Every Canadian has a credit score, but most of us have a pretty foggy understanding of what they mean and how they work.
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Every Canadian has a credit score, but most of us have a pretty foggy understanding of what they mean and how they work.
Some of that is purposeful. The two major reporting agencies, TransUnion and Equifax, are discreet on the details of how they calculate scores. They do this both to protect their business, and to make it more difficult for people to “game” their credit ratings.
Despite this veil of secrecy, there are a number of simple best practices you can employ to improve your credit score over time. If you follow these tips, you’ll be well on your way to a stable financial future!
We’ve done our best to boil things down to the following seven steps.
First things first, you need to know what your current credit score is. As we mentioned before, credit scores in Canada are reported by TransUnion and Equifax. While each company calculates your score slightly differently, both use a scale that ranges from 300 (terrible credit) to 900 (excellent credit). Both companies rely on information reported by companies with whom you’ve done business, and will reflect the following:
Both TransUnion and Equifax are legally obligated to provide you with your credit report for free upon request, and you are not limited in the number of times you may ask for them. However, both companies will only provide a physical copy of your report for free. (Your report may be viewed online for an added fee.)
Here are links to the request forms:
It’s important to note that the score you see may not be identical to what a lender sees when they make an inquiry. That’s because Equifax or TransUnion may weigh different factors more heavily in their score calculation based on what the lender is looking for.
Reading over your credit report, you may notice errors. For example, a debt undertaken by someone else with a similar name may have been misattributed to you, or a debt which you have repaid may not have been reported.
These errors are common enough to affect the credit of thousands of Canadians. Fortunately, there are mechanisms to rectify these problems. A good first step is to reach out to your creditor to explain the situation and ask that they inform the credit bureau about the mix-up. You can also register a protest with Equifax and/or TransUnion directly. If you’re able to prove the error, it will be stricken from your credit report and your rating should rise accordingly.
Familiarize yourself with the term “credit utilization.” Credit utilization refers to what percentage of your overall credit you are using at any given time.
For instance, if you have a line of credit with a maximum of $15,000, and a credit card with a limit of $5,000, your total available credit is $20,000. If you are currently using $2,000, your credit utilization is 10%.
The simplest, and most important, way to improve your credit score is to make your bill payments on time every month. It can be easy to forget to pay, for example, your cell phone bill, even when you have the money on hand to do so—but each time you do, you’re hurting your credit.
Use automated billing so that payments are always withdrawn on time, and mark down when bills come due in your calendar. It’s critical to ensure that there will be enough money in your account so that these payments don’t bounce.
If you expect to have a problem making a payment, contact the person or company you owe to let them know. Often, it’s possible to make an alternative arrangement, which will prevent them from having to send notice that you’ve missed payment to the credit bureau.
Lenders like to see a mix of different types of credit. This proves that you are competent to manage different kinds of debt. If you already have a credit card, for example, you might consider also taking out a small personal loan.
This suggestion can be risky, as it’s far worse to have more overall debt than you can manage from multiple sources than an amount you’re comfortable with from a single source. However, if you’re financially secure enough to open up a new line of credit, and to use it responsibly, it can be a boon to your score.
Above all, be consistent. Restoring your credit rating to a healthy level takes time, as lenders want to see that your newfound fiscal responsibility isn’t just a passing phase. But with consistent good habits come rewards.
For example, if you have had the same credit card in good standing for many years, it will be seen as further proof of your reliability. Even if you’re getting a new credit card, consider keeping the old one open as well and using it from time to time to keep it active. (Obviously, if there are significant fees associated with keeping both cards active, ditch the less useful one!)
Finally, be careful about the number of credit checks you invite. There are two types of credit inquiry:
Hard Hits
A “hard hit” is a credit check that will appear on your credit report for anyone who requests it to see. While each individual hit has only a negligible effect on your score, if you have many over a short period of time your score will take a hit. “Hard hits” might include when you apply for a new loan or credit card, as well as some employment or rental applications.
Soft Hits
A “soft hit” is a credit check that only you will see on your report, and which does not affect your score. A good example of this is when you request your own report.
If you have a lot of hard hits on your record, it may suggest to lenders that you are trying to live a little beyond your means. For this reason, we recommend only applying for credit when you have good reason (as opposed to any time an attractive offer arrives in your mailbox).
Also, if you’re shopping around for a loan, try to ensure you file all your applications within the same two-week period. In this way, all the checks on your credit will be filed as a single inquiry in your report.
As we’ve said throughout this guide, there’s no lightning-quick way to improve your credit rating. But if you’re committed to spending with wisdom and sticking to your financial commitments, you’ll see big changes sooner than you might think!
