How to improve credit score in Canada? – If you are new to Canada, you might already know how important it is to have a good credit score. Getting a new phone plan, a new credit card or looking to lease a condo – a good credit score will make sure that your application is successful. Among many other things, a good credit score can also get you a low rate of Interest if you plan to apply for a mortgage.
In short, your credit score shows how likely a credit bureau thinks that you will pay your bills on time and how risky it would be for a lender to lend you funds. So, obviously having a high credit score can make your life easier. In this post, we will discuss some tips that can help you to improve credit score in Canada.
What is a good credit score in Canada?
A credit score is a three digit number that is derived from the information in your credit report. A ‘good credit score’ can be different for different credit bureaus as it depends on the scoring model that they used.
According to Equifax, the biggest credit bureau in Canada, a person with a credit score above 660 is seen as a low-risk borrower. If your credit score is between 725 to 759 it is considered very good. A credit score of 760 is considered to be an excellent credit score. The credit score range is anywhere between 300 to 900. Higher your score is, more trustworthy you are seen as. SIMPLE!
What comprises a credit score?
- Payment history (35%) is the biggest factor deciding your credit score.
- After payment History, it is the Credit Limit Utilization Rate(30%), that can improve or bring down the credit score.
- Credit History makes up 15% of an individual’s credit score.
- Other two important factors, both making up 10% of the credit score, are New Credit and Credit Mix.
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Tips to improve credit score in Canada
1. Get a Credit card
Just paying utility bills on time won’t help you reach that high credit score mark. You need to have a credit card and use it often to build and maintain a high credit score. So, if you are someone who likes to use cash or debit cards for everyday purchases, its time to switch to credit cards.
2. Pay Credit card bills on time
This is a no-brainer. You want a good credit, you need to pay your credit card bills on time. Obviously it would be best if you can pay the full amount. But even if you can’t, NEVER NEVER miss paying at least the minimum payment amount mentioned on your credit card bill. You don’t want any MISSED PAYMENT on your credit report.
As discussed previously, payment history makes up 35% of an individual’s credit score, so it’s important to avoid late credit card payments. You miss a payment and your score takes a huge dip.
If you are someone who is not good at keeping track of bill payment dates, the best suggestion would be to set up an automatic payment by linking your credit card to a bank account. You can do this by visiting your credit card website and activating AUTOPAY. You can opt to pay just the minimum amount or the full amount, whatever sits right with you. You can also set up alerts on your credit card so that you are reminded to pay.
In case you you’re unable to pay your bill or even the minimum payment, you should contact the lender. In many cases, the lender can help and give you some options to avoid missing a payment.
3. Keep credit utilization rate low
The second biggest factor deciding your credit score is the CREDIT UTILIZATION RATE. What exactly is credit utilization rate? Suppose you have a credit card with a limit of C$ 10,000. You have spent C$ 5,000 on this card this month. So, your credit utilization is 50% on this card (Credit used / Credit Limit *100).
To improve Credit Score, It is crucial that you do not use up more than 30%-35% of your credit limit at any time. Going beyond 30% would negatively affect your credit score. If you often cross the 30% mark, it is better to ask for a credit limit increase or get an additional card to increase your overall credit limit. That way you can keep your Credit Utilization rate below 30%.
BTW, by credit limit we mean the overall credit limit. That is the sum of credit limits of all the credit cards and line of credit. So if you have three cards having credit limits of $2000, $4000 and $3000 respectively, your credit limit would be $9,000. And 30% of that is $ 2,700. So, you should aim to keep your credit limit utilization to $2,700 if you want to maintain a high credit score.
4. Opt for Maximum Credit Limit
If you are being given an option to increase your credit limit by the lender, you should go for it even if you don’t really need it. It will help you to keep the credit utilization rate low and hence maintaining a good credit score.
5. Limit Hard checks
You must know the difference between a Soft credit check and Hard credit check on your credit score. When you go to your bank’s website and check your credit score, that is an example of a soft credit check and doesn’t affect your credit score. But if you are trying to get a new credit card or a new loan, that will result in a hard check on your credit score. Too many and regular hard credit inquiries will bring down your credit score.
If you have applied at various companies to get a new loan or a new credit card, it is advised that you apply at all those places within a gap of few days or within a week. So that when they conduct a hard inquiry on your credit, it would appear as just one inquiry on your credit report as all of them were done within a span of few days.
6. Old credit accounts are good
If you are contemplating closing one of your credit cards, go for the newer one. The length of your credit history is the third biggest contributor to your credit score. So keeping that old credit account active is an awesome idea to keep your credit score in good health.
7. Credit mix is the way to go
You can increase your credit score if you have multiple types of credit accounts on your file. Don’t rely on not just credit cards but also have some also other types of credit like a line of credit, monthly cell phone contracts, a car loan etc.
8. Monitor your Credit Report
it is always a wise idea to keep monitoring your credit report regularly. It can help in spotting any error on your report like any unauthorized credit inquiry or a missed payment in error. Timely disputing such errors on your credit report with the credit bureau can save your credit score taking a fall.
