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How to Improve your Credit Score

Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.

Your credit score is a number within a specific range that indicates to lenders how trustworthy you are.

The higher your score, the more lenders trust that you’ll pay back the money you borrowed. The lower your score, the less lenders believe that you’ll pay them back. So a credit score only really matters when you’re taking on debt from a lender like a bank, or trying to prove your reliability to a third party, such as a landlord.

Credit scores range from 300 to 900. Lenders believe that higher number indicates a better chance that you’ll repay your debt.

Your credit score is considered good once it hits 660. At 725, it’s very good and over 760 it’s excellent. That’s the range you want to be in since lenders will give you the best interest rates and terms. Fair is from 659 to 560 560 and anything under 559 is poor. In this range you will probably still be able to get credit from somewhere, but you’ll probably have to pay a higher interest rate to make up for the bigger risk the lender is taking on.

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How credit scores are calculated

Most lenders report your borrowing behaviour monthly to one or both of Canada’s major credit reporting agencies: TransUnion and Equifax .

Did you pay on time? How much credit did you actually use from what was available to you? Did you take on more debt this month? The agencies use factors like these to come up with a credit score—a shorthand number that allows lenders to quickly assess your reliability. The calculation itself is proprietary—no one besides the agencies themselves knows exactly how it’s calculated. And the score may differ at each agency depending on the formula and each lender’s reporting practices. The calculation is also constantly changing month to month as your behaviour changes.

That’s why you shouldn’t get too hung up on the exact score—there’s no magic number to aim toward. It’s better to focus on the range you want to be in.

How to increase your credit score

It’s in your benefit to try to increase your credit score. That’s because debt is such an integral part of our society. If you want to shop online, you’ll likely need a credit card. If you want a place to live, you’ll probably have to show a landlord your credit score. And unless you can pay for a house in cash, you’ll likely need a mortgage. The better score you have, the better rates and terms lenders will offer you.

But because the score formulations are secret and particular to each agency, there’s no definite way to increase your credit score.

There are a few simple techniques you can use to bump it up. The guiding principle for increasing your credit score is to think like a lender. What would make a lender want me as a client? What would make them feel comfortable lending me stashes of cash? If I was giving money to a friend, what could they do that would make me want to lend them more money?

1.Check for mistakes

The first step is to order your credit report from TransUnion and Equifax to ensure it only includes accurate information. You can order a credit report for free once a year from both bureaus.

A credit report is not a score, but it contains the information used to calculate a score. It’s a document several pages long that contains your personal information like you SIN number, address, credit payment history, any collections, judgments, or bankruptcies and a list of lenders that have recently asked about your credit.

You’d be surprised at the potential for mistakes and oversights, such as a store credit card you completely forget you signed up for three years ago during a promotion or a bankruptcy that is listed after the maximum number of years allowed (usually six to seven).

Mistakes can also be a sign that someone is trying to steal your identity, so it’s always good to keep an eye on it.

Contact both the lender and the credit bureau with any errors, and they will investigate your claim. If you’re not satisfied with the result then you can escalate your case and add a note to your file explaining your side of the story. If necessary you can also file a claim with the Office of Consumer Affairs.

While it may first appear that credit agencies are government regulated or owned, they are not. They’re not there to protect or education you. Remember: they’re private businesses working on behalf of lenders to help determine the risk level of borrowers. And just like any other organization they make plenty of mistakes.

2. Pay your debt on time

By far the most important thing you can do to increase your credit score is to pay your debt on time. It’s better to pay the minimum interest of your debt on time than to pay the debt off in full a week late.

If this is an issue for you, then consider setting up automatic payments with your bank. It may also help to schedule an hour once a month to sit down and look at all your bills.

If you need to dispute a bill, then contact your lender, but still pay the minimum payment required for now.

3. Don’t use all available credit

Just because you have credit doesn’t mean you need to use it. For example, let’s say you have $40,000 of available credit spread out across a $5,000 Visa, a $10,000 Mastercard and a $25,000 unsecured line of credit with your bank. If you consistently use all $40,000 it’s a sign that you’re too reliant on debt.

Add up all your loans, then try to use no more than 35% of the available credit.

4. Don’t be an eager beaver when paying off debt

It’s okay to carry a little debt. While it is commendable, and personally responsible, to pay off all your debt every single month, we have to remember that lenders actually make money off of your debt. The best kind of borrower in their eyes is one that racks up interest and pays it in a timely manner, not necessarily once who racks up debt and pays it before any interest is charged.

Visa and Mastercard, for example, don’t make any money off of you when you pay your balance in full every month. They only make money when you remain in debt and pay interest.

So while we definitely don’t recommend purposefully staying in debt, it’s also okay to find a debt repayment plan that fits within your budget, instead of going crazy trying to live on rice and beans just to pay off every last dollar of your bill this month.

5. Take on various forms of debt

Lenders like to see variety—a credit card, a line of credit, a car loan—different forms of debt show lenders that you can handle repayment well.

Boosting your credit score will happen naturally with time as you become a better borrower. And being a better borrower includes only taking on debt that you know you can pay back in full in an appropriate amount of time.

Don’t start taking on more debt if you can’t handle the debt you have now. Only start adding different kinds of debt if you can trust yourself to pay it all back on time.

6. Keep your old credit cards

Don’t bother cancelling a credit card before it expires. Instead, put it in a ziplock bag, fill it with water and put it at the back of the freezer. Or cut it up and throw it in the trash. Both are better options than calling a lender and cancelling a credit card before it expires. That’s because cancelling a card will a. decrease your credit utilization (see point 3) and b. delete part of your credit history, and a long credit history helps you improves your score.

7. Don’t constantly take on new credit

It’s not a good idea to constantly take on new credit. If you need to borrow more, consider paying down your current balance to free up room.

Lender’s view it suspiciously if every week you’re going from store to store, or bank to bank opening new credit cards. It’s okay to take on additional or diverse kinds of debt as long as it’s not too frequently and as long as you don’t actually use it all (again, see point 3).

And keep in mind that every time you apply for debt, it shows up your credit report and will temporarily drag down your score.

8. Limit hard credit checks

A hard credit card check is when a lender requests your credit history to determine if they want to advance you money. Anytime you apply for a credit card, a job or an apartment or a mortgage it’s possible that the lender will perform this credit check. Sometimes it’s unavoidable and the effects are only temporary anyway. Reduce hard checks by only applying for more credit when you really need it. Also, consider asking a landlord if they will accept a screencap or printout of your credit score instead… Checking your own credit score does not affect it in any way and you can do so for free online

The Bottom Line

Improving your credit score will happen naturally as you become a better borrower. Every month is a new opportunity for you to prove that you’re someone lenders want to give credit to. Developing good financial habits and maintaining those habits over time is the best way to improve your credit score.

Last Updated December 2, 2019

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