How To Improve Your Credit Score

Most of us have only a vague idea what our credit scores are. Very often people think they have great credit scores, and then their credit report ends up showing a poor or average credit score. There are many reasons why this happens.

You don’t have to be an expert in personal finance to maintain a good credit score. In fact, you only need to know (and do!) a few simple things.

The information below will help you improve your credit score.  Let’s start with the basics.

There are two major credit reporting agencies, Equifax (www.equifax.ca) and Trans Union (www.transunion.ca). Think of them like news reporters for everything you do involving debt and credit. They report everything you do (or as much as possible) to companies that offer credit to customers, like banks, mortgage lenders, credit card companies, car-loan companies, cell-phone companies, etc.

Why do banks and these companies want to know about you and your credit history? It’s because these companies will use your current and past repayment history to determine the chances of your paying back any money they decide to lend you.

The reports that Equifax and Trans Union create about you come in two formats. One is for consumers, you. The other report is for the credit bureau’s members. Members include companies and individuals that work in the area of lending and managing credit. Like mortgage brokers, for example.

Tips

  • You can’t erase bad credit.
  • You can’t remove bankruptcies or consumer proposals from your credit report.
  • But you can raise your credit score by 100 points in less than a year.

Here’s how.

First Step: Know Your Score.

Don’t just use those free tools many banks allow their customers to use.  You need more details.  Request an actual credit report from one of the two national credit-reporting agencies, Equifax or Trans Union.  Depending which company you choose (Equifax seems to be more popular among mortgage brokers), you can make the request by phone, email, online, or even in person.

To request from Equifax, click here.

To request from Trans Union, click here.

Understanding Your Credit Score (and Your Credit Report)

Your credit score (also called a Beacon score, or a FICO score) is a number that describes your current and your past use of credit. It ranges between 300 (the lowest possible score) and 900 (the highest possible score). A score of 300 is the worst credit score, and 900 is the best. In the USA people call these scores “FICO scores”—they’re the same thing as credit scores in Canada.

For lenders, your credit score will influence their decision to lend you money, as well as the terms and conditions of that loan. Why do these scores matter? Well, because the lower a person’s credit score, the higher the chance that person will not pay back money loaned to him/her.

Credit Scores and Delinquency/Default Rates

Next we want to understand what affects your credit score. It’s actually pretty simple. There are six factors, shown here below:

Factors That Make Up Your Credit Score 

Here are the factors, in order of importance.


Payment History: This is the biggest factor, making up 35% of your credit score. Never miss a payment! Pay on or before the due dates. Public records such as judgments, bankruptcies, third-party collections, etc. will all have a big (negative) impact on your credit score.

Amounts Owed: This is the second biggest factor, making up 30% of your credit score. The rule of thumb: keep balances below 30% of the available credit limit. Why? Because if you’re using more than 30%, it suggests (to the credit-scoring agencies) that you need credit in order to fund your day-to-day lifestyle (as opposed to funding your needs through your earnings and income). You want to use credit regularly—not using it will leave you with a lower credit score. But just don’t surpass the 30% limit on any single credit source.

Length of Credit History: This is the third biggest factor, making up 15% of your credit score. The longer you’re had a credit card or cell phone plan, the better. If you’re considering closing an account, then it might be a good idea to close the newest account, that is, the one most recently opened. 

New Credit and Inquiries: This is the fourth biggest factor, making up 10% of your credit score. The logic here is this: if you’re constantly trying to get more credit, then you’re seen as a credit seeker. Needy. Fortunately, if you’re seeking an auto-loan, or a mortgage, or a cell phone, then it’s reasonable that you should apply with a few companies. For this reason, there’s a thirty-day buffer. For example, if you apply for a car loan on January 1, and then again on Jan. 10th, and then again on January 30th, those three inquiries on your credit score won’t matter. Why? Because they occurred in the same 30-day window.

Types of Credit Used: This is the fifth biggest factor, making up 10% of your credit score. At the bare minimum, you want a store credit card, and a major credit card (Visa, Mastercard, or American Express).

