There are many reasons that achieving and maintaining a good credit score is important. If your credit score has dropped because of struggling with debt or filing a consumer proposal or a bankruptcy, you’ll quickly realize the limitations it places on you. In today’s world, most people rely on good credit for a wide variety of activities. Let’s face it, certain purchases cannot easily be handled with cash or your paycheque, and even then, often credit cards are required to hold a reservation. Whether you want to borrow at favourable credit rates, get approval for a mortgage, buy a car, or order a credit card, your good or bad credit rating will impact your ability to do so. Without a credit card, for example, simple pastimes like online shopping and car rentals that we often take for granted become impossible. Follow these tips and you will be well on your way to an improved credit score.
Step 1: Know Your Credit Score and How it is Calculated
Your current credit score can be obtained from credit bureaus like Equifax®. There are mathematical algorithms used to calculate credit scores based on 5 variables: payment history, credit utilization, time accounts that have been active, variety of accounts and number of accounts opened recently.
Step 2: Pay Your Bills on Time
An important element to credit scoring is the presence of a consistent and reliable payment history, therefore, it is very important that your payments are made on time. Set up reminders in your calendar, and/or alerts on your phone that will remind you when a bill is due and that you have to pay it, whenever possible align your payments with your paycheques or deposit schedule. Paying your bills on time allows you to establish a positive payment pattern which will be easier to maintain over time and increase your credit score
Step 3: Apply for and Open New Credit Accounts Only as Needed
Be mindful of opening too many accounts at once and not opening more accounts than you need. Credit scoring models usually look at how many new accounts you have as well as how many new accounts you have applied for recently. Having too many new accounts may indicate to lenders and creditors that you are taking on a lot of new debt and may be a high-risk borrower.
Step 4: Create a Budget
Having a monthly budget helps when it comes to your finances. Budgets help you stay on track and plan out all your spending in advance. The key to a good credit score is being prepared. Within your budget create sections for fixed expenses and variable expenses to prepare you for any scenario. Don’t forget to also allocate a percentage of your income into a savings account on a regular base.
Step 5: Limit your Number of Credit Applications or Credit Checks
It is normal and expected that you will apply for credit from time to time. When lenders and others ask a credit bureau for your credit report, it’s recorded as an inquiry. Inquiries are also known as credit checks.
If there are too many credit checks in your credit report, lenders may think that you are:
Urgently Seeking Credit
Trying to Live Beyond your Means
Step 6: Stay on Top of Your Credit
Whether you are recovering from past credit issues or starting a new credit history, it is always a good time to start taking care of your finances. Continue to be financially responsible so that lenders can establish trust in you and your spending habits. Make sure to regularly review your credit report so you can be aware of the full picture. The higher your credit score is, the more freedom you have to take out loans. To help stay aware, Equifax Canada and TransUnion Canada can provide a copy of your credit report. Your credit score follows you with every purchase you make, hence the importance of maintaining a high number. No matter how low your score is, there are always ways to raise it if properly educated. Take the time to learn about your credit score and most importantly how to improve it. Your credit score impacts everything from your everyday purchases to the house you buy, so don’t let your credit score stop you from your attaining your dream life. Here’s the golden rule when it comes to your finances: learn about your credit score, improve it and maintain it.