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How can I improve my credit rating?
Your credit rating may seem like a simple indicator to you, but it can have a huge impact on your finances. Most people don't give enough importance to their credit ratings. Yet having a good credit rating is essential for applying for a car loan, student loan or mortgage, as well as for renting an apartment or getting a job that involves managing money. If you don't pay attention to your credit rating, you could end up paying a higher interest rate on a loan or credit card account. A credit rating gives information to future creditors about your creditworthiness and your ability to manage money well. If your credit rating is low, you may have difficulty obtaining a loan and lose a lot of money. Fortunately, you can improve your credit rating by changing your habits and adopting financial optimization strategies. Follow the tips in our article to find out how to improve your credit rating and regain the trust of your lenders.
What is a credit rating?
A credit rating is an evaluation of an individual's or entity's credit history and ability to repay debts. It is a 3-digit number between 300 and 900 that represents the reliability of an individual or corporate entity in meeting its financial obligations. It is calculated through an in-depth, detailed analysis of the credit file.
A credit rating is generally calculated by a specialized credit rating agency, which closely monitors the behavior of individuals with regard to debt repayment (bank loans, credit cards, lines of credit, etc.). In Canada, Equifax and TransUnion are the two credit reporting agencies.
Some of the factors that make up a credit rating are:
- Payment history
- The age of your accounts
- Credit utilization (number and type of credit accounts)
- Number of creditors
- Debts
- New credit applications
- If you have gone bankrupt and for how long
Banks and lending institutions use credit scoring to determine the risk an individual represents if they decide to grant credit or a loan. It helps them determine who can obtain credit and at what rate.
Credit file analysis
Before considering improving your credit rating, you first need to know what your credit score is to get a better idea of your creditworthiness. To do this, you can apply to Equifax Canada or TransUnion Canada. You'll need two pieces of identification, such as your passport and driver's license.
Your credit report contains a lot of information. In addition to your personal information, the credit report contains information on your various loans and bank accounts, bankruptcies, NSF cheques and unpaid debts. However, your file does not indicate your credit rating. You have to pay about $25 to obtain it. Consulting your credit report is an opportunity to identify bad habits that could affect your credit rating and prevent you from obtaining a loan.
If you find an error in your file and wish to correct it, contact Equifax Canada or TransUnion Canada as soon as possible, supporting your request with relevant documentation such as your bank statement. You can also contact your creditors directly to obtain more recent information and correct the error.
Tips for improving your credit rating
Rest assured, your credit rating is not permanent. It evolves over time according to your actions. Here are a few tips to help you improve your credit rating:
Monitor your payment history
Your payment history is one of the most important factors in your credit rating, accounting for 35% of your score. To improve your payment history:
- Make your payments in full
Paying your bills in full by the due date is one of the best habits you can adopt to boost your credit score. If you're one of those people who's content to pay off the minimum amount of your credit each month, you need to start doing things differently in order to boost your credit score.
As far as credit cards are concerned, if you can't pay the amount in full, make sure you pay the minimum amount every month. If you want to avoid this situation, spend what you can pay back in the short term.
- Make your payments on time
Another way to improve your credit rating is to pay your bills, cards or lines of credit on time, i.e. by the due date, not the day it's due. This applies to both small and large amounts, since any delay in payment has an impact on your credit rating.
If you have a habit of forgetting to make your payments on time, make your payments automatically on a set date. Automatic payments can be applied to personal loans, lines of credit, mortgages, student loans, car loans and more.
- Eliminate sales that are too small or too numerous
If you want to increase your credit rating and you have several credit cards, try to keep just one or two, preferably the ones you've had the longest and from major creditors. You can also choose the cards with the lowest interest rates, or those offering the best benefits. Pay off the balance of any other cards you haven't chosen without cancelling them, starting with the credit cards with the highest rates.
2. Use credit wisely
This is an essential step in maintaining or improving your credit rating. It's all about using your credit more intelligently and, above all, not using all of it. Creditors have a pejorative view of consumers who overuse or abuse their credit. As far as possible, don't exceed your credit limit, and don't use more than 35% of your credit. You should combine all your credit (credit cards, lines of credit, loans) and use only 35% of your total credit limit.
For example, if you have a credit card with a $1,000 limit, a $6,000 line of credit and a loan with a $10,000 limit, try to use only 35%, or $5,950. If you exceed this limit, lenders consider you a higher risk, even if you pay off your balance in full before the due date.
3. Increase your credit limit
If you are about to exceed 35% of your credit limit, increase your credit limit so that you can continue to use your card without damaging your credit score. This advice applies only to people who are able to control their spending.
4. Limit your loan requests
Applying for credit from time to time is completely normal. However, repeatedly applying for loans suggests that you're in urgent need of credit or that you're trying to live beyond your means, both of which make you a risky person and are very bad for your credit rating.
Be sure to apply for credit only when you really need it, and don't accept credit cards to receive promotions or gifts. If you wish to apply for credit, do so with different lenders and within a two-week period so that these applications are combined and referenced as a single credit application in your file.
For example, if you apply for a mortgage at three different financial institutions within a two-week period, these applications will be counted as one. On the other hand, if you apply three months apart, three applications will be counted, which is less advantageous for your rating. We also recommend that you make no more than three loan applications per year.
5. Vary your credit types
Your credit rating can be influenced by the types of loans you have. If you have only one type of credit (for example, a credit card), your rating will be considered lower. It's therefore preferable to vary your types of borrowing (credit card, mortgage, consumer loan, etc.). However, you must be able to manage these different types of loans and repay them on time. Give preference to lines of credit. This type of permanent credit is easier to manage and generally better for your credit rating.
- H3: Keep your old accounts open
If you don't have to change banks or credit cards... don't. In fact, it's better to keep the same accounts or cards you have for as long as possible. This can demonstrate stability and responsibility to your lenders. What's more, if your long history shows that you're creditworthy and that you pay back your loans assiduously, that's a positive point in your favor.
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