How to improve your credit score

You just spent all evening filling out an application for a loan or a new credit card, only to see the word “rejected” flash across the screen.

Feeling a tinge of disappointment, you read your rejection letter and find out that your credit score was to blame.

Unfortunately, this situation happens all too often to Canadians across the country. Your credit scores will naturally vary over the course of your lifetime, but persistently low credit ratings can stop you from getting the loans, mortgages, or lines of credit that you need.

Improving your credit score, however, is easier said than done.

Thankfully, there are ways to increase your credit score, especially if you’re willing to put in the effort.

What is the average Canadian credit score?

Any discussion about improving credit scores starts with an honest look at the average Canadian credit score range so we can define what a “good” rating actually is.

In Canada, credit scores range from 300 to 900. Anything within the 760-900 range is considered “excellent,” while scores between 660-760 are considered good to very good.

The average credit rating varies from province to province, but across the country the general average is around 650.

How to check credit scores in Canada

Now that you know what you should strive for, in terms of credit scores, it’s time to do your own credit score check. It might seem scary to check your credit score, but if you want to improve your credit rating, you need to know where you currently stand.

In Canada, there are two main credit bureaus - Equifax and Transunion. These two companies are in charge of creating the credit ratings that get sent to financial institutions whenever you apply for a loan or line of credit, like a credit card.

It’s important to note that both Equifax and Transunion actually buy most of their credit information from FICO, a US-based company. These two bureaus then use your FICO score to determine your Canadian credit rating.

Here’s the catch: Canadians can’t directly access their FICO scores (weird, we know), and historically, you could only get an idea of what your credit rating is by requesting a report from a credit bureau or by applying for a loan or credit card. Today, many banks offer a “soft” credit check in their apps for free, so you have more options than ever when it comes to staying on top of your score.

Both Equifax and Transunion charge a fee to access your credit score while other companies, like Borrowell and Credit Karma offer free credit scores.

It's worth noting that if you request your score from all 4 of these companies, you’ll almost certainly find that you have 4 different scores. This is due to slight differences in how each company calculates your credit score.

All this means is that when you go and check your rating, remember that the score you receive is more of an approximation than the cold, hard, truth. Use your score as a guide to help you get to where you want to be and don’t dwell on it for too long.

Now that you understand what good credit is and how to check your score, let’s dive into our 7 top tips for improving your credit rating.

Tip 1: Know what affects your credit score

Credit scores are calculated using some complex equations, so it’s impossible to know precisely how much a certain action will affect your score. With that in mind, according to the Financial Consumer Agency of Canada, there are a handful of key factors that affect 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

All of these factors demonstrate your level of financial responsibility. When combined into a credit score, they give lenders an idea of whether or not you’ll actually pay them back.

By knowing what affects your credit score, you’re in a better position to take steps toward becoming more financially responsible. As a result, your credit rating will go up and financial institutions will be more likely to lend you money or approve you for a credit card.

Tip 2: Pay bills on time, every time

One of the biggest things that affects your credit score is your history of missed payments.

If you’ve never missed a bill payment before, good work!

For people who have missed bills in the past, worry not - you can turn things around. Set yourself up for success by paying your bills on time, every time.

With your KOHO account, you can set up automatic withdrawals to pay your recurring bills on time each month. That way, it’s impossible to pay a bill late and your credit score will slowly start to improve.

Tip 3: Only take out credit that you need

In a world filled with reward credit cards and other flashy loan offerings, it’s easy for Canadians to take out much more credit than they need.

Unfortunately, applying for credit cards and loans will cause your score to drop by a few points, especially if you routinely apply for new offers.

If you actually need the credit, then this is nothing to worry about. Your score will rebound, especially if your credit applications are few and far between.

Applying for every credit card offer that you get, however, isn’t going to do your score any favors in the long run. Frequent credit applications make lenders nervous because they indicate that you might be living beyond your means.

People who take out lots of lines of credit also tend to close these accounts fairly frequently. Oddly enough, closing credit accounts usually negatively impacts your credit score because it affects the average age of your accounts, which is an important part of your financial history.

Moral of the story? Only apply for credit that you actually need. If you have the money on hand to pay for something, it’s better to pay out of pocket with your prepaid Visa card than to take out unnecessary credit. Alternatively, if you need a small buffer to get you by between paycheques, check out our Early Payroll feature.

Tip 4: Pay off your debt

Carrying around large amounts of debt does not make potential lenders very excited about giving you more money. There’s no shame in having debt, but working to pay off that debt, even if it feels impossible, is essential.

Add in debt repayment as part of your budget (more on that in a second), and work to minimize what you owe so you can maximize your credit score.

Tip 5: Budget wisely

Your budget doesn’t directly impact your credit score but it does impact your financial stability. In turn, this indirectly affects the many actions you take that can cause your rating to go up or down.

You can use our ultimate budget template to figure out precisely how much you need to set aside for essential expenses, debt repayment, and other discretionary spending.

Your KOHO account also helps you get a real-time look at what you’re spending your money on. With your Insights, you can see how much you’re spending and find ways to cut back so you can focus on debt repayment and building your savings.

Tip 6: Build your savings

Savings and credit scores might seem like two totally separate parts of your financial life, but they’re inextricably linked. This is especially true for people who struggle to pay off their debts, which affects your credit score.

By having a good financial safety net behind you, you’re less likely to take out credit you don’t need and you’re also less likely to carry a balance on your account - two things that will hurt your credit score.

If you’re new to saving, you can start by setting aside part of your paycheque for investing in your future self.

Don’t have any extra wiggle room in your budget? No problem. Take advantage of the PowerUps and RoundUps you earn with every dollar you spend on your KOHO card and put that aside in your savings account. It’s also worth noting that pretty soon, you’ll be able to earn 1.2% interest on your whole balance with KOHO Save, just by setting up direct deposit and opting in.

It might not seem like much, but an extra few dollars here and there will add up over time. That means more money in your pocket, less money charged to your credit accounts, and a better credit score over time.

Tip 7: Understand that your KOHO account doesn’t affect your credit (exception: KOHO's Credit Building tool)

With your KOHO account, you get a lot of nifty features, including a prepaid Visa card. Since this card is prepaid, however, anything you spend on it doesn’t affect your credit score.

This might sound disappointing if you’re trying to improve your score, but it’s actually a good thing. If your credit score is low because you charge too much to your credit cards (a.k.a. you have a high credit utilization ratio), then using your KOHO prepaid Visa for most purchases can help you get back on track.

Keep in mind that KOHO does, however, have a Credit Building tool that is separate from your spending account. It was created to help Canadians grow their credit scores seamlessly for only $7/month. That’s it! No continued effort or large up front deposits. It’s almost a no-brainer if you’re looking to re(build) your credit score.

Improving your credit score takes time

If you’re looking to improve your credit score, you’re in the right mindset. Just thinking about your financial well-being is the first step toward being financially responsible. As you use your KOHO account to pay off your debt, stay on top of your bills, and build your savings, you’ll help improve your credit score along the way.

Keep in mind that your credit score takes time to build, so don’t expect changes overnight. But, with diligence and effort, you can get the credit score you need to take charge of your financial life.