Posted on Wednesday 04 December 2019
If you’re trying to buy a home, purchase a new car, or start a new business, you’re going to have to take a long, hard look at your credit score first. These big-ticket items require going through the borrowing process, which means a thorough evaluation of your current financial health before your application can even be considered.
Even if you are looking for a new apartment to rent, chances are that you will probably have a credit check before you are approved. It doesn’t stop there: getting married, remodeling your home, taking a family vacation, or replacing a faulty oven may not be possible without access to a line of credit or two.
In a world where so many things depend on your credit health, having a good score means much more than being able to afford the things you want or need—it means having financial freedom. It’s getting a 4 percent interest rate on your loan instead of 10 percent. It’s the peace of mind to know that you can confidently apply for a personal loan, put an offer in on your dream house, or finance that cross-country trip you’ve been dying to take. It’s knowing that you can get the financing you need, exactly when you need it.
But before all of that financial bliss and freedom begins, you’re going to have to get a good understanding on what your credit is and how you can start improving it. Here are some facts and tips on how you can start boosting your score today.
A credit score is a numerical representation of how well you manage your finances.
It’s what lenders use to determine how trustworthy you are (i.e., whether they can count on you to make that credit card payment, or if you can manage a mortgage).
There are a ton of different things that factor into your score, and not all credit bureaus use the same criteria. And even when they do share factors, they don’t always agree on their importance. You can’t make everyone happy—especially when it comes to credit bureaus—but generally speaking, here are the things that will always be important:
Having a credit card for five years vs. five months is going to impact your credit in a significant way. Lenders like to see that you’ve been able to manage an account for a long period of time (which is why closing an account once you’re done with it is never a good thing).
This is less about how often you are using your credit cards, and more about how much you have available versus how much you owe. To see what your usage is, take the total sum of your lines of credit (what you could spend) and match that against your balance (how much you have already spent).
The general rule of thumb is to stay below 30 percent for credit card utilization. If you’ve only spent 10 percent of your available balances, your credit card use is considered “excellent” (and hats off to you). The lower you can get your credit utilization, the better—it shows that you aren’t reliant on your cards to get by, meaning greater chances for financial stability.
Opening up a new line of credit has two benefits: first, credit bureaus like seeing that you have successfully managed a variety of different types of debt, such as a mortgage, car payment, personal loans, and credit cards. It’s just another way to demonstrate that yes, you are a responsible borrower, and no, you won’t take out a loan and skip town.
The second way that this factors into your credit score is by contributing to your overall credit card use (utilization rate). For example, if you have a credit limit of $1,500 but have used up $850 of that limit, you’re at a 56 percent utilization ratio. Now let’s say you get approved for a new card with a $2,000 limit. Assuming you don’t spend it immediately, that makes your total limit $2,500, dropping that ratio down to 34 percent.
This one is pretty straightforward: having a good history of making payments on time is going to make lenders feel more confident in your ability to pay them back. While one late payment here and there isn’t going to break you, having a consistently late payment history can easily drop your score down. This is perhaps the most important aspect of your credit score.
Improving your score means playing the long game—it’s all about setting good financial habits and sticking to them over time. Here are some steps that you can take to start improving your credit health:
Everyone can get one copy of their credit report each year for free from the big companies, like TransUnion Canada, but you need to be able to keep an eye on your credit at all times.
Signing up for a credit monitoring service can help you gain insight into the full details of your score, including debt from student loans, car loans, and credit cards. You can even get suggestions for how to improve your score over time and advice on how to consolidate or refinance debt.
If you have any old bills that have gone into collections, you’ll want to find out what agency owns the debt and work with them to pay it off. If you can make a payment today, many collection agencies will accept settlements that are actually much lower than the original debt. Use your monitoring service to identify any outstanding debt that may have flown beneath the radar—and get serious about paying it off.
Don’t forget that this is about settling, not closing. The idea is to keep as many accounts as possible in good standing, and closing a credit card can have an immediate negative effect on your score. To recap: Closing is bad. Settling is good.
If you’ve already maxed out three or four credit cards, the thought of paying them down can be overwhelming. But making higher payments on your cards is a smart move towards improving your credit, since it could impact anywhere from 20 to 30 percent of your entire score.
Don’t make just the minimum payments (it will take years for you to get out from under those interest charges). Pay as much as you can each month and make a commitment not to spend any more money on your credit cards. Or, you could use the “snowball method” to pay them, where you:
If your credit is extremely low—or if you have little to no credit history—you’re going to need to start somewhere. Most traditional credit cards like to see scores of 650 or higher, so you may not be eligible. The good news is that there are plenty of options for bad credit credit cards out there that are designed to help you start improving your credit.
You won’t get a high line of credit, and you may need to pay an annual fee—but it’s a great way to start establishing a positive lending history. Use it in small amounts for gas or groceries, and pay it off before your statement ends, so that you aren’t hit with interest fees.
No matter where you are in your credit journey, increasing your score isn’t going to happen overnight—but every percentage point counts. Get the details of where your credit stands today, start chipping away at your debts, adopt smart financial habits, and you’ll be well on your way to better financial health!
If you have debt from multiple credit cards and want an easy way to consolidate it quickly, you might want to consider a payday loan! My Canada Payday is proud to be one of the top payday lenders in Canada, and we are always happy to help our customers take steps towards building their credit. Give us a call at any time (604-630-4783) or shoot us an email (firstname.lastname@example.org) to speak with our industry-leading customer support team!