Credit scores undeniably play a crucial part in the lives of every Canadian. While it is common knowledge that banks check your credit score before giving you a loan, there are other reasons individuals and institutions request a credit score.
For example, if you want to rent a house, your landlord may request your credit history or credit score. For some people, employers ask for their credit history before awarding them job opportunities.
In Canada, credit scores range from 300 to 900, with 300 being the poorest score and 900 being the best score. With a score of 300, you are considered a high-risk borrower when it comes to taking loans or paying back debt. Banks may refuse to lend to individuals with poor credit scores or give them loans at higher interest rates.
This is why it is important to improve your credit score. If you face challenges due to a low credit score and want to build it up to a better score, these tips below will help you achieve this goal.
Pay off your existing debt
A low credit score is most likely due to failure to pay your debt when due, so this may seem like an obvious solution. However, paying off debt may not come easy if you barely have enough income to meet your recurring financial needs.
You can increase your earning power by freelancing, taking extra work shifts, and starting a low-cost side business. Having a budget helps you allocate part of your income towards paying off debt.
Have a plan to pay down debt and stick to it. You can get an accountability partner to help you stay committed to paying off debt.
Avoid racking up more debt
Resist the urge to take up more debt, especially high-interest debt. Adding more debt to your existing liabilities can make paying off your loans, and credit card balances more difficult.
If you have a low credit score, chances are that your new loans will come at a very high rate. Servicing high-interest debt can worsen your ability to pay off both existing and new debt.
Reduce your credit utilization rate
What is the credit utilization rate? Let’s use this very basic example.
If your credit card has a $5,000 limit and you consistently use up to $4,000 monthly, your credit utilization rate is high at 80%. A high utilization rate suggests that you rely heavily on debt, and may result in a low credit score.
To improve your credit score, you should aim for a low utilization rate, leaving a large chunk of your available credit limit untouched.
If you are great with managing money and your bank offers you a higher credit card limit or line of credit, you can accept this increased credit limit to improve your utilization rate.
Some other factors that may impact your credit score are hard checks on your credit history, insufficient credit history, and closing your credit accounts.
Credit bureaus rely on sufficient credit history to calculate your credit score. Closing your credit accounts or credit cards may hurt your credit score, but only temporarily.
Provided you keep paying your debt when due, your score can still improve over time. Also, when lenders carry out a hard check on your credit, it may indicate that you intend to take up more debt. This, in turn, may cause your credit score to dip.
Monitor your credit report
Finally, you can keep track of your credit score periodically to see if your score is improving. Monitoring your credit score and credit report at least once a year is a good practice. Your credit report shows information on loans, lines of credit, mortgages, and other debts you have taken.
Some financial institutions allow you to check your credit score for free. If your bank does not provide a free option to check your credit score, you can use other platforms like Borrowell to check your credit report for free.
The two credit bureaus in Canada, TransUnion and Equifax, allow you to check your credit score and history for a fee.
Using debt responsibly, consistently paying off your credit balances on time, avoiding hard credit checks, and maintaining good credit history can help improve your credit score.