You just spotted your dream house or car. Since you can’t raise the full amount to make the purchase, your only option is to take a loan from your bank.
Just a few hours after your application, you are slapped with the heartbreaking “rejected” tag. Dejected, you decide to follow up, and find out that the reason for rejection is your low credit score.
Unfortunately, a low credit score is a serious problem affecting lots of Canadians. With a low score, most people are unable to access much-needed funds in the form of loans during emergencies. It also becomes difficult for them to get credit for making big purchases or investments.
Therefore, everyone should work on improving their credit score. Unfortunately, there is no magic wand you can wave to change your history and improve your score overnight. It takes continuous effort and strategies that you should incorporate into your day-to-day life.
In this guide, we cover all you need to know about your credit score in Canada, including some measures you can take to improve it for a financially stress-free life.
Why is Credit Score Important
A credit score is a number generated by credit bureaus to help lenders and financial institutions weigh your creditworthiness. It is used by banks, insurance firms, mortgage lenders, and prospective employees.
Credit scores determine your likeliness to service a loan. A high credit score implies you’re more trustworthy, which makes it more likely that lenders will loan you at low interest rates. A low score, on the other hand, reduces your likelihood of getting a loan and increases the amount of interest you’ll be charged.
In Canada, a credit score is a three-digit number ranging from bad to good. They vary between 300 and 900, the latter being the worst score.
The average credit score in Canada is around 650.
Credit score ranges in Canada
Credit scores in Canada are classified as follows:
- 300 to 600: It is difficult to obtain financial aid if your credit score falls in this range. If you are given credit, the interest rates will be very high.
- 601 to 657: This range is considered fair, but you will find it difficult to get reasonable interest rates on credit and loans
- 658 to 719: This range is considered good, and lenders will give you favorable interest rates thanks to good loan behavior.
- 720 to 900: This excellent score proves perfect loan payment behavior. You will receive credit quickly and get lower interest rates.
How Credit Scores are Calculated
Different factors and models are used to calculate your credit rating. In Canada, the main credit bureaus are Transunion and Equifax.
The two companies independently collect data such as your payment history from lenders and other financial institutions to produce a credit score. This information includes your payment history and the number of credit accounts.
Nevertheless, each bureau uses a different rating model, meaning your score will vary across bureaus.
The top factors used in calculating your credit rating include:
- Payment history – Your history of payments and late payments dramatically affects your score. It helps bureaus determine your dedication to repaying loans.
- Length of credit history focuses on when you first took a loan or opened a credit card account. It includes everything from personal & auto-loan, secured credit cards, and unsecured credit. A long and good history proves that you are good at repaying your debt.
- Credit Utilization – This refers to the amount of debt you have from your limit. For example, if you have a limit of $1000 and a balance of $100, you are not at risk of missing payments. The recommended ratio is 30% of your credit.
- Types of credit – This factor looks at the type of credit you have to determine your credit score. They include mortgages, loans and credit cards, and others.
- New Credit – Your recent credit activities also determine your credit score. Your score would be lower if you took a loan recently compared to when you have stayed a while.
How to Check your Credit Score
Knowing your credit score is the first step toward improving it.
In Canada, you can get your credit rating from credit bureaus. The two prominent companies are Equifax and Transunion, and they send your ratings to financial institutions when you apply for credit. The reports are sent online, via mail, in-person, or by phone at a small fee.
You can get free credit check providers with a simple online search. You can also subscribe to a MyMarble account for free credit score checks and receive personalized recommendations on how to improve your credit rating.
Credit bureaus are also required to send you a yearly credit report at your request.
Also, remember that your rating is an approximation and not the truth. Use it to move to where you want and forget about it.
With the understanding of how credit scores work, we can dig into tips on how to improve your credit score.
How to Improve your Credit Score
While it may seem simple, improving your credit score can be tricky. It incorporates your payment history and takes up to months to see any significant changes. So if you want to add a few numbers to your score, there are things you ought to do.
