An excellent credit score is your key to lower rates and easy approval for credit cards and loans. If your credit score has taken a hit, there are some simple strategies you can implement to improve your credit score quickly, starting today.
How long does it take to improve your credit score? It varies and will depend on how bad your credit score is. With the right approach, you can see significant improvements in your credit score in as little as 30 days.
No matter how bad your credit score is, following the right strategy can increase it by 100 to 200 points in no time at all.
What is a Good Credit Score?
A credit score is a 3-digit number that credit bureaus (Equifax and TransUnion) provide to lenders and others who want to assess your creditworthiness. These include banks, mortgage lenders, insurance companies, utility providers, and in some cases, potential employers.
Your credit score can range from bad to excellent. In Canada, credit scores range from 300 to 900, with the following rankings:
- 800 – 900: Excellent credit score
- 720 – 799: Very Good credit score
- 650 – 719: Good credit score
- 600 – 649: Fair credit score
- 300 – 599: Poor credit score
In the United States, the range is from 300 to 850.
If your credit score is ranked in the “good” to “excellent” range, it makes it easy for you to get loan and credit approvals and also qualify for competitive rates.
When your credit score falls in the “poor” to “fair” category, you may be required to pay sub-par rates on credit lines or be denied outright.
How Is Your Credit Score Calculated?
A variety of factors are taken into consideration when calculating your credit score. The most popular criteria as utilized by FICO are:
A. Payment history: This makes up 35% of your credit score and is the most important factor influencing your score.
B. The amount owed makes up about 30% of your credit score.
C. Length of credit history: The longer this is, the better. It makes up about 15% of your credit score.
D. New credit history: The recent activity on your credit histories, such as new accounts and inquiries, account for approximately 10% of your credit score.
E. Types of Credit: The different types of credit accounts you have opened make up the remaining 10% of your credit score.
8 Ways To Increase Your Credit Score in Canada
Follow these 8 simple steps to start raising your credit score today:
1. Inspect Your Credit Report and Score
As per the Federal Trade Commission, about 1 in 5 consumers have errors in their credit report that negatively impacts their credit score. That’s a big number and is why you should routinely request your free credit report annually and read it through for any errors.
By law, the two major credit bureaus (Equifax and TransUnion) are required to each provide you with one copy of your credit report per year (upon request).
Companies like Borrowell (Canada) or Credit Sesame (U.S.) also provide it for free on a weekly or monthly basis along with your credit score. Checking your own credit score (and report) does not impact it as it is deemed a “soft inquiry.”
Errors on your report could include wrong personal information, inaccurate status, e.g. late payments made on time, hard inquiries you did not authorize, negative information that has expired, e.g. collections, bankruptcy, open debts that have been paid in full, etc.
You can dispute any errors on your credit report and ask that they be removed. The credit bureaus will investigate your claim and respond within 30 days.
2. Pay Your Bills On Time
The first step to improving your credit score is to pay your credit card balances on time – all of the time. Payment history is the most important factor for ranking your score.
Late payments register on your credit as negative information. The later the payment is, the more damage you can expect to your credit score.
Even if you have missed paying your bills on time in the past, the only way to revive your score is to start making payments before they are due. Automate your bill payments, so you do not forget!
3. Keep a Low Balance
Credit reporting agencies dislike a high credit balance. When you max out your credit, it hurts your credit score.
A popular ratio used to measure how you use credit is known as the “credit utilization ratio.” This ratio measures how much of your total credit is being used.
For example, let us assume you have two credit cards, A & B, each with a credit limit of $5,000. If you carry a balance of $2,000 on Card A and $1,000 on Card B, your credit utilization ratio is calculated as:
Total credit limit: $5,000 + $5,000 = $10,000
Total debt: $2,000 + $1,000 = $3,000
Credit utilization ratio: $3,000/$10,000 = 30%
The consensus is that you should aim to keep your credit utilization ratio below 30%. The lower, the better. Some ways to accomplish this include:
- Ask for a credit limit increase – the higher your limit, the lower your utilization. For example, if you double your limit, you cut your utilization in half for the same spending.
- Pay down your balances more often. Credit card issuers report your balance to the bureaus once a month, and it is in your favour if they report a lower balance.
4. Keep Old Credit Alive
The length of your credit history influences your credit score. Do not cancel old credit cards in good standing even if you rarely use them now. Keep these cards and use them now and then to show some “activity” on your credit profile.
Cancelling old lines of credit also lowers your total credit limit, hurting your credit utilization ratio.
5. Vary Your Credit
It helps to have various credit accounts, for example, credit cards, installment loans, lines of credit, mortgages, etc. Your ability to manage all these different credit facilities well signals to credit bureaus that you are a good borrower.
Your mix of credit affects your credit score by about 10%.
6. Plan Your Credit Shopping
Every time you apply for credit, a hard inquiry is placed on your credit file, resulting in a drop in your credit score. If you need to shop around in several places for credit, for example, if you are shopping around for a car loan with the best interest rate, try and do so within 2 weeks.
Credit reporting agencies will consider all the hard inquiries placed on your file within this period as one hit, limiting the potential impact that several hard inquiries would otherwise have.
7. Consolidate Your Debt
If you have a significant credit balance and find it difficult to keep up with paying it down, a low-interest balance transfer credit card can save you thousands of dollars in interest payments.
An example of a low-interest balance transfer card in Canada is the Scotiabank Value Visa Card which charges an interest of 0% for 6 months and 12.99% after.
To make the most of this strategy, you should plan to pay all or a significant portion of your debt during the low-interest period – usually 6 months.
If you qualify for a personal loan at a reasonable rate, you can use this to pay off your credit card balance as well and save money.
8. Get a Secured Credit Card
If your credit score is poor or you do not have a credit history (e.g. new immigrant or student), it may be difficult to qualify for a regular credit card.
A “secured” credit card requires you to put down a deposit with the bank (such as in a GIC) that secures the amount of credit they are extending to you. For example, if your credit card has a limit of $2,000, you will be required to deposit $2,000 in a designated account.
A secured credit card helps you to build your credit score when there are limited options. You will still need to pay your balance on time and this is a good way to learn about how to use credit responsibly.
You can compare the other secured credit cards in Canada.
You can also raise your score by becoming an “authorized user” on someone else’s credit account. For example, if you know someone with an excellent credit history, they could add you to their own credit card as an authorized user. They do not have to give you a credit card to use; however, their high credit score will impact yours positively.
How To Obtain Your Free Credit Score and Report
While you can obtain a credit score for about $20 from Equifax and TransUnion, there’s no need to do so. You can now obtain your free score and report from companies like:
Borrowell: Get a free credit score and report (using Equifax). It is updated weekly.
Credit Karma: They give you a free credit score and report (using TransUnion).
Credit Sesame: For a free credit score and report.
Credit Karma: Free credit score and report
Checking your credit score does not impact it in any way.
If you prefer, you are entitled to one free credit report every year from TransUnion and Equifax. You can obtain them as follows:
TransUnion: Online, via mail, in-person, or by phone at 1-800-663-9980
Equifax: In person, via mail, or by phone at 1-800-465-7166
If your credit score is less than stellar, there is hope. You can turn things around and improve your score by 100 or 200 points in a very short time with the steps detailed above.
The starting point is to request your credit report and check it for errors. If there are any errors, dispute them and have them rectified.
Following this, you should ensure you pay your bills on time as this is the most important factor impacting your score.
Lower your credit usage across the board so your credit utilization is decreased. If you can stay disciplined with credit, increase your credit limit and the variety of credit gradually.
If you can do all these, you are on your way to raising your credit score and improving your finances for good!
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