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How to Improve Your Credit Score

Your credit report and credit score are important. Whenever you apply for a loan, the lender will almost certainly look at your credit score and use it to decide if they will give you the loan and, if they do, what interest rate they will give you.

Lenders use your credit report and your credit score to determine how risky it is to give you a loan. People with good credit scores are considered less risky, so they will be more likely to get a loan and to get a favourable interest rate when they do.

What is a Credit Score?

If you want to improve your credit score, it’s important to understand what a credit score is. Simply put, a credit score is a three-digit number that represents the information in your credit report. Your credit report contains information on every loan you have taken out in the last six years. This means it details how much you owe, how often you pay, the limit on each account, and more.

Credit scores range from 300 to 900, with higher being better. In general, if you have a score lower than 650, you may have difficulty getting new credit. Those with scores over 700 are considered to have good credit and a score over 800 is considered excellent.

To find out what’s in your credit report, you can contact the major credit bureaus in Canada (Equifax and TransUnion) and they will mail you a copy of your credit report for free. If you want to know your credit score, however, you will need to pay. Recently, however, some financial institutions such as banks have been give their customers access to their credit scores for free.

Factors that Affect a Credit Score

As mentioned, your credit score is generated based on the numbers in your credit report. While the credit bureaus don’t make the formula they use to generate scores public, the factors that affect a credit score are known.

Factors that affect your credit score include:

  • Your payment history
    • Consistently making payments on time is one of the biggest factors affecting your credit score. Lenders want to see that you can keep on top of your bills.
  • Your outstanding balances
    • If you’re using almost all of the credit available to you, this can look like you’re maxed out and using more credit than you can reasonably pay back.
    • Most lenders like to see someone use about 30% of their available credit (or less). This means if you have a $10,000 limit on your credit cards, you should try to keep your balance to $3000 or less.
  • Your account history
    • The longer you have an account open, the better this is for your score.
  • Recent inquiries made to your account
    • Whenever you apply for new credit, the lender looks into your credit report and this check is recorded. If there are a lot of recent inquires listed on your credit report, it can look like you are urgently trying to get credit because you are living beyond your means.
    • Note that looking at your own credit report does not generate an inquiry that others can see.

Improving your Credit Score

If you have a poor credit score, it’s important to know that this can’t be changed overnight. In fact, the only way to immediately improve your credit score is if there is an error in your credit report and you have it corrected. Otherwise, it takes time to improve a credit score. Over time, following good credit habits will improve your score.

Here are some things you can do:

  • Pay your bills on time
    • This is perhaps the biggest factor. If you have outstanding debts (credit card debt, a line of credit, a car loan, etc.) make sure to make your payments on time. When you miss payments, this is noted on your credit report and it negatively affects your credit score.
  • Keep your balances low
    • Don’t max out your cards or borrow more than you can afford to pay back.
  • Only apply for new credit when it’s needed
    • Avoid opening new accounts for convenience or to have a different mix of accounts. Not only can this hurt your credit score, but the more credit you have available, the more tempted you will be to use it.