Achieving a stellar credit score is crucial for securing lower interest rates and effortless approval on credit cards and loans. If your credit score has faced setbacks, there are straightforward tactics you can employ to swiftly enhance it, beginning today.
The duration required to enhance your credit score is variable and hinges on its current condition. With a strategic approach, substantial improvements can be observed in as little as 30 days.
Regardless of the severity of your credit score challenges, adhering to the correct strategy can result in a rapid increase of 100 to 200 points in no time.
What is a Good Credit Score?
A credit score is a three-digit number provided by credit bureaus such as Equifax and TransUnion to assess your creditworthiness. Lenders, including banks, mortgage lenders, insurance companies, utility providers, and sometimes employers, use this information.
In Canada, credit scores range from 300 to 900, with the following classifications:
- 800 – 900: Excellent credit score
- 720 – 799: Very Good credit score
- 650 – 719: Good credit score
- 600 – 649: Fair credit score
- 300 – 599: Poor credit score
In the United States, the scale ranges from 300 to 850.
A credit score in the “good” to “excellent” range in Canada makes it easy to secure loan and credit approvals and qualify for competitive rates. Conversely, falling into the “poor” to “fair” category may lead to subpar rates on credit lines or outright denials.
8 Ways To Increase Your Credit Score in Canada
Follow these eight simple steps to start raising your credit score today:
#1 Inspect your credit report and score
According to the Federal Trade Commission, approximately 1 in 5 consumers encounter errors in their credit reports that adversely affect their credit scores. This significant statistic underscores the importance of regularly obtaining your free annual credit report and meticulously examining it for inaccuracies.
By law, the two prominent credit bureaus, Equifax and TransUnion, are mandated to furnish you with one copy of your credit report per year upon request.
Additionally, services like Borrowell (Canada) or Credit Sesame (U.S.) offer free weekly or monthly access to your credit report, along with your credit score. It’s crucial to note that checking your own credit score (and report) is considered a “soft inquiry” and has no impact.
Errors in your report may encompass incorrect personal details, inaccuracies in status (e.g., marking timely payments as late), unauthorized hard inquiries, or outdated negative information (e.g., collections, bankruptcy, debts paid in full).
You have the right to dispute any errors on your credit report and request their removal. The credit bureaus will investigate your claim and provide a response within 30 days.
#2 Keep a low balance
Maintaining a high credit balance is frowned upon by credit reporting agencies, and it can adversely impact your credit score. One key metric used to assess your credit usage is the “credit utilization ratio,” which gauges the proportion of your total credit being utilized.
Consider having two credit cards, A & B, each with a $5,000 credit limit. If you carry a $2,000 balance on Card A and a $1,000 balance on Card B, your credit utilization ratio is computed as follows:
Total credit limit: $5,000 + $5,000 = $10,000
Total debt: $2,000 + $1,000 = $3,000
Credit utilization ratio: $3,000/$10,000 = 30%
It’s generally advised to aim for a credit utilization ratio below 30%, with lower ratios being more favorable. Strategies to achieve this include:
- Request a credit limit increase: A higher limit reduces your utilization. For instance, doubling your limit cuts your utilization in half for the same spending.
- Pay down your balances more frequently: Credit card issuers report your balance to the bureaus monthly, and maintaining a lower reported balance works in your favor.
#3 Keep old credit alive
Your credit score is influenced by the length of your credit history. It’s advisable not to cancel old credit cards that are in good standing, even if they are seldom used nowadays. Retain these cards and use them occasionally to demonstrate some “activity” on your credit profile.
Closing old lines of credit not only erases the historical data associated with them but also diminishes your total credit limit. This reduction can have a negative impact on your credit utilization ratio, affecting your overall creditworthiness.
#4 Pay your bills on time
The primary stride towards enhancing your credit score involves consistently paying off your credit card balances promptly—without exception. Payment history stands as the paramount factor influencing your score.
Late payments are recorded on your credit report as adverse information, and the timing of the payment delay correlates with the severity of the impact on your credit score.
