How To Build Or Improve Your Credit Score
Financial success in our society is often dictated by what type of credit score we have. Your credit score is a series of three numbers that serve as a numeric summary of the information in your credit report. Your credit report is particularly important and holds details of every type of credit (including credit cards, payday loans, bank loans, department store credit, etc.) you have applied for and received over the previous six-year period. This includes information on how much debt you owe, how often you pay your bills (and if you pay them on time or let the deadlines slip), the credit limit on each account, and other related information.
Credit reports are maintained by two major credit bureaus in Canada (Equifax and TransUnion). Your creditors (the people you owe money to) provide these credit bureaus with regularly updated information on your loans. The credit bureaus then use this information to update a report and a credit score for each person. Every person’s credit report is unique to them.
If you apply for a loan, lenders will review your credit report and/or your credit score. They will use the information they see in your report to determine how risky it might be to give you the loan you are applying for.
What is “Bad Credit?”
Credit scores range from 300 to 900, with higher being considered better. If you have a score of less than 650, it could be difficult for you to obtain new credit and you may have to pay a higher interest rate on any loans you do get. That is because lenders will consider it riskier to lend you money. A credit score of 750 to 800 is considered exceptionally good and if you can build up your score to that level you will find access to new credit improves dramatically.
People end up with poor credit for many reasons, with the main ones being:
- Missing bill payments or paying bills late (utility bills can cause far more damage than a late credit card payment)
- Carrying too much debt
- Using a substantial percentage of your available credit (more than 30% is best to be avoided)
- Applying for frequent loans or credit cards:
- If you are making frequent credit applications, lenders could think you are having financial difficulty
- Having multiple applications for credit declined on your report will further damage your credit rating
What is “No Credit?”
People who are considered to have “no credit” are those who the credit bureaus do not have enough information on to predict their behavior. Without this information, it is tough to determine how likely a person is to pay their bills. This situation usually applies to people who have not borrowed money or taken out very many loans in recent years.
If you have no active credit accounts, or if you have only recently applied for credit, lenders may be less likely to give you a loan. That is because they do not have the information they need to determine the level of risk of lending to you.
Having no credit does not mean you have poor credit. It means there is not enough information available for lenders to classify you for the purpose of giving you a loan.
Tips for Improving your Credit Score
The good news is that building your credit score or improving your credit score is possible. Here are some tips:
- Pay bills on time
- This is the most crucial factor that goes into calculating a credit score. Missing payments can seriously hurt your credit score. Save your due dates in your calendar and make sure you do not miss any payments.
- If you end up in a situation where you think you might not be able to make a payment, contact the creditor before the bill is due and see if you can work something out.
- Do not borrow too much and pay down what you have borrowed
- Borrowing reasonable amounts and making on-time payments is the key to building credit.
- The amount of credit you are currently using compared to how much credit you have available is called your credit utilization. For instance, if you have two credit cards and each one has a $5,000 limit, you have $10,000 of available credit. If you have a balance of $4,000 owing, then you are using 40% of your available credit. This means your credit utilization is 40%.
- In general, lenders like it when someone is using no more than 30% of their available credit.
- If you are using more than 30% of your credit, paying down your outstanding balances will reduce your credit utilization and improve your credit score.
- Correct errors in your credit report
- You can get a free copy of your credit report by mail by requesting this information from TransUnion and Equifax. If you want an electronic copy or if you want a copy of your credit score (not just your report), you will need to pay a fee through the credit bureaus (though some financial institutions offer these reports to their customers for free). Smartphone apps such as Borrowell and Credit Karma can give you an updated credit report for free.
- Check your credit report for errors and, if you find any, let the credit bureau know by submitting the correct online form to them so they can correct the errors. It helps if you have documentation to support your claims.
Improving poor credit or building credit takes time. You do not get a good credit score overnight. Any organization that claims to be able to fix your credit quickly for a fee is not being truthful with you. By following good credit habits, you will slowly build your credit over time and improve your credit score. But it can be a slow, laborious process.
In some cases, you could be asked to share your credit score when applying for a new job or renting an apartment. Some insurance companies are also using credit scores to determine the cost of auto and home premiums for their clients. This means it is virtually impossible to exist in our modern-day world today without a credit score. And the better the score, the more you can do in our society.
If you are finding your poor credit score is making life difficult for you and think you may need help to resolve your debt pressures, please reach out to the professionals at Farber by CLICKING BELOW ON THE FREE CONSULTATION BUTTON. We will review your situation and provide you with advice on how best to get rid of, or clean up, your existing debt and build a good credit rating moving forward. Call us today!