Having a good credit score can unlock a lot of perks, like better credit cards and loan interest rates.
But more and more, it’s becoming a necessary part of living a good life — many landlords now ask for credit scores before renting apartments.
In hot markets like Toronto or Vancouver, having a good credit score could be the difference between landing your dream apartment or sharing a basement suite.
In any case, building your credit score is a good idea. You’ll thank yourself in the future when it comes time to buy a house or take out a loan to start a business, or when you feel like entering the world of high-perk credit cards.
If you’re starting with a low score, the prospect of building it back up can seem daunting — maybe even overwhelming. But while it’s not an instant process, there are a number of ways you can speed it along and help out future you.
What Is A Credit Score?
When a bank or another lender is deciding whether to give you credit (in the form of a loan, mortgage, credit card or any other form of debt) they need to figure out how likely you are to pay it back on time and in full.
To do that, they look at a variety of factors in your financial past — everything they can get their hands on. Once they have all that information, they break it down into a single number. That number is your credit score.
Your credit score moves up and down as you do things that affect it. Paying bills on time, for example, will increase your score. Carrying a high balance on your credit card can lower it.
If you have a bad credit score, lenders might not let you take out a loan or get a nice credit card.
If they do approve you, they might charge a higher interest rate, or require you to take out insurance. They may also make you find someone to stand in and co-sign as a guarantor, to be on the hook in case you stop paying.
Credit bureau Equifax has helpfully broken down the score ranges from worst to best:
300 to 559: Poor
560 to 659: Fair
660 to 724: Good
725 to 759: Very good
Of course, Equifax isn’t the only authority out there. The other major credit bureau, Transunion, is a bit less generous, defining a score of 580 as “very poor,” which Equifax considers “fair.”
Different rating agencies use different scoring systems, so it’s normal to see multiple credit scores depending on where you get yours from.
In any case, you’ll want to aim for 750-plus to make sure you’re almost always in lenders’ good graces (and have access to the best loan deals).
What Is A Credit Score Made Up Of?
What exactly goes into a credit score, and how all the information is weighted, is a secret of the credit bureaus who decide the scores. But we know enough about how they work that we can pick out some of the key variables.
According to Equifax, the U.S. Consumer Financial Protection Bureau, and the Canadian government, your credit score is based on:
Your bill-paying history
Your current unpaid debt
How long you have had your loan accounts open
How much of your available credit you’re using
The number of financial accounts you have
The types of accounts
How long each credit has been in your report
The amount of your outstanding debts
Being close to, at or above your credit limit
The number of recent credit applications
The type of credit you’re using
If your debts have been sent to a collection agency
Any record of insolvency or bankruptcy
How Can You Quickly Improve Your Credit Score?
If your score is low, you can improve it by paying off debt, using less of your available credit, paying your bills on time, and fixing errors in your credit history (if there are any).
While the process might seem boring and straightforward, there are also a couple neat little tricks that can speed things along.
Don’t do anything to hurt your score
If you’re in a hole, stop digging. Actions like applying for credit cards or even opening a chequing account can ding your score. Here are a few more examples of things to avoid:
Don’t overdraft your bank account (KOHO’s Cover overdraft protection doesn’t affect your credit score, though!)
Don’t carry a balance on your credit card
Don’t default on other loans, like car payments or mortgages
Protect your bank account and credit card from fraud
Don’t let any cheques bounce
Don’t frequently open and close bank accounts or credit cards
That last point is to avoid any inquiries on your credit. Lenders will make inquiries when you apply for a new financial product, like a bank account or credit card. Each “hard inquiry” will ding your credit score by a few points.
Soft inquiries, on the other hand, happen when a person, not a lender, checks your credit.
Now that we’ve gone over the don’ts, let's get into the dos.
Pay down your debt
Try your best to budget and pay off any outstanding loans, starting with the ones with the highest interest.
For many people, that means paying off credit card balances. Other examples of debt could include late or missed car payments, mortgage payments, or even child support payments.
Pay bills on time
Okay, this is a boring one. But it’s arguably the most important part of your credit score.
If you have trouble remembering to log in to pay bills every month, set up an auto-payment plan. Nearly every credit card and bank will let you do this.
KOHO allows you to set up automatic withdrawals and pre-authorized debits from your account, so you never miss another car insurance payment.
