Every year, people across the country discover just how valuable the health of their credit scores is. Not only can good credit help you gain access to the financial tools and products that you need, but it can also help 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 scores aren’t great, but your application is approved, you’ll usually 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 a credit score is typically calculated. It’s important to take control of your financial future and understand the correlation between your financial well-being and your credit score. While improving a credit score may seem like a long process, the great news is that if you are dedicated and put in the work necessary, you may 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 your personal information, your credit-related accounts, and transactions over a predetermined number of years. If you open an account for a new credit product or make a transaction using an existing one, it typically gets recorded in your report. However, it’s important to note that not all credit accounts and transactions get recorded as some lenders and creditors do not report the data to one or both Canadian credit bureaus.
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?
A 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 the credit score range between 750 – 900, your credit is considered excellent and you may have little to no problem getting approved for any credit products on the market.
What Causes a Credit Score to Drop?
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 a low-interest rate and being approved may increase. On the other hand, if your credit score is low, not only could your chances of approval decrease, but if you are approved, your interest rate will likely be higher than you want.
Here’s how a 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 credit score of 650 or higher is where you would ideally like to be to help improve your chances of approval. The further your score is below 650, the worse your chances may 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 a credit score may drop:
- 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 may 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 a Credit Score?
Firstly, to build, fix, or improve a credit score, you’ll need to apply for and use credit products. This may include 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 help raise your creditworthiness, we have a few simple steps you can follow.
Make Timely Payments
One factor that is taken into consideration when a credit score is calculated is how responsible you are with your debt payments. Paying on time and in full can help do 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 help boost a credit score, one of the first things you should focus on is paying off your debt. Having too much debt on the books is usually not good for your credit health. While a little bit of debt is fine – and even healthy in some circumstances – overwhelming debt may have 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 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. Whenever this happens, a “hard inquiry” is noted on your credit report. Doing so may cause your credit score to drop and multiple hard inquiries may signal to any potential lender 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 can also be 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 help improve 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 scores 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 scores.
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 could be a 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, 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 is meant to help you steadily improve your credit scores. Just keep in mind that everyone’s credit is different and that a secured credit card is not a guaranteed fixed.
Apply For a Guarantor Loan
Guarantor loans are a good option if you have a credit score 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 a 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 may also 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 likely you’ll be approved for a favourable interest rate.
Higher Credit Limits and Larger Loan Amounts
The better your score is, the more available credit you’ll likely be approved for.
How to Stay on Track With Credit Improvement
Since improving a credit score can 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 check your own credit and you should do so at least once a year. Checking your own credit can help you spot signs of fraud or even errors in the information contained in your credit file. Keep in mind that the score you see when you check your credit is likely different than the score a lender sees when they pull your credit.
- 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 can 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 factors that usually affect the calculation of your credit scores. 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.