Tackling debt

Ready to improve your credit score?

5 min read

Megan Radisa

A credit score is basically a measure of how good you are at handling debt. You probably never think about it until suddenly it seems really, really important—like when you’re looking to rent an apartment or open a line of credit.

FYI, in Canada, a decent credit score is usually around 650-720. According to Borrowell, the average credit score is around 750. The full range of scores is 300 (the lowest) to 900 (the highest). If you keep your score above 650, you should be able to apply for a standard loan at a reasonable interest rate. If you take a peek at your credit score and it’s not quite where you want it to be, don’t stress – improving it might actually be easier than you think.

Here’s a simple rundown on five simple steps you can take to improve your score.

1. Check your credit score online

Take a breath and just rip the band aid off! The sooner you know and understand your score, the sooner you can improve it. There are a few myths around checking your credit score, like it’ll cost you money to check, or that the act of checking it will hurt your score. We want to clear that up right off the bat: both are untrue if you use the right tools.

That’s why companies like Borrowell exist. Borrowell allows you to easily (and for free, we might add) check in on your credit score. They’re safe and legitimate, and produce your credit score using Equifax, a reputable Canadian credit bureau. Borrowell also sends you an updated score every month so you can track any increases or decreases. This gets you in the habit of being more mindful of your score, and things you can do regularly to keep it stable or increase it.

Along with your credit score, you’ll get your credit report, which will list all of your debts outstanding. Use this to make sure that there are no errors on your report (for example, a credit card that you never signed up for, or maybe debts that you’ve forgotten about). If there are errors on your file, you can file a dispute.

One thing to be mindful about, is that any accounts being reported as “in collections” on your credit report will have a negative impact on your score. When you pay off debt through a collections agency, it doesn’t necessarily mean it’s “gone” from your credit report (the list of your debts which is used to calculate your credit score). Debts that have gone to collections can stay listed on your credit report for 6 years, which can certainly affect the likelihood of lenders opening new credit lines with you. You may have to call the specific collections agency and ask them to remove it or mark it as “paid as agreed.”

2. Pay your bills on time

You have to make the minimum payment required on your credit card bills and any loans (like car loans, student loans, etc) when they’re due, or else your credit score will get dinged. And it needs to be paid on time. Usually the minimum payment is a smaller amount, often around 35% of the balance owing.

If you can pay more than the minimum payment, that's great! Especially for credit cards, the quicker you pay off your credit card balance, the faster your credit score will increase (in a big way).

To avoid forgetting, set up these payments automatically from your account. Sometimes you can’t do this for credit cards – your bank might make it a little harder to automate these payments because it wants to keep making money off you (ugh, banks). But some banks might allow you to set up automatic repayments if you have a chequing account at the same bank.

Pay off an outstanding credit card balance, and your credit score will increase (in a big way).

And of course, it should be noted that paying just the minimum balance is not sustainable in the long run and might, over time, negatively affect your score.

In turn, if you have a big debt balance and can’t make your minimum payment, it’s best to reach out to the credit company right away (ideally before missing a payment) and see if you can negotiate a smaller payment, or set up a payment plan with them. If you go this route, make sure you get in writing. If they don’t honour it, you can file a dispute.

If the amount of debt you’re carrying has grown really unmanageable, you might also consider loan consolidation or a consumer proposal.

3. Use less than 30% of the limit on your credit cards

Another factor that credit bureaus (such as TransUnion or Equifax) use when calculating your score is your credit utilization ratio - which is basically the amount of available credit you use each month on your credit card. Again, this shows up on your credit report and lets lenders know how risky your spending is. If you’re constantly using up all of your available credit, this could raise some red flags on your credit report.

Calculating your credit utilization ratio is easy, we promise. Let’s say the limit on your credit card is $1500, and your balance for the month is $384. That would mean that you’ve used around 25% of your credit limit, and that’s your credit utilization ratio.

