With interest rates rising to combat inflation, a large number of Canadians feel that large purchases, such as houses and new cars, are priced far beyond reasonable expectations. And many economists agree. Your credit score is a reflection of your actions and unforeseen circumstances. Whether you are someone with bad credit or someone who can maintain a great credit rating, there is always room to improve your score. It may take some discipline and maybe learning a new set of financial skills, but it is achievable for all Canadians. In this article, we will help you understand what a credit score is, what factors affect your rating and provide some tips to help you raise your credit score to your advantage.
How will a good credit score impact your future?
In Canada, credit scores range between 300 and 900. However, you’ll find very few people on the extreme ends of the spectrum. Most Canadian’s credit scores fall between 600 and 800. According to Equifax, a good credit score is usually between 660 to 724. If your credit score is between 725 to 759, it’s likely considered very good. A credit score of 760 and above is generally known as an excellent credit score.
Credit scores are set in ranges. Here’s a breakdown of each level, so you can see how they are categorized:
- A score of 800 or above is “excellent”
- A score between 720 and 799 is “very good”
- Between 650 and 719 is a “good” credit score
- 600 to 649 is “fair”
- Anything under 600 is deemed to be a poor credit score
The higher the score, the more you’ve demonstrated responsible credit management. This will give lenders more confidence in loaning you money.
Where does my credit score come from?
A good credit score is based on the three-digit number you receive from TransUnion or Equifax. Your score is calculated from the credit report, which includes:
- Your payment history
- The amount of debt you have, and
- How long your credit history is
The credit score will help a lender figure out what they can offer you in terms of loans or credit cards, and at what rate. If you have good credit, you’re most likely to get the loans you want at low rates. Your good credit shows that you pay your bills and manage your money well enough to pay back loans.
Advantages of a good credit score
Here are some of the benefits you’ll get from having a good credit score:
- Greater chance of getting a lower-interest mortgage: Owning your own home with a low mortgage rate is one of the top benefits to having good credit. The lower your interest, the more money you save in the long run. Your good credit can have lenders competing for your business, so you have the luxury of shopping around for the best offer.
- Better credit cards with perks: You can benefit from getting the best credit cards available in Canada for the lowest interest rates. Some also offer perks, like free upgrades or free flights while you’re traveling. You may get to enjoy additional travel perks, such as free entry to airport lounges around the world.
- Able to rent an apartment in a competitive market: If you have a good credit score, you can easily compete to get the home you want to rent. Landlords that have accommodation in competitive markets will potentially include a soft credit check as part of their process. If you have good credit, you can beat out those people who have a lower credit score.
- Financial perks: If your credit score is really good, lenders will give you the best possible interest rates. Your good credit gives lenders the confidence to loan money to you. Things like unsecured credit loans and low interest loans will be available to you.
- Helps you get hired: If you happen to be looking for a job in the financial world, they may ask to do a credit check on you. Employers have to be careful who has access to other people’s financial information.
How can I obtain my credit score?
The two main credit bureaus in Canada, Equifax and TransUnion, are required to offer a free credit report to anyone who wants one, once per year. However, instead of going directly through the credit bureau, you can open an account with Borrowell (partners with Equifax Canada) or Credit Karma (partnered with TransUnion). Both companies will email your credit score and credit report to you for free every week. It’s free to sign up, and you can access your credit report within minutes of becoming a member. Be sure to take advantage of the free credit reporting, as well as the educational resources both companies offer to help you improve your credit score.
8 ways to improve your credit rating
If you have a low credit score as a result of an unexpected event or poor money management skills, all is not lost. There are a few tricks to improving your credit, and it doesn’t take long to see the improvements. Here are some steps you can take to make sure your credit is in good shape so you can be in good standing for your next big purchase or financial endeavor:
1. Avoid making too many credit inquiries
Anytime you apply for credit, the lender’s inquiry shows on your credit report. Each inquiry lowers your credit score a little. If you’re getting a car loan, it only makes sense to make an inquiry to know where your credit stands.
2. Keep your credit utilization below 30%
If you have revolving credit (credit card or line of credit), the best advice is to pay the balance in full each month to avoid paying interest. This is especially true for high-interest credit cards. If you need to maintain a balance, try to keep it below 30% of the overall limit. Having a high balance in comparison to your credit limit can reduce your credit score.
3. Be cautious about applying for credit
While a soft credit check for credit and loans doesn’t have an impact on your credit score, a hard check does. When applying for a mortgage or are looking to purchase a new car from a dealership, hard checks are carried out. Applying for too much credit all at one time can reduce your credit score.
4. Avoid cancelling credit cards
Part of money management difficulties usually stems from the misuse of credit cards. The debt that you accumulate may be unnerving and your first response might be to cancel the card to take away the temptation. This is the last thing you want to do because it’s connected to your credit history, and cancelling a credit card can negatively impact your credit. Keep it out of your wallet in a safe place, like a safety deposit box, and only use it if absolutely necessary.
5. Pay off unpaid collection items
No lender will approve you for credit with an unpaid collection item displaying on your report. If you do have one, this should be your top priority when it comes to restoring your credit. Too many people have their credit ruined because they didn’t pay a small balance owing.
6. You need to have credit history to be approved for a mortgage
Having no credit at all can be as detrimental as having bad credit. You won’t be approved for a mortgage without having established some credit on your report. The longer your credit history goes back, the better. You should have at least a couple of credit products, like a credit card or small car loan, showing on your credit report for at least a couple of years.
7. Pay bills on time
Pay everything on time, whether it’s your cell phone bill, credit card, rent or loans. Even if you’re disputing a bill, make the payment on time. You can keep on top of your bills by adding reminders on your phone.
8. Guaranteed credit card
If your credit isn’t up to this level quite yet, it’s in your power to change this. You can use a guaranteed credit card. A guaranteed credit card is not a prepaid credit card. Rather, it’s an option that provides access to credit, and a great way to build or repair your credit score. It’s a great tool to learn how to properly manage your credit.
Regardless of your present credit score, remember that good credit differs with each individual creditor. However, if you have a credit score of 700 or more, it’s most likely that any creditor will view this as good. This means you can own a home, finance a car or start a business through a low interest loan. Even if your credit is bad at the moment, there’s an opportunity to improve it by spending modestly and paying for things on time. The low interest rates you can get by having good credit is worth any effort you put into it. Remember, when you’re ready to buy a car or home insurance, speak with one of our isure representatives to help you find the best rates.