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Improving Your Credit Score

Your credit score is important. Lenders use the information in your credit report, including your credit score, to help them determine whether or not they should give you a loan and, if they do, what sort of interest rate they should offer you. In short, your credit report could determine whether you’re able to get an auto loan, a credit card, or a mortgage, and how much you’ll pay for these loans.

So, it’s important that you try to have a good credit score.

What is a Credit Report, a Credit Rating, and a Credit Score?

Before you try to improve your credit, it’s important to understand the different terms you may hear when talking about this subject.

  • Credit Report
    • A credit report is created when you first borrow money or apply for credit. It is recorded in files kept by the major credit bureaus in Canada: TransUnion and Equifax.
    • Companies that lend money (such as banks, credit unions, finance companies, etc.) routinely report information about your financial transactions to these credit bureaus. This includes information like how much you have borrowed, how often you pay your bills, whether you have missed any payments, and other such information.
    • A credit report is considered a “snapshot” of your financial situation.
  • Credit Rating
    • A credit rating is a code used by lenders to rate how and when you make payments. It is made up of two parts: a letter and a number.
    • The letter represents the type of credit. “R” refers to revolving credit, which is credit where you can borrow up to a certain amount and are expected to make regular payments, such as with a credit card. “O” refers to open credit, where you receive a certain amount of credit, you withdraw from the limit as you need to, and you are expected to pay back the balance when the payment date arrives “I” refers to installment credit, where you borrow money once and repay it in regular payments, such as with a car loan.
    • The number refers to how often you pay your bills. It starts at 1, which means you pay your bills within 30 days of the billing date, and goes until 9, which means you do not pay your bills, you have been placed into collection, or you have filed for bankruptcy.
  • Credit Score
    • Your credit score is a three-digit number that represents the information in your credit report. Credit scores range from 300 to 900 and a higher score is better. In general, a credit score of around 760 or higher is considered good.

What’s in Your Credit Report?

It’s important to know what’s in your credit report. The good news is that it’s easy to find out. You can contact TransUnion or Equifax and they will mail you a copy of your credit report for free. You can pay extra to get an instant copy online. If you want to know your credit score, this will cost extra as well.

Your credit report includes a lot of information on your financial situation. It lists every loan you’ve taken out in the last six years, how often you pay on time, how much you owe, your limits on each account, and a list of authorized credit grantors who have accessed your file (such as a lender that you applied for a loan with.)

How to Improve Your Credit Report

The most important thing that you can do to improve your credit report and credit score is to borrow money and pay it back on time. Lenders want to see that you have a successful history of borrowing money and paying it back. This makes you less risky to lend to. Try not to miss any payments and always pay at least the minimum balance owing, if not more.

Do not go over your credit limit. If you use a lot of credit, creditors may assume that you are a greater risk. Try not to use more than 35% of your available credit. This means if you have $10,000 of credit available on your credit cards, you shouldn’t use more than $3500.

The longer your credit history, the better. If you have an older credit card, think twice before cancelling it. It could benefit you to keep it open even if you rarely use it.

Try to limit the number of times you apply for credit. When you apply for credit, the lender will look into your credit report and this check is noted on your report. If a lender sees that you have several credit checks on your report, they could assume that you are in over your head financially and trying to get credit urgently. They will consider you a riskier person to lend to if they believe this is the situation.