Improving credit score in Canada
A good credit score can help you get any kind of financial help you need without too much hassle. The steps below will help you with credit repair and improve your score.
Getting the credit score
A credit score and credit report are different, which means getting them does not involve the same process.
The score is not available in a report, and it helps lenders determine your ability to pay back their money. It is only given by credit bureaus like Equifax and TransUnion, but some banks allow their customers to access them online, even though they are not the official scores. People with low credit scores tend to have a lot of debt, making it harder for them to acquire more loans when needed, even in emergencies.
Getting a credit report
A credit report shows the credit history and is also mostly available from the bureaus that are also called reporting agencies. They usually give free credit reports once every year, but you have to apply. Getting a credit report does not affect your credit score in any way. The report covers information such as:
- Employment and other relevant details, which can be used for identification reasons
- A record of every institution that has asked for your credit report
- Details about payments you have made to accounts that are registered with the bureaus
- Financial information on the public record, such as bankruptcies, collections, and judgements
- The types of credit you have
Checking a credit rating
The credit bureaus rate every account on the credit report according to the present payment status. The type of credit is usually shown by a letter, while the status is indicated as a number ranging from 0 to 9. for example:
R means recurring credit like that of credit cards
O is an open account like Lines of Credit
I means an instalment debt like a student loan
M is a mortgage loan
Credit rating examples:
R0 means the credit is new, like in cases where they are approved but not used
R3 shows that payment has been late for 60 to 89 days
R5 is a rating for payment that is late by 120 days
R6 does not exist
R9 indicates bad debt or accounts that have filed for bankruptcy. Debts in the collection and those who move without giving an alternative address also get such ratings.
Calculating credit scores
Every person that uses a phone plan, credit cards, or takes personal loans has a credit score.
The two reputable credit bureaus in Canada, namely Transunion and Equifax, usually calculate credit scores using the FICO formula. The score ranges between 300 and 900, depending on several factors below.
Payment history: This shows how consistent you have been with payments and whether you have been doing so promptly or how late you have been. It covers 35% of the credit score.
Credit history: This is the duration you have been taking and using credit. It covers 15% of the score.
Credit usage: How much credit you have been using from the available amount. Covers 30% of the score.
Loan diversification: The different types of loans you have.
Inquiries: The number of times you have applied for a new loan.
Credit scores are usually classified, ranging from poor to excellent. Any rating above 650 is a good one and is less likely to be turned down by lenders. 800 and above is excellent and will get better interest rates.
Rebuilding and improving your credit history and score
Credit problems in the past can affect your credit history, but they can be solved easily with the following tips.
- Prioritizing payments on accounts that are due but have not gone into collections yet. The main reason here is to prevent those accounts from being sent into collections. It takes at least six years for such accounts to be cleared from the credit report, regardless of whether they are paid or not.
- Contact the accounts in collections to make payment arrangements and notify creditors too. Research and get as much information as you can about your rights under those circumstances before contacting the collectors. Some of them may insist that you pay in full, and others may threaten you with legal action.
- Take secured credit cards as opposed to unsecured ones, which will reflect negatively on your credit report. The secured ones have your money, which helps you maintain control of spending.
Building a credit score
Getting a good or excellent sore requires a lot of patience and consistency. It does not happen overnight, but the smallest positive contribution has an impact on the overall score. Try the following.
- Check your credit report keenly, at least once each year. Look for misinformation that can lower the score and report any findings immediately. Equifax or TransUnion can help you with dispute resolution.
- Making timely payments for the regular house and credit card bills is also essential. Create reminders on your phone or computer to avoid being late.
- Space credit applications correctly. Applying for too many loans at the same time has negative implications. It shows that you cannot manage your finances properly and are only rely on the credits to cater to daily needs.
- Avoid giving cheques when the account has limited funds. The bank will likely alert the credit bureaus and they will have that consideration when calculating the score. Alternatively, you can apply for overdraft protection.
- Improve your saving habits by outing aside at between 10 to 15% of your income. For the informally employed, at least 2 to 3% should be mandatory savings, but that number can rise when income increases. Find ways to cut down expenditure and, if possible, use budgeting tools to help manage the available funds. The more you can rely on your income, the less you will have to borrow and worry about accumulating debt.
The only way to avoid taking too many loans is by learning the right money management skills and living according to your income. Compare the money coming in versus the amount you are spending each month, then cut down on non-essentials. YorkCredit can also give you sound advice on how to live within your financial means and provide you with information about how credit reporting works. They can also help you enrol in the right programs and adopt practices that help you reduce your debt and improve your score.