How to Improve Your Credit Score

As per Equifax, one of the two credit reporting agencies in Canada, a credit score above 660 is considered to be good. According to Borrowell’s study of credit scores in 2022, the average credit score in Canada was 672. Credit scores can be divided into the following categories as per Equifax:

If you recently checked your credit score and found out that it is low, you could take certain measures to improve your credit score. Rebuilding your credit score takes time. You must remain patient and practice positive credit behavior to increase your credit score over time. Individuals with lower credit scores are likely to see their scores improve quickly, sometimes in as little as 30 days, compared to individuals who already have a strong credit history. If you are looking to get a mortgage urgently but have a bad credit score, you can look into mortgages for bad credit.

Listed below are ways in which you can improve your credit score:

1. Keep track of your credit utilization

   Keeping your credit card balance well under your credit limit can help you increase your credit score. Credit utilization ratio is the utilized percentage of the available credit limit. It is recommended that you use less than 30% of the total available credit. For example, if your credit limit is $10,000, you must not use more than 30% of that, which is $3,000.

   If you use multiple credit products such as credit cards, lines of credit and loans, you can calculate the total credit limit by adding the credit limits of each of the products. As a general practice, try to limit the credit utilization of each of the credit products to 30%. You can also reduce your credit utilization by asking your creditors to increase your credit limit. For example, if you charge $2,000 to your credit card every month then,

   • Your credit utilization for a credit limit of $5,000 would be 40%.
   • Your credit utilization for a credit limit of $10,000 would be 20%.
2. Make your payments on time

   Missing mortgage payments or credit card payments has a negative effect on your credit score, therefore you should always pay your debt on time and if possible, in full. Be sure to make at least the minimum payment by the due date every month. Payment history has a significant effect on credit scores and you must ensure you are never late for your payments. Even if a bill is in dispute, you should still make a payment, if the transaction has not been canceled by the credit card company. If you struggle with keeping track of your payments, you can consider setting up automatic withdrawals.

3. Space out your credit card and loan applications

   Whenever you apply for any kind of credit, the lender requests the credit bureaus for your credit report. This is recorded as a hard inquiry on your credit file and can have a negative impact on your credit score. If there are too many inquiries, also known as credit checks, on your credit report in a short span of time, it can lead the lenders to think that you are desperately seeking credit and you will be perceived as risky.

   There are a few measures you can take to limit the number of credit checks:

   • If you are looking around for a car loan or a mortgage, you should get quotes from different lenders within a two week span. By doing so, the multiple inquiries would be clubbed and counted as a single inquiry.
   • Maintain a gap of at least three to six months in between your credit applications.
   • Don’t apply for credit when you don’t need it.

   You should also note that there are two kinds of credit checks - hard hits and soft hits

   • Hard hits are the ones that are visible on your credit report and can be seen by anyone who checks your credit report. These include your credit applications, and sometimes rental or employment applications.
   • Soft hits are the checks on your credit report that only you can see. These usually include your own requests for your credit report and businesses requesting your credit reports for updating records of existing accounts.
4. Check your credit reports for inaccuracies

   Sometimes the information on your credit report may be inaccurate or incomplete because of not being reported correctly. If you monitor your credit score regularly, you may be able to catch such errors easily. Inaccuracies can also be signs of identity theft or fraud. Credit reporting agencies allow for disputing inaccuracies. When you file a dispute, the credit reporting agency will verify the correctness of the information, and if they find any inaccuracies, your credit file will be updated with the correct information.

5. Avoid decreasing the length of credit history

   The length of credit history, also called the age of credit history, is another factor that impacts your credit score. If your credit accounts are new, your credit score would be lower than when you have had credit accounts for a long time. Closing an old credit account or transferring it to a new account will have an adverse influence on your credit score. If you have old credit accounts, avoid closing them even when you don’t use them.