And if you’ve been delinquent on a bill for more than 30 days, pay it immediately. Then try calling the creditor to see if they’ll consider no longer reporting it to the credit bureau as unpaid. Sometimes, the human touch can work wonders.
Use KOHO’s Credit Building service
Self-plug time. KOHO has a program specifically to help you build credit history, affordably and securely. Here’s how it works:
KOHO opens a line of credit for you.
You choose an amount to set aside from your line of credit.
Each month, KOHO reports that amount as an on-time payment to Equifax.
Use less of your allotted credit
A big part of your credit score is what’s known as your “credit utilization.” If you’re bumping up against the upper limits of what the lender will let you have, that’s a bad sign in their eyes.
Generally, lenders don’t like to see you use more than 30 per cent of your limit. If you can get it under ten per cent, that’s ideal.
It’s important to pay off your existing balance — especially if you’ve been carrying one for a long time — but it’s also critical to avoid using up too much of your credit in the first place.
Ask for a higher credit limit
Here’s an easy way to lower your credit utilization: ask for more credit.
While it’s not guaranteed that your credit card issuer will grant you more credit — especially if you haven’t used it responsibly in the past — it’s worth a shot.
If your credit limit goes up and your spending stays the same, congratulations: you’ve just become a more responsible credit user in the eyes of the lender.
You can also gain a higher credit limit by simply getting another credit card and not using it. Be wary, though, since every credit card application will ding your credit score by a few points.
Start a budget and stick to it
Creating a budget is another boring strategy that can have drastic results. Even the act of writing down what you spend can have a big mental impact on your spending habits.
KOHO has an ultimate budget template, which is a great place to start — especially if you’ve never budgeted before.
Piggyback on someone else’s good credit
Here’s another one that feels like cheating but isn’t. You can become an “authorized user” of another person’s credit card account.
If a friend or family member with good credit trusts you enough, they can add you to their account, and voila! Your credit will start to improve.
You don’t even have to use the account — or know any of their credit card information — for the process to start.
Dispute credit report errors
The human touch, unfortunately, can work both ways. Credit scores are compiled by people, and people make mistakes.
The Canadian government has instructions on how to get your credit report for free, how to check for errors, and how to dispute them.
Look for things like mistakes in your personal information, errors in credit card and loan accounts (like an on-time payment marked as late), negative information that’s too old to be listed anymore, and accounts listed that you never opened.
That last one is especially important, as the government notes it could be a sign of identity theft.
If you spot an error, you’ll want to gather documentation and take it to a credit bureau. The Canada.ca page has instructions for that, too.
Deal with collections
If you’re being harassed by a collections agency, it might be time to pay the piper. Try calling them to see if they’ll accept a lower amount to get your name off their books.
Even if you have to pay the full amount, it’s likely worth it. Any amount in collections is a major black mark to creditors.
Use a secured credit card
Secured cards differ from traditional credit cards because the “credit” is your own money.
To use one, you deposit cash into an account for a secured card and then withdraw it by using the card as you’d use a normal credit card.
Secured credit cards are an easy and risk-free way to build a history of on-time payments.
Improving Your Credit Score Takes Time
Unfortunately, there’s no overnight solution for building your credit score. It’s a lengthy process for a reason — banks need to know they can trust you with credit.
If there were a way to “skip the line,” so to speak, credit scores would be meaningless.
Big credit-impacting events, like paying off a large credit card balance, can cause your score to shoot up by 30 to 50 points in a single month.
But overall, realistically, you might be able to see 10- to 20-point gains in your credit score each month if you start doing things right.
That said, if they stick to the above principles, even people with low credit scores can turn things around. All it takes is time and discipline.
Frequently Asked Questions
How do I check my credit score?
The most accurate reports will come from Equifax and TransUnion, which are the two official bureaus to dispense credit reports in Canada. You can get a credit report from either of their websites, but they cost money to use.
While some landlords or creditors will insist on Equifax or TransUnion reports, there are also free sites where you can get a credit score, like Borrowell, Mogo and Credit Karma.
If nothing else, those sites are a good way to keep an eye on your score.
Does applying for a credit card hurt my credit score?
Yes, but just a bit. Every time you apply for a credit card, the lender will make what’s known as a “hard inquiry,” also known as a “hard credit check” or “hard pull.” That process hurts your credit score down by a few points.
Applying for prepaid credit cards — like the ones issued by KOHO — won’t affect your credit score either way. That’s because there’s no actual credit involved, since you can only spend what you load them with.