Have you ever wondered what your credit score is or how it’s calculated?
Your credit score is a three-digit number between 300-900 that lenders use to predict your creditworthiness. Credit reporting companies calculate your score based on your payment history, how much you owe, how long you’ve had credit and how often you apply for new credit.
In general, the higher your score, the less likely you are to become delinquent on credit. If it’s above 680, you’ll probably qualify for a standard loan, but if it’s lower than that, you may have trouble getting new credit.
If your score is lower than you’d like, here are 6 ways to raise it…
1. Check your credit report regularly – at least once a year and make sure your report agrees with your records. Correct any errors you notice as soon as possible and watch for signs of identity theft. There are two main credit reporting companies in Canada: Equifax and Trans Union and their reports can be different from each other, so it’s good to check with both companies – even though they do charge a fee. Free credit checks from Credit Karma are not accurate and may not reflect reports from Trans Union or Equifax. And, if you are thinking about applying for a mortgage, it’s especially important to check your report a few months in advance. That way, if your score is on the low side, you have some time to raise it.
2. Make sure your credit limits appear – If your credit card limits aren’t listed, your cards are assumed to be maxed out – and this damages your credit score. Ensure your limits are indicated and stay well below them to maintain a higher score. If you can keep your balances below 50% of your available credit, that is best. For example, having two credit cards with $3000 limits and balances of $1000 is much better than having one credit cards with a $3500 limit and $2000 balance. Make sense?
3. Pay ALL of your bills on time! I know that this can be difficult, especially in a pandemic, if your income has been impacted. However, if you have been falling behind, take care of past due accounts first – delinquent accounts reduce your score more than anything else.
4. Pay new liens or charge-offs (debts that your creditor thinks is not likely to be collected) – These are your next priority, however, if they are older than 24 months they have already done their damage. While you may still need to address these, your effort will be better focused on the other suggestions I’m discussing.
5. Don’t cancel your credit cards – credit scoring software totals your available credit limits across all your cards. If you close a credit card, suddenly you have a total lower limit which means your credit to debt ratio is higher. This drives down your score. An exception to this rule is if you know you don’t have self-control and know you will max out these cards and not keep up with payments.
6. Keep your old cards active – the longer you’ve had an account open, the longer your average credit history and the less likely you are to default on it. But it’s not enough to simply keep these accounts open, you have to use the card – even if it’s only a couple of times a year. Keep these old cards open and don’t apply for credit you don’t need – too many inquiries over a short period of time can reduce your score.
I hope you have found this helpful. If you have any questions about your credit score and want help, please call me and we can set up an appointment to chat about which options will work best for you.