How To Increase Your Credit Score In Canada

If you live in Canada, a good credit score is important to your financial health. Credit scores range from 300 to 900, and they’re designed to prove your creditworthiness based on factors such as payment history, credit utilization, and credit history duration.

While you may not give much thought to credit scores, they can have a significant impact on your life.

Your credit score can influence your ability to obtain loans, credit cards, and mortgages, as well as the interest rates you will pay on these loans. In this article, we’ll examine why your credit score matters more than you think, and how you can increase it.

Payment History – 35%

Payment history is one of the most important factors considered when calculating your credit score and It accounts for 35% of your score.

Your payment history shows how responsible you have been in making your credit payments on time, and it is an indication of how likely you are to make timely payments in the future.

Late payments can have a significant negative impact on your credit score, especially if they are reported to a credit bureau. Payment history not only takes into account your credit card payments but also any other credit accounts you may have, such as personal loans, mortgages, or lines of credit.

Missed payments or paying late can result in penalties, such as late fees, and can also lead to negative marks on your credit report, which can lower your credit score.

Therefore, it’s important to pay bills on time and in full to maintain a positive payment history. Even if you cannot pay your balance in full, be sure to make the minimum payment.

If you have missed payments in the past, it’s never too late to start building a positive payment history. You can do this by making all future payments on time and in full, and by contacting your creditors to set up a payment plan if you are struggling to make payments.

Over time, this will help to improve your credit score and increase your creditworthiness.

Credit Utilization – 30%

Credit utilization