Here are our suggestions for improving your credit score:
Pay your Bills on Time
The first step to improving your credit rating is paying your bills on time – every time.
Bills payment affects your score the most, and having late payments negates it and reflects negatively.
If you have missed the bills before, you can start fresh by paying all outstanding debt and planning how to pay future bills.
You can start by automating the payment of recurrent bills such as rent to avoid missing payments. As a result, all our bills are paid in time, and your score improves gradually.
You can also make the minimum payment if you cannot get the total amount.
Review and Inspect your Credit Report
Routinely requesting your credit report and inspecting it is crucial to improving your credit score. It helps you report and dispute errors that could be affecting your score.
Errors in your report could include incorrect personal information, faulty status like a late payment on payment made in time, outdated information, and unauthorized hard checks.
You should contact the credit bureau with your concerns, and they will investigate and contact you in a few days.
You will see an improvement once the issues are solved.
Get a Secured Credit Card
It is difficult to obtain a regular credit card if you have a poor credit score or do not have a credit history.
Fortunately, you can build your credit score using a secured credit card. A secured credit card mandates you to make a cash deposit and act as your credit limit when you open your account.
So if you deposit a thousand dollars to your account, your credit limit automatically becomes a thousand dollars.
You will see an improvement in your credit score if you use the secured card responsibly and pay all bills.
Keep a Low Balance
Maxing out or having a high credit balance impacts your credit score.
Credit reporting organizations will look at how much of your available limit you are using and calculate a utilization ratio.
Keeping your ratio below 30% helps add digits to your credit score. It applies across all your credit cards as the report consolidates them.
Another way to achieve a low balance is to ask your credit provider to increase your credit limit. You can also settle your balances more frequently.
Always avoid going beyond your credit card limit.
Keep a Good Credit History
The length of your credit history affects your score. The longer your credit account is open and used, the higher the score.
Keep all old accounts open even if you are not using them. Closing a credit account shows an inability to manage credit and lowers your score.
Remember that transfering an old account to a new one makes the new account new credit.
Ensure the account remains active and has no fees. It is a simple, savvy way of improving your credit rating.
Limit your number of Inquiries and Applications
Regular application for credit hurts your score. It is documented as an inquiry or credit check and will raise red flags to lenders.
Many credit checks represent an urge to believe beyond your capabilities or desperation to get credit.
You can keep the number of inquiries low by doing the following:
- Applying for credit when necessary only
- Ask for quotes within two weeks and have them count as a single inquiry
- Reducing the number of credit applications
Hard Credit Checks vs. Soft Credit Checks
You may have come across someone advising you not to check your credit report for fear of hurting your score. Well, it’s a lie.
Checking your credit report does not hurt your credit score!
There are two types of credit checks, and only one affects your score.
First, hard credit checks occur when a lender or financial institution checks your credit report when approving your loan request. It is recorded in your credit report, hurts your score, and is viewed by anyone looking at your report.
Hard credit checks could include:
- Credit card applications
- Mortgage and auto-loan applications
- Some employment applications
Secondly, soft credit checks occur when you check your report or a business wants to update an account you have with them. It does not appear on your report nor affects your score. It is also visible to you and whoever requested the check only.
Vary your Credit
Having different types of well-serviced credit accounts improves your credit score. Many credit accounts show lenders and financial institutions your credibility in handling credit.
You can have accounts on credit cards, installment loans, lines of credit mortgages, and auto loans.
Remember, it is not an excuse to drown yourself in debt.
Improve Your Credit Score with Boost
If your credit score is bad, there is hope. You can increase your credit score with the right financial discipline. Ask for your credit report, check for errors, and follow the steps mentioned above.
If you are looking for fast results, you can subscribe to Boost, a unique financial product that will help you increase your score by up to 150 points in a short time. It implements a loan repayment structure that reports directly to credit bureaus, helping the changes reflect quicker.
Don’t let a bad score hold you back. Partner with Marbles today and enjoy a stress-free life with more financial opportunities.
