1. INSPECT YOUR CREDIT REPORT AND SCORE
As per the Federal Trade Commission, about 1 in 5 consumers have errors on their credit report that negatively impacts their credit score. That’s a big number and is why you should routinely request your free credit report annually and read it through for any errors.
By law, the 2 major credit bureaus (Equifax and TransUnion) are required to each provide you with one copy of your credit report per year (upon request). Companies like Borrowell (Canada) or Credit Sesame (U.S.) also provide it for free on a monthly basis along with your credit score. Checking your own credit score (and report) does not impact it as it is deemed a “soft inquiry.”
2. PAY YOUR BILLS ON TIME
The first step to improving your credit score is to pay your credit card balances on time – all of the time. Payment history is the most important factor for ranking your score. Late payments register on your credit as negative information. The later the payment is, the more the damage you can expect to your credit score.
Even if you have missed paying your bills on time in the past, the only way to revive your score is to start making payments before they are due. Automate your bill payments so you do not forget!
3. KEEP A LOW BALANCE
Credit reporting agencies dislike a high credit balance. When you max out your credit, it hurts your credit score. A popular ratio used to measure how you use credit is known as the “credit utilization ratio.” This ratio measures how much of the total credit available to you is being used.
4. KEEP OLD CREDIT ALIVE
The length of your credit history influences your credit score. Do not cancel old credit cards in good standing even if you rarely use them now. Keep these cards and use them every now and then to show some “activity” on your credit profile.
Cancelling old lines of credit also lower your total credit limit and this hurts your credit utilization ratio.
5. VARY YOUR CREDIT
It helps to have a variety of credit accounts, for example, credit cards, installment loans, lines of credit, mortgage, etc. Your ability to manage all these different credit facilities well gives a signal to credit bureaus that you are a good borrower. The mix of credit you have affects your credit score by about 10%.
6. PLAN YOUR CREDIT SHOPPING
Every time you apply for credit, a hard inquiry is placed on your credit file – this results in a drop in your credit score. If you need to shop around in several places for credit, for example, if you are shopping around for a car loan with the best interest rate, try and do so within a 2-week period.
Credit reporting agencies will consider all the hard inquiries placed on your file within this period as one hit, limiting the potential impact that several hard inquiries would otherwise have.
7. CONSOLIDATE YOUR DEBT
If you have a significant credit balance and find it difficult to keep up with paying it down, a low-interest balance transfer credit card can save you thousands of dollars in interest payments. An example of a low-interest balance transfer card in Canada is the Scotiabank Value Visa Card that charges interest of 0.99% for 6 months!
To make the most of this strategy, you should plan to pay all or a significant portion of your debt during the low-interest period – usually 6 months.
If you qualify for a personal loan at a reasonable rate, you can use this to pay off your credit card balance as well and save money.
8. GET A SECURED CREDIT CARD
If your credit score is poor or you do not have a credit history at all (e.g. new immigrant or student), it may be difficult to qualify for a regular credit card. A “secured” credit card requires you to put down a deposit with the bank (such as in a GIC) that secures the amount of credit they are extending to you. For example, if your credit card has a limit of $2,000, you will be required to deposit $2,000 in a designated account.
A secured credit card helps you to build your credit score when there are limited options. You will still need to pay your balance on time and this is a good way to learn about how to use credit responsibly.