We always hear that we should strive to have good credit scores, but many of us don't always recognize the importance of planning ahead. Your credit score is often used as the basis in determining whether you qualify for a loan. Even if this might not seem relevant now, there may come a day when you need to make a major purchase, such as a new car or home. And while your primary way to make such purchases is to save money in your bank account, that might not always be enough. You may also need to consider a mortgage or car loan.
In order to do that, many financial services and major credit bureaus will look into your credit score to determine if you qualify for a loan and for how much.
If you find yourself in a situation where you need to increase your credit score quickly, here is what you need to know.
Before we discuss ways to improve credit scores, it's important to first understand exactly what a credit score is and why it matters.
A credit score is a three-digit number (usually between 300 and 850) and it is used to represent your credit risk. Essentially it tells lenders how likely you are to pay your bills on time.
There are many different types of credit and not all terms can be used interchangeably. Here are some definitions of keywords you should remember.
Credit Score: This is a three-digit number used to represent your history of paying bills on time. A higher credit score generally results in more favourable credit terms.
Credit History: This is a record of your responsible repayments of debts. Strong credit history is usually an indication that you make on-time payments.
Credit Report: This is a record of your payment history from multiple sources, which can include banks, credit bureaus, collection agencies, credit card companies and governments.
Credit Limits: These are used to determine how much you can spend using your secured credit card. Enforcing a limit allows lenders to limit the amount of risk when they lend money.
So you're wondering how to increase your own credit score? Luckily, there are multiple ways for you to do that. Here are the quickest and most efficient ways for you to improve your credit score and put yourself in good financial standing.
You can retrieve a free credit report from any of the credit reporting agencies in Canada once a year. By getting a copy of your report, you can look for any potential errors that lower your credit score and take action to have them corrected. Additionally, you have the option to review negative factors and work towards improving them. This could include avoiding late or missed payments and finding ways to reduce debt.
One of the most common ways someone's credit is negatively impacted is when they make late payments. Credit card payments especially have high-interest rates and can end up costing you more time and heartache in the long run. To ensure you make monthly payments by the due date, consider setting up automatic payments with your bank or sign up for email alerts from your credit card company.
Be sure to pay off any collections in order to increase your score. While the record of debt going into collections will still be on your credit file, not paying it off will only make matters worse.
Even if you have access to higher credit card limits, it's important to keep your credit card balances at or below 10 percent in order to boost your score. If you have a balance that is close to or over the credit card limit, it can significantly reduce your score.
Opening newer credit accounts in a short period of time can actually lower your score. Don't apply for additional credit unless you actually need it - contrary to popular belief, it won't necessarily boost your available credit.
Closing your unused credit card accounts will not only reduce your total credit limit but will also lower your credit score. By keeping the accounts open, you will show that you can responsibly manage your available credit limit. This is especially important when it comes to older accounts - a longer history greatly improves your score. It is even better if it shows you have been ordered a credit limit increase.
When it comes to personal finance, the Government of Canada recommends that borrowers have various types of credit, as opposed to too many credit cards. It's a good idea to have both installment loans and credit cards, especially if you are paying off student loans.
Missing a payment can lead to a lower score of approximately 100 points. That is why it is important to avoid making the minimum payment and pay all your bills on time and in full. This will not only help with your payment history but also contributes to a higher score for your credit.
Lower interest elsewhere may seem like a great incentive for transferring credit card debt, but it is actually better for your credit score if you work towards simply paying it off completely. That is the right course of action in order to attain a high credit score. After all, no debt is better than low-interest debt.
If you're a first-time homebuyer, financial planning is crucial. If you don't know how much credit you have or need in order to qualify for a mortgage, it's always a good idea to consider credit inquiries with the Credit Bureau of Canada. Requesting your own credit report is an example of a "soft hit" and won't impact your score like a "hard hit". In fact, it will help you to improve your credit score in the long run.