Even if past instances involve missed bill payments, the sole avenue to rejuvenate your score is to commence settling payments prior to their due dates. Streamlining this process can be achieved by automating your bill payments to mitigate the risk of oversight.
#5 Vary your credit
Maintaining a range of credit accounts, such as credit cards, installment loans, lines of credit, and mortgages, is beneficial. Proficient management of these diverse credit facilities signals to credit bureaus that you are a responsible borrower.
The composition of your credit mix holds a weight of approximately 10% in influencing your credit score. Ensuring a well-rounded assortment of credit types can contribute positively to your overall creditworthiness.
#6 Plan your credit shopping
Each time you seek credit, a hard inquiry is recorded on your credit file, leading to a decrease in your credit score. When exploring credit options, such as shopping for the best interest rate on a car loan, aim to complete these inquiries within a concise timeframe—ideally, within 2 weeks.
Credit reporting agencies consolidate multiple hard inquiries made within this short period into a single impact. This approach minimizes the potential negative impact that numerous individual inquiries could otherwise exert on your credit score.
#7 Consolidate your debt
For individuals grappling with a substantial credit balance and struggling to make headway in reducing it, a low-interest balance transfer credit card presents a valuable opportunity to trim thousands of dollars in interest payments.
An illustrative option in Canada is the Scotiabank Value Visa Card, boasting a 0% interest rate for the initial 6 months, followed by a competitive rate of 12.99%.
To capitalize on this approach, it’s advisable to devise a plan to repay the entirety or a substantial portion of your debt during the favorable low-interest period, typically spanning 6 months.
Alternatively, if you qualify for a personal loan with a reasonable interest rate, leveraging this option to settle your credit card balance can result in substantial savings.
#8 Get a secured credit card
For individuals grappling with a poor credit score or lacking a credit history, securing approval for a conventional credit card can pose a challenge. In such cases, a “secured” credit card emerges as a viable solution, requiring a deposit (held in a designated account, such as a GIC) that matches the credit amount extended, effectively mitigating the risk for the issuing bank. For instance, a $2,000 credit limit would entail a $2,000 deposit.
A secured credit card serves as a constructive tool for credit building when traditional options are limited. Upholding timely balance payments remains imperative, offering a practical opportunity to cultivate responsible credit usage habits.
Exploring other secured credit card options available in Canada is advisable.
Additionally, another avenue for enhancing your credit score involves becoming an “authorized user” on someone else’s credit account. If you have access to an individual with an exemplary credit history, they can designate you as an authorized user on their credit card. While you won’t be issued a physical card, their positive credit history can positively impact your own credit score.
How to check your credit score and report for free
While purchasing a credit score from Equifax and TransUnion can cost around $20, there’s no necessity to do so. Several companies now offer free access to your credit score and report:
In Canada:
- Borrowell: Obtain a complimentary credit score and report (utilizing Equifax), updated on a weekly basis.
- Credit Karma: Provides a free credit score and report (using TransUnion).
United States:
- Credit Sesame: Offers a free credit score and report.
- Credit Karma: Provides a free credit score and report.
It’s essential to note that checking your credit score through these methods does not have any impact on the score itself.
Alternatively, you are entitled to receive one free credit report annually from TransUnion and Equifax. Obtain them through the following means:
- TransUnion: Online, via mail, in-person, or by phone at 1-800-663-9980.
- Equifax: In person, via mail, or by phone at 1-800-465-7166.
How is your credit score calculated
Calculating your credit score involves considering various factors. The key criteria employed by FICO include:
A. Payment History: Contributes 35% to your credit score, making it the most influential factor.
B. Amount Owed: Accounts for approximately 30% of your credit score.
C. Length of Credit History: The longer your credit history, the better, constituting about 15% of your credit score.
D. New Credit History: Recent activities on your credit, such as opening new accounts and inquiries, make up around 10% of your credit score.
E. Types of Credit: The variety of credit accounts you have opened constitutes the remaining 10% of your credit score.
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