6. Diversify your credit

   One of the factors affecting credit score is credit mix, which refers to having different kinds of credit accounts. Having a diverse credit mix can increase your credit score, as it demonstrates to lenders that you have been managing different kinds of credit accounts responsibly. There are four types of credit in Canada:

   Type of Credit	Description
   Installment Credit	When you pay off borrowed money through installments over a fixed period of time, such as personal loans and car loans.
   Open Status Credit	Amount up to a specific limit may be borrowed if required, such as mobile phone and utility bills.
   Revolving Credit	Money up to the credit limit may be borrowed on an ongoing basis, such as credit cards.
   Mortgage Loan	Any mortgage that you have taken to buy a house.

   That said, you don’t need to open credit accounts unless you plan to use them. You can always focus on other strategies of improving your credit score first.

7. Use secured credit cards

   If you don’t have a credit history in Canada, you can get a secured credit card and start building your payment history. If you are a student, you could get a student credit card offered by one of the banks or credit card companies. Secured cards require you to make an upfront cash deposit, which acts as a security deposit in case you fail to make payments. Your credit limit is set at the value of that deposit. For example, if you deposit $1,000, your credit limit will also be $1,000. Many credit card companies allow you to upgrade to an unsecured credit card after some time. You should keep in mind that secured credit cards work in the same way as regular credit cards. You should keep paying them off regularly and keep your credit utilization below 30% of the credit limit.

8. Use credit builder tools and loans

   Credit builder tools and loans are financial products specifically meant to build credit. A lender who gives you a credit builder loan does not give you a loan upfront. Instead you make regular payments to the lender, which are held in a savings account. You get access to the loan amount when the loan-term ends. Your payments are regularly reported by the lender which helps improve your credit score over time. Some companies offering credit builder programs and loans in Canada are - Borrowell, Refresh Financial (Powered by Borrowell), KOHO and Fairstone.

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Credit scores fluctuate over time but you can’t expect to see a change overnight. It takes most people years to rebuild their credit score. You are most likely to see negative changes on your credit score much faster than positive changes. As per the Financial Consumer Agency of Canada, it usually takes 30 - 90 days for changes to reflect on your credit report. If you are new to credit or have a very low credit score, there is a chance that you will see a change in 30 days, and you might be able to build a decent credit score in a year. However, the road from a decent to a very good credit score can be much longer.

The duration for which information remains on your credit report depends on your province of residence, the kind of financial information and the credit bureau that created the report. As per the law, negative information can stay on your credit report for a limited amount of time. Most types of negative remarks stay on your credit report for up to six or seven years. Positive information on the other hand can remain on your credit report indefinitely.

Your credit reports and credit scores are created by credit bureaus, also known as credit reporting agencies. These are companies who collect and store information about your credit use. This information is collected from your creditors, and your credit reports are generated on the basis of this information. A credit report contains your personal and financial information, and your credit score is calculated using a formula based on the information on your credit report.

There are two main credit bureaus in Canada - Equifax and TransUnion, and both of them have their own scoring models for calculating credit scores. You can check your credit score with either or both of them directly. Checking your own credit score does not affect your credit score. However, when a lender, organization or other makes an inquiry, your credit scores may be affected. It is noteworthy that not all creditors report to both credit bureaus, and not all lenders check your credit scores from both the bureaus.

You may also be able to check your credit scores through your bank for free. RBC, Scotiabank, CIBC and BMO allow their banking customers to check their credit scores for free. This credit score would be from either one of the credit bureaus depending on your bank. Alternatively, you can check your credit score through free credit score providers such as Credit Karma (TransUnion), Borrowell (Equifax) and Mogo (Equifax). Read more about checking your credit scores in Canada.

Your credit scores say a lot about your credit management, and having a healthy credit score helps you qualify for credit cards and loans. Credit reports are usually updated monthly, and if you put in efforts to increase your credit score, you might see improvement in as little as 30 days. Building your credit takes time and patience. If you consistently maintain a positive credit behavior, you will see your credit score improve slowly but surely.