How to improve your credit score

Moving out on your own, financing a car or landing your dream job—all of this can require having a good credit score. Your credit score indicates how trustworthy you are in the eyes of creditors, and it can range from a low of 300 to a high of 900.

A good credit score (typically in the high-600 to mid-700 range) can help you qualify for a car loan, mortgage or insurance. It can help you get the best interest rates from your lender. At times, a landlord or employer may even ask to see your credit score before accepting you as a tenant or offering you a job. For that reason, it’s important to know how credit scores work, was well as how to build or improve your own score.

Factors that impact your credit score

Young adults tend to have lower credit scores on average than older Canadians. At the time of a 2018 study by Equifax Canada, Canadians aged 18 to 25 had an average score of 692. That was lower than all other age groups—including 26-to-35-year-olds, whose average score was 697. On a positive note, the data also found that young adults’ average scores improved over a 10-year period, in part from apparently learning good financial behaviours early on.

Canada’s two credit bureaus, Equifax Canada and TransUnion Canada, have their own credit score formulas, which are not publicly shared. They generally take similar factors into account when determining your score. If you want to build a strong score, the main factors to watch for are:

• Credit history: This refers to how long you’ve had access to credit. It contributes to your credit score by showing lenders that you are capable of borrowing money and paying it back. Since lenders like to see that you’ve been able to handle credit accounts over a long period of time, it is advisable to not cancel any old or unused credit cards, because that credit history will be erased. 

• Debt-to-credit ratio: Also known as your credit utilization ratio, this number is expressed as a percentage and indicates how much revolving credit you’re using. That includes your lines of credit and credit cards, in relation to the total amount of credit available to you. Ideally, you want to keep your overall credit balance to 30% or less of your overall credit limit. If you are constantly maximizing or going over your credit limit, companies may wonder if you are able to pay the balance, so you may be flagged as a greater risk for delinquency.
• Payment history: This is based on whether or not you’ve missed or been late in paying any loan payments. If you miss a payment by more than 30 days, the lender will typically report it to the credit bureaus, and this can negatively affect your credit score. 

• Credit checks: If you are shopping around for a new credit card, mortgage or car loan, the lender requests your your credit report. This is known as a credit check. If credit checks are conducted too often, lenders may think you are living beyond your means. Ideally, it’s best to shop and get quotes within a two-week period so that all the inquiries are combined into one and don’t raise any red flags.

• Type of credit used: Lenders want to see the types of credit you carry. Having a mortgage, car loan or line of credit, along with a credit card, helps show you can manage different forms of credit. However, be sure that you can pay back what you borrow, and avoid taking on too much debt.

How to get a 900 credit score in Canada

Here are ways to build your credit history and achieve a top credit score. 

1. Check your credit score: You can receive a copy of your credit report and credit score from Equifax or TransUnion either online or by mail. Be sure to check your score with both credit bureaus as they use different scoring models. Also, make sure the reports are accurate, as errors may misconstrue your creditworthiness. Also, verify that no one is trying to steal your identity and opening up accounts under your name. If you find any inaccuracies, report them to the credit bureau to be corrected. 

2. Use different types of credit: It’s common to use a credit card to start building a credit history. However, over time, you will want to add other forms of credit into the mix. If you have outstanding student loans, making regular payments will help pay down your debt, as well as increase your credit score. A cell phone bill you pay off monthly, a car loan, a line of credit and/or a mortgage are all good ways to show you can handle different kinds of credit.

3. Build credit with your rent payments: With the current housing market making it challenging for young adults to become home owners, many are resorting to renting. Historically, renters haven’t been able to use their monthly rental payments to build their credit history since they typically pay by Interac e-Transfer, post-dated cheques or cash. This has now changed with third-party services allowing renters to pay by credit card. Another program being offered is Borrowell’s Rent Advantage, which allows tenants to report their rent payments to Equifax without landlord approval. 

4. Limit the number of credit cards that you have: Opening too many credit cards at once can hurt your credit score, and having too many credit cards in your name can make you look risky to lenders. According to Equifax, two to three credit cards at a time, along with other types of credit, is ideal. When you have access to more than that, it can be challenging to keep track of all your monthly payments.

5. Pay your bills in full and on time: Lenders want to see that you’re responsible in paying your bills on time and in full every month. Late or missed payments will hurt your credit score—and can remain on your credit report for up to six years. If you aren’t able to pay the full amounts, then make an effort to pay at least the minimum payments amount by the due date. Here’s a tip: Schedule automated monthly debt repayments with your financial institution so you don’t miss the deadline. 

A good credit score has many benefits

If you’re a student or just starting your career, it will take time to build your credit score. Don’t fret if you don’t currently have a stellar credit score. Taking simple steps, such as making your monthly student loan payments, and paying your credit card balance and cell phone bill in full every month will build your credit history and help you improve your score. And in the long term, this can have all kinds of other benefits, including getting better interest rates on loans, being accepted as a tenant, and even getting hired for that dream job of yours.

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