The last thing to understand are Public Records on your credit report. If you have any, you want to understand them (and address them in your credit-improving efforts) ASAP. Here are the public records that can show up:

  1. 1
    Bankruptcies: it means you were legally declared to be unable to pay your debts. 
  2. 2
    Third-party collections: it’s a debt that the creditor couldn’t collect from you, and therefore the creditor hired a third party to collect the debt. This third party is usually a collection agency.
  3. 3
    Judgments: this is a court order against you for payments owed. Maybe you’ve been sued and lost. Or you owe child support or alimony. There are many possible judgements. Address them!
  4. 4
    Other: foreclosures, orderly payment of debt (OPD, which is only available in Alberta, Saskatchewan and Nova Scotia), and credit counselling.
  5. 5
    Secured loans: this could be a registered loan, a chattel mortgage, or registered lien. In all cases it’s when you’ve pledged personal property as collateral, and the loan itself is registered with the provincial government. Keep in mind that, unlike the other public records (#1 - #4 above), a secured loan isn’t a bad thing. Just know about it and realize you have pledged assets to secure a loan.

Second Step: Fix Inaccuracies.

What’s easier, paying off your biggest credit cards or car loans, or contacting the credit agency to remove inaccuracies from your report? Exactly! Removing inaccuracies from your report.

It’s estimated that roughly 25% of the population has some inaccuracy in their credit report.  25%! It’s an imperfect world. Errors in your credit report can affect your credit score. This is why you want to remove them as soon as possible.

How to remove inaccuracies:

  1. 1
    Read your report through from beginning to end.  Use a pencil and circle, underline, or put little stars next to everything you want to revisit.
  2. 2
    Contact the credit agency and advise it of the errors. Depending on which organization the error involves (for example, it might involve a bank, or a gym, or a cell phone company, etc.), you might need to take different actions. Don’t get stressed about having to do this—it happens everyday to millions of people in North America. Just get it done!

Third Step: Get A High-Level View.

There’s an important factor that determines your credit score: “credit utilization.” It means how much of your available credit you actually use. Use too much and your credit score drops. Use too little and your credit score might also drop, or not reach its potential. (You want a high credit score, not a “good” or an average one.)

For all your debts with interest rates, get the following information for each one:

  1. 1
    The annual interest rate
  2. 2
    The current balance (how much you currently owe)
  3. 3
    The minimum payment required
  4. 4
    The maximum credit limit you have available

With this information, you’re going to calculate your credit-utilization ratio for each debt. The credit-utilization ration is (#2 above) the current balance of the debt, divided by the maximum credit limit you have available. For example, say you have a Mastercard and the current balance is $2000. On that same Mastercard, your credit limit is $3000. Divide $2000 by $3000 and you get 0.66. 0.66 equals 66%. So that’s the credit utilization ration for that debt: 66%.

Is 66% good or bad? It’s bad! I’ll explain why.

Amounts Owed: This is the second biggest factor, making up 30% of your credit score. The rule of thumb: keep balances below 30% of the available credit limit. Why? Because if you’re using more than 30%, it suggests (to the credit-scoring agencies) that you need credit in order to fund your day-to-day lifestyle (as opposed to funding your needs through your earnings and income). You want to use credit regularly—not using it will leave you with a lower credit score. But just don’t surpass the 30% limit on any single credit source.

Remember this too: Never pay less than the minimum required. Are you having trouble paying on time, or scheduling your payments? Easy solution: pay twice per month, every second Friday. Then you’ll never miss your monthly payment.

You want to pay MORE than the minimum payments on all your debts. If you have extra cash floating around, then either pay down the debt with the highest interest rate, or pay down the debt that has the hight credit-utilization ratio.

Long-Term Perspective

Credit scores take time to improve. Don’t let that strip you of motivation. Better to start now with small, easy steps than begin trying, years from now, to make magic happen. There is no magic to credit score and reports. Just start with what’s in front of you now. And what’s in front of you now should be your credit report!

To give you an idea of how long the credit-reporting agencies keep information, here’s a chart with the actual numbers.

"Trade" or Event

Number Of Years The Event is Kept On File


Equifax

Transunion

Credit transactions, from the date of last activity

6

6

Judgments, from the reporting date

6

7

Collections, from the first date of delinquency

6

6

Secured Loans, from the date opened

6

5

Bankruptcy, from the date of discharge

6

7

Consumer Proposal, from the date satisfied

3

3

Credit Counseling, from the date paid

3

2