3 tips to help improve your credit score

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Q: When I got my first credit card in university, I didn’t take making payments too seriously. I tried to make my minimum payments but didn’t always work enough hours when classes got busy. I would catch up between semesters when I picked up more hours. Now that I’ve been out of school for a few months and have a steady paycheque, I applied for a car loan and was declined. They said my credit score was too low. I started trying to figure out what that means and realized that only paying my credit card when I could was a big mistake. I need a more reliable car for work and it will take time to save up money for it. Is there a way to improve my credit score in the meantime? ~Nathaniel 

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A: It can be hard to understand how the credit scoring system works, but in simple terms, a credit score takes information from your credit history file and creates a numerical representation of your creditworthiness. Scores range from 300 to 900 and your score helps lenders, landlords, and even some employers and insurance companies decide how likely it is that you will repay borrowed money or manage financial responsibilities effectively. Higher scores indicate better credit health and can open doors for you, where lower scores will limit your options and increase your expenses.

Whether you’re just starting out or looking to recover from past financial problems, there are steps you can take to strengthen your credit score. However, keep in mind that it’s not a straightforward process and there’s no one single thing you can do to get a high credit score. It will take time to boost your score, so try to focus on doing what’s best for your overall financial stability, rather than watching your score go up and down based on the proprietary algorithms of the credit reporting companies.

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With that in mind, here are practical tips anyone can implement to achieve and maintain a healthy credit score.

Make payments on time

Your payment history is the most significant factor to influence your credit score. Since lenders use your credit score to gauge the likelihood of you repaying future debts, it’s clear why this aspect is so important. If you have a track record of making timely payments, it indicates to lenders that you are likely to continue this responsible behaviour in the future.

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If you have trouble making your payments on time, outline due dates on your calendar and set up automatic payments from your bank account. For any payment that can’t be made automatically, establish calendar alerts to remind yourself to make those payments. Ensure that your budget accounts for all of your expenses and obligations so that you aren’t falling behind on payments due to a lack of income. If you do have a budget shortfall, take steps to reduce your spending and/or increase your income.

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Reduce how much you owe overall

When you apply for credit, lenders pay close attention to how much you already owe. Your existing debt and payments help them determine if you can handle additional payments within your budget. This is known as your credit utilization ratio. While some experts recommend keeping this ratio below 30 per cent, others suggest not exceeding 65 per cent. Ultimately, there isn’t a single definitive number, but generally, the lower your credit utilization ratio, the better, as it indicates you owe less overall.

However, attempting to manipulate your credit utilization ratio by increasing your credit limits or applying for additional credit isn’t wise. Having too much available credit, even if you don’t plan to use it, can negatively impact your ability to qualify for the loans you do want, such as for buying a car or a home. A more effective strategy is to focus on paying down your existing debt and spending within your means, ensuring that your payments remain manageable.

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When paying down debt, it’s essential to balance this effort with saving for emergencies. While it might seem counterintuitive to put money into a savings account when you could be making extra payments on your credit card, having savings available for unexpected expenses is crucial. This way, if an emergency arises, you can cover the costs without having to rely on your credit card and undoing the repayment progress you worked so hard to achieve.

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Length of credit history

The length of your credit history does impact your score, but it’s less significant compared to timely payments and your credit utilization ratio. While some suggest keeping old accounts open to extend your credit history, it’s not always beneficial if you don’t need those accounts or if they tempt you to spend unnecessarily. Unused credit cards can be more vulnerable to fraud since their statements aren’t regularly reviewed. In fact, many zero-balance credit cards and lines of credit don’t generate monthly statements, which could result in a delay of months or even years before any fraudulent activity is discovered.

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Almost all information, whether positive or negative, is removed from your credit report six to seven years from the date of last activity. This means that when you apply for a mortgage in your forties, the car loan you paid off with meticulous payments in your twenties will no longer appear on your credit file. Similarly, the late payments you made on your credit card during university will also be purged once they reach the six- to seven-year mark, and the on-time payments made since will replace the negative information. This process ensures that credit reports provide an up-to-date and relevant picture of a person’s creditworthiness.

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Other factors that affect your credit score – applications, types of credit, and accuracy

There are several other factors that influence your credit score, and three specifically, are ones entirely within a borrower’s ability to control. The first is new credit applications. Each time you apply for credit, a hard inquiry is made on your credit file. An inquiry will temporarily lower your credit score, but taken cumulatively, a series of inquiries over time for credit you don’t truly need or want, affect your score negatively.

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Another important factor is the type of credit you apply for. A credit card from a bank or credit union is viewed more favourably than one from a ‘buy now, pay later’ provider, as the former is typically harder to qualify for. Similarly, a debt consolidation loan on your file suggests past difficulties in managing payments. However, if this loan is obtained from your financial institution and repaid responsibly, it reflects more positively than a consolidation loan from a high-interest financing company. While there’s no perfect mix of credit types, maintaining a healthy variety and managing them well is what lenders prefer to see.

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A third factor is ensuring that your credit reports are accurate. In Canada, there are two credit reporting companies: Equifax Canada and TransUnion Canada. It’s a good practice to obtain your free credit report from each company at least once a year. Verify that the information reported to the credit bureaus is accurate and complete, so you can address any errors that might negatively affect your score well before you apply for credit. (Instructions for how to correct mistakes are included when you obtain your credit reports.) Attending to this regularly gives you time to correct any mistakes and allows your score to reflect the changes. However, accurate but negative information cannot be removed. Avoid paying credit repair companies who claim that they can do this for you. Despite their claims, they are not able to remove accurate information from your credit file placed there by your creditors. Over time, negative information will become less significant and have a reduced impact on your score.

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The bottom line on boosting your credit score

Improving your credit score is a journey that requires patience, diligence, and a consistent approach to managing your obligations. However, it’s important not to focus solely on the score; true financial stability encompasses much more. While significant changes to your score may take time, each step you take brings you closer to a stronger credit profile. By understanding the factors that influence your score and applying practical tips to manage your money wisely, you can confidently take control of your financial future.

Related reading: 

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Peta Wales is President and CEO of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Peta by email, check nomoredebts.org or call 1-888-527-8999.  

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