Your credit score plays a huge part in determining whether you qualify to borrow money, so actively trying to improve it is always a good plan. Whether you need a car loan, are looking to buy a house, want to increase your credit card limit, or need to access cash for home improvements, your credit score has a big impact on where you stand in the eyes of any lender.
The first step to improving your credit score is knowing what it is. Those three digits could help you determine the interest rate you’ll receive when you apply for a mortgage/loan, so understanding what your score is and where you land on the scale will help you get a better grasp of what you can do to improve. Remember that credit scores are not etched in stone, they are ever-changing. While your score may be low currently, it doesn’t mean it’ll be low forever. Following the tips below will help you work to improve it over time while focusing on being responsible with your credit:
Improve Payment History
Your payment history makes up 35% of your credit score, making it the biggest factor in determining your overall number. Payment history refers to how timely you are when it comes to making your payments on past and current debt. It’s very important to always make your payments on time, even if it’s only the minimum that you’re paying. Be sure to never skip a payment, even if a bill is in dispute, and always reach out to your lender right away if you’re concerned about not being able to make a payment.
Don’t Go Above Your Credit Limit
While you may have a credit card with a $10,000 limit, that doesn’t mean you should be using anywhere near the maximum credit. In fact, how much available credit you’re using (credit utilization) makes up 30% of your credit score. As a rule of thumb, try to use less than 35% of your available credit as it’s always better to have a high credit limit and use less of it each month. If you tend to use up a lot of your available credit, lenders may see you as a risk, even if you pay your balance in full when it’s due. To calculate your ideal credit usage each month, add up the credit limits for all your credit products (loans, credit cards etc.) and then calculate what 35% of that total equals so you know how much credit you should be using each month overall.
Increase Credit History Length
The length of time you’ve been establishing credit accounts for 15% of your overall credit score so it’s important to keep your oldest credit cards active, even if you never use them. Instead of cancelling your old credit cards, make sure you’re aware of any yearly/monthly fees and try to use the card every so often. Be aware that transferring an older account to a newer one is considered new credit and could damage your credit score.
Reduce Amount Of Hard Hits On Credit Applications
Occasionally you’re going to apply for more credit, in one form or another, and that’s totally fine. Just make sure you keep these applications to a minimum, so when lenders check your credit report, they don’t see red flags of a borrower who may be living beyond their means or urgently in need of more money. To keep this in check, be sure to limit the amount of times you apply for credit and apply only when you really need it. It’s also important to note that any checks that come through within a 2-week time frame will be counted as one hard hit, so when you’re shopping around for better rates on a car loan or mortgage, be sure to do so within that window so your credit score doesn’t take a dive when you’re about to need it most.
Hard Checks Vs. Soft Checks
It’s very important to understand the difference between hard credit checks and soft credit checks as they both have different impacts on your credit score. Hard checks appear on your credit report and will count toward your credit score. These types of checks can include applications for new credit cards and some rental/employment applications. Any lender who does a hard check on your credit report, will see all of these previous inquiries.
Soft checks appear on your credit report but they don’t affect your credit score as they’re only visible to you. Some examples of soft checks include the action of you requesting to see your personal credit report or businesses asking for your credit report to update their records for an existing account you have with them.
Use A Mix Of Credit
Diversity of credit accounts for 10% of your overall credit score. So, if all you have is one type of credit product (like a credit card), your credit score may be lower. Mixing up your credit is always advisable (car loan, line of credit, etc.) and could improve your score, but only if you can manage the debt and make your payments on time.
Avoid Applying For Too Much New Credit
Credit inquiries account for 10% of your overall credit score so don’t mindlessly open new credit accounts for the sake of earning more rewards at a local store or unlocking better prices per litre at the gas station. Constantly applying for new credit can come off as a red flag for lenders who may see you as an irresponsible borrower who’s likely a higher risk.
Consolidate Debt
If you can, consider consolidating your debt to avoid making multiple payments every month at different interest rates. This can save you money in the short and long term and help make your finances easier to manage if you’re working to pay back old debt.
Pay Down Debt
Got debt to crush? Most of us do. Start by making payments on past-due accounts right away. Getting current with anything that hasn’t yet gone to collections is a solid first step. Accounts that are moved to collections will remain on your credit report for 6 years so avoiding that whole process is advisable. If you have multiple sources of debt, experts suggest paying off the debts with the highest interest rates first, regardless of their balance.
There are a lot of myths and misunderstandings surrounding credit reports and credit scores in Canada. Understanding how to check your credit score, how the scoring process works and what you can do to improve your number will help you access better interest rates and improve your status as a borrower. Want to learn more about your credit score and how it may affect your short- and long-term goals? Need to seek out professional guidance? The team at Rocket Mortgage can help!