Once you’ve reached 750, your credit is considered excellent and you’ll have little to no problem getting approved for any credit products on the market.
What Caused My Credit Score to Drop?
One of the most important factors when it comes to your overall credit is your credit score. Your credit score is a three-digit number, ranging from 300-900, which works like a grade point average, only it relates to all of your credit-related transactions. When considering you for various credit products and the interest rates that come with them, one of the first elements that most lenders examine is your credit score. If your score is considered favourable, your chances of both getting approved and a low-interest rate will improve. On the other hand, if your credit score is low, not only will your chances of approval decrease, but if you are approved, your interest rate will likely be higher than you want.
Here’s how your credit score will appear to most lenders:
- 760-900 = Outstanding
- 725-759 = Very Good
- 660 – 724 = Good
- 560 – 659 = Average
- 300 – 559 = Poor
According to TransUnion, a score of 650 or higher is where you would ideally like to be to improve your chances of approval. The further your score is below 650, the worse your chances will become. If your score is below that mark, or you see it slowly dropping at times, it might be due to several different factors.
Reasons why your credit score dropped:
- Missed, late, or short payments for your credit products.
- Financial delinquencies (bankruptcies, consumer proposals, accounts in collections, etc.)
- Activating and/or cancelling too many new accounts within a short period of time.
- Errors in your credit report that go undisputed
- Recent “hard inquiries” performed by lenders and other organizations when considering you for new credit.
Any of these factors can slowly, but surely damage your score. Unfortunately, when it drops, it can take a long time and require serious attention to get it back to the point where most lenders no longer consider you a financial risk.
For a more detailed article about how and why credit score drops, click here.
How to Improve Your Credit Score?
Firstly, to build, fix, or improve your credit score, you’ll need to apply for and use credit products. This means taking on (in small amounts and for short periods of time) and paying off debt in a responsible manner. If you’ve already started using credit products, but you’ve had difficulty managing them or you’d just like to know how you can use them to raise your creditworthiness, we have a few simple steps you can follow.
Make Timely Payments
The factor that holds the most weight in how your credit score is calculated is how responsible you are with your debt payments. Paying on time and in full does wonders for your credit score, so be diligent with your payments. If your credit score has tumbled because you’ve missed payments in the past, it’s imperative that you make sure these habits change.
Pay Down Debt
This one goes hand-in-hand with making timely payments. In order to boost your credit score, one of the first things you should focus on is paying off your debt. Having too much debt on the books is not good for your credit health. While a little bit of debt is fine – and even healthy in some circumstances – overwhelming debt certainly has the opposite effect on your credit score.
Do you know the difference between good debt and bad debt? Click here to find out.
Increase Your Credit Limit
Using your credit card in a responsible manner is important for good credit health. If you max out on your credit card every month, you should know that this won’t do any good to your score. Instead, spending just a little bit of your credit limit is better.
This is referred to as your credit utilization and is a big contributor to your credit score calculation. A good rule of thumb is to spend less than 30% of your credit limit. But if you’re looking to spend more on your credit card, consider asking for an increase in your credit limit. Doing so will give you a little more wiggle room with your credit card spending while still allowing you to stay under the 30% mark.
Don’t Apply For Too Many New Credit Accounts
Whether you’re applying for a car loan, personal loan, or credit card, the creditors associated with each will want to know what your credit health is like. This entails pulling your credit report. And whenever this happens, a “hard inquiry” is noted on your credit report. Not only will doing so cause your credit score to drop, but it’s a sign to any potential lenders that you’re frequently applying and being denied for new credit. This, in turn, might make them question whether or not you have a significant debt problem. If other lenders aren’t approving your applications, why should they?
Add Variety to Your Credit Products
Funny enough, having a number of different kinds of credit products is a good way to improve your credit. In many cases, having a credit card, mortgage, and car loan with moderate balances can be better than just having a bunch of credit cards with high balances. This, of course, hinges on you being responsible with them. Once again, as long as you’re paying all your bills on time and in full, a variety of good credit products can help you improve your credit bit by bit, showing you’re a responsible credit user. By doing so, you’ll also be improving your credit history, which is a very good thing.
For more ways of improving your credit score quickly, click here.
Review Your Credit Report For Errors
It’s recommended to pull your credit report once a year, not only to see where you’re at with your score but also to make sure all the information on the report is up-to-date and accurate. If there are any errors, your credit score can suffer. If you do notice any errors, report them to the respective credit bureau to have them investigated and rectified. Fixing even the smallest error can make an impact on your credit score.
Apply For a Secured Credit Card
While we mentioned that it’s probably not a good idea to open too many accounts within a short period of time, applying for a secured credit card might be an exception, especially if you are trying to build your credit from the ground up (for more information about secured credit cards, click here).
A secured credit card is the perfect financial product for those who may have a hard time getting approved for a traditional credit card or who have bad credit. These cards require that a deposit is made against it, which serves as the credit limit. Technically, you’re only allowed to spend whatever you’ve already put into the card, and every payment you make will help you steadily improve your credit score.
Apply for a Guarantor Loan
Guarantor loans are a good option if your credit score is so low that you’re having trouble getting approved, mainly because there is generally no credit check involved for the primary borrower (you) during the application process. Instead, a co-signer will need to become your guarantor, thereby agreeing to have their credit checked in your place. Your guarantor will need to have good credit and finances in order to be approved. If you’re approved, even if your credit is not under the microscope, you should still receive a credit score boost whenever you make a timely, full loan payment.
Benefits Of a Good Credit Score
Now that we’ve learned about how your credit score functions, it’s time to look at the ways a good score can benefit you.
Better Chances of Approval
Besides the fact that a high credit score is good for your finances in general, lenders will be more likely to approve your applications.
Lower Interest Rates
A good credit score could help you save a lot of money down the line, because the better your score is, the more favourable interest rate you’ll be approved for.
Higher Credit Limits and Larger Loan Amounts
The better your score is, the more available credit you’ll be approved for.
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 score. 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 affect the calculation of your credit score. Cancelling the credit card you’ve had open the longest could have a bad effect on your score.
Need More Help Boosting Your Credit Score?
If you’re interested in finding the right credit improvement product or service to meet your needs, Loans Canada can help. Whether you’re looking for the best secured credit card or are struggling to manage your debt levels, we have the options you need.