Over the course of our lives, our credit scores will naturally fluctuate, but having a continuously low credit score can prevent you from obtaining the loans, mortgages, or credit lines you require. Although it’s easier said than done to raise your credit score.
Fortunately, there are strategies to raise your credit score, particularly if you’re prepared to put in the work. Here are some tips to help you improve your credit score in Canada.
Tip 1: Know What Affects Your Credit Score
Since credit ratings are derived from a number of intricate mathematics, it is hard to predict with absolute certainty how a certain activity would affect your score. In light of this, the Financial Consumer Agency of Canada lists a few crucial elements that have a significant impact on your score:
- The length of time that you’ve had credit
- Whether or not you carry a balance on your credit card(s)
- How often you have missed payments
- The amount of debt you currently have
- How much you spend on your credit (a.k.a. credit utilization ratio)
- If you’ve ever filed for bankruptcy
- Whether you’ve ever had debt sent to collections
These factors collectively show how financially responsible you are. They provide creditors a sense of whether or not you’ll actually pay them back when added together to form a credit score.
You’re in a better position to take actions to become more financially responsible if you are aware of the factors that affect your credit score. Your credit score will increase as a result, and financial institutions will be more likely to approve you for a loan or credit card.
Tip 2: Pay Bills on Time, Every Time
Your history of missing payments is one of the factors that has the most impact on your credit score. Well done if you’ve never been late on a payment.
Don’t worry if you’ve previously forgotten to pay your payments; you can change that. Set yourself up for success by consistently paying your bills on time.
Tip 3: Only Take Out Credit That You Need
In a culture where incentive credit cards and other glamorous lending options are plentiful, it is simple for Canadians to take out much more credit than they actually need. Unfortunately, applying for credit cards and loans will reduce your score by a few points if you do it regularly.
There is no need for anxiety if you actually need the credit. Particularly if you don’t seek credit frequently, your score will rise.
Applying for every credit card offer you get, won’t improve your credit score over time. Frequent credit applications make lenders nervous because they imply that you might be living above your means.
People that open numerous lines of credit also frequently close these accounts. Interestingly, shutting credit accounts typically lowers your credit score since it changes the average age of your accounts, a crucial aspect of your financial history.
Long story short: apply for credit only if you really need it. If you have the cash on hand to pay for anything, using your prepaid Mastercard® is preferable to using unneeded credit. As an alternative, take a look at our Early Payroll tool if you just need a little bit of extra money between paychecks.
Tip 4: Pay Off Your Debt
Large quantities of debt make prospective lenders less enthusiastic about lending you more money. It’s okay to be in debt, but it’s also important to make an effort to pay it off, even if it seems impossible.
Consider including debt payments in your budget (more on that in a moment), and make an effort to reduce the amount you owe to improve your credit score.
Tip 5: Budget Wisely
Your credit score is not directly impacted by your budget, but your financial stability is. This then has an indirect impact on the numerous behaviors you conduct that have the potential to raise or lower your rating.
To determine exactly how much you need to set aside for necessary costs, debt repayment, and any discretionary spending, utilize our comprehensive budget template.
Tip 6: Build Your Savings
Savings and credit scores may appear to be two very distinct aspects of your financial life, yet they are interdependent. This is especially true for those whose credit score is impacted by their inability to pay off their debts.
Having a strong financial safety net behind you reduce your likelihood of taking out credit you don’t need and of carrying a balance on your account, both of which lower your credit score.
If you’ve never saved before, you can start by designating a portion of each pay check for saving for the future.