July 23, 2021
Credit scores reflect your credit worthiness. While there are lots of ways to improve your credit score, it takes time. Here are our tips to make it easier.
A good credit rating is an integral part of your financial health. But how do you ensure you have good credit? There are many misconceptions about how a credit score is calculated. There are a variety of factors at play. Understanding these factors will help you improve your credit score in the long run.
Improving a credit score is a process that cannot be achieved overnight, but there are some easy ways to start.
Your credit score is calculated by credit bureaus to establish your creditworthiness. It’s based on a scale between 300 and 900. For your credit score, 900 is the highest and best, and 300 is the lowest and worst.
According to Equifax, one of Canada’s largest credit bureaus, there are five factors that are used to determine your credit score.
A credit score is a reflection of how likely you are to repay your debts on time. It is used by lenders to assess the risk of lending to you.
A favourable credit score typically falls within the range of 660 to 724. A good score ranges from between 725 and 759, and those over 760 are generally regarded as excellent, according to Equifax.
You can obtain your credit report for free through Canada’s two credit bureaus, Equifax and TransUnion. You can also obtain your credit score at no cost from Equifax; however, getting your score from TransUnion will require a fee (unless you live in Quebec).
Lenders often view higher credit scores as indicative of responsible financial behaviour, making borrowers with excellent credit more attractive candidates for loans and credit cards with competitive terms and benefits. A good credit score not only opens financial opportunities but also reflects a history of timely payments, manageable debt levels, and responsible credit management.
There are a variety of ways to improve your overall credit score. As we said, achieving a good credit score is a process, but putting these strategies into practice can improve your credit score over time.
Paying bills on time and in full is one of the most impactful strategies for improving your credit score. Your payment history counts for a significant portion of your credit score, meaning that consistently paying your bills on time shows lenders that you are reliable and responsible with your debts.
Paying your bills in full is equally important. It not only helps you avoid costly interest charges but also shows that you can manage your debts effectively. By paying in full, you avoid carrying over balances and accruing unnecessary debt, which can positively impact your creditworthiness over time.
A good practical way to ensure you’re paying in full and on time is to set up automatic payments or reminders can help ensure that you never miss a payment deadline. This not only saves you from late fees but also protects your credit score.
Reducing the balances on your credit cards can significantly impact your credit score. Paying down debt shows lenders that you can manage your financial obligations responsibly. It reflects your ability to control spending and live within your means, which are key indicators of financial stability.
Lenders prefer borrowers who demonstrate a history of paying down debt because it reduces the risk of default and indicates a lower likelihood of financial distress.
Having a high balance or maxing out a credit card are not ways to improve your credit score.
Having a lower balance means having a lower credit utilization ratio, which measures the amount of credit you use compared to your total credit limit.
Keeping your credit utilization below 30% is a way to achieve a good credit score, this means if you have a credit limit of $5,000, you should have a maximum balance of $1,500. Having a balance lower than this would help your credit score more.
Moreover, reducing credit card balances not only benefits your credit score but also saves you money on interest charges.
Having a lower balance will also make it easier for you to afford more than just the minimum payment, something that will save you money over time.
Paying off balances and keeping them low minimizes interest charges, allowing you to allocate those funds towards paying down debt or building savings.
One essential strategy for improving and maintaining a good credit score is to avoid applying for new credit unless necessary. These inquiries can have a negative impact on your credit score, especially if done frequently within a short period.
Lenders may interpret multiple credit applications as a sign of financial distress or an increased risk of default, which can lower your credit score.
This doesn’t mean you can never apply for new credit, applying once a year will not have a large impact, but making multiple inquires in a few months can cause a drop.
It's important to recognize that having one or two credit cards that you manage responsibly is often sufficient for building and maintaining good credit. Instead of pursuing new credit regularly, focus on using your existing credit responsibly, making timely payments, and keeping your credit utilization low. These habits can have a more positive and lasting impact on your credit score over time.
One key factor in credit scoring models is the length of your credit history. The longer you have established credit accounts, the more it demonstrates your ability to manage credit responsibly over time. Closing old accounts can shorten your credit history, potentially lowering your credit score.
Closing old accounts can also reduce your total available credit, which may increase your credit utilization ratio if you carry balances on other accounts.
Additionally, older accounts may reflect a longer track record of on-time payments, which is another crucial factor in credit scoring. Therefore, unless there are compelling reasons such as high fees or unmanageable temptation, consider keeping your old credit accounts open.
If you’re struggling to improve your credit score despite your best efforts, reaching out to a Licensed Insolvency Trustee at BDO can be a helpful step. Licensed Insolvency Trustees offer a judgment-free environment where you can discuss your financial situation openly.
They are there to provide guidance, not judgment, and your first consultation is free. Whether you need help understanding your debt options or finding a path to rebuild your credit, a Licensed Insolvency Trustee can help you make informed decisions and regain control of your financial future.
July 23, 2021
Credit scores reflect your credit worthiness. While there are lots of ways to improve your credit score, it takes time. Here are our tips to make it easier.