Borrowell recommends that you try and keep your credit utilization below 30% (we'd even suggest aiming for 10%). It’s counterintuitive, but it’s good to use some of the credit—carrying small balances that you can pay off every month (and on time) will demonstrate financial responsibility and in turn, increase your score.

4. Build up a long and stable history with credit you actually need

The average length of credit accounts factors into the calculation of your score. It’s best if you stick to one or two credit cards for the long haul—even though you might be getting lots of offers for different perks with different cards. If the shinier, perkier card you want is offered by your financial institution, you can most likely speak to the bank and have your history continued with the new card. But if you’re opening a credit card with another bank, your credit score might take a little dip at first, but can easily and quickly bounce back if you're maintaining a strong score otherwise.

Keeping old credit accounts on your credit report can sometimes benefit your score, as long as they’re paid-off and you don’t use them frequently.

5. Limit the number of inquiries by creditors into your credit

Say you’re looking to add a credit card because you want to earn travel points, but you just opened a student line-of-credit to pay for tuition. If you’re suddenly using a lot of new credit, it could look bad to lenders. They might think that you’re urgently trying to get credit, or that you’re living outside your means, and they may submit a hard inquiry—the effects of which can last anywhere from 6-12 months on your credit report.

Hard inquiries are one thing, but not all inquiries affect your score. Soft inquiries (like using Borrowell) are harmless and can sometimes happen without you even knowing. If you’ve ever received a credit card in the mail, or been pre-approved for a certain type of loan, it’s because a lender has verified your eligibility through a soft check on your credit report.

On the other hand, a hard inquiry on your credit report does affect your score and usually requires your consent. These inquiries are for when you are actively applying for a mortgage, loan, or credit card. If you’re unsure about whether something will be a hard or soft check, you can always ask the potential creditor or even the credit bureau.

If you’re constantly using up all your available credit, it raises red flags on your credit report.

However, this doesn’t mean you should be afraid to shop around for the best rate on a mortgage or auto loan. Multiple inquiries for the same type of loan in a short amount of time (usually two weeks) generally count as one inquiry on your credit report.

Basically, there are a lot of relatively simple things you can do to stay on top of your credit score. Plus, taking these steps will help you prioritize getting out of debt and forming healthy financial habits! It’s a win/win.

We’ll leave you with a couple more tips on building and maintaining a good credit score:

If you’re a student with untested credit or actively rebuilding your score: You can ask your landlord or telephone company to report your rent.

Especially if you’ve got low or damaged credit, reporting your rent payments is a good way to increase your score. Proving to the credit bureaus that you’re making your rent payments on time every month is a positive report. It’s also a good move for students to actively set up good credit histories for later. Most landlords won’t report this on your behalf, so you may have to take matters into your own hands. There are companies in Canada that will do this for you: check out Tenant Verification or Rent Track.

Timing is everything: How long will it take to see an increase in your score? Or, how long do delinquencies or negative reports stay on your credit history? Here’s what you need to know:

  • Increased score: it might take several weeks to see a notable increase in your score, but it all depends when your credit information is reported to the bureaus. Sometimes companies do this daily!

  • Decreased score: if your score suddenly dips, it might be because of things that happened weeks ago. As with increases, it depends on when the information was reported

  • Credit history and banking info: available 6 years from the last activity date

  • Bankruptcy: stays on your report 6 years from the date of discharge (1st bankruptcy)

  • Consumer proposals: stays on your report 3 years from the date settled or completed

  • Collections: stays on your report 6 years from the date of last activity

Knowledge, they say, is power and knowing your credit score is the first step to getting it in check. The next most important thing is to remember to make your mandatory payments on time and in full every month. Once you get a handle on that, you’re golden.

Additional Resource: Check out this article from Money We Have for additional info on how to improve your credit score.

Megan Radisa is a content creator and freelance writer from Toronto with a curious mind. She’s an Uber Eats addict and hardcore Aquarius in her spare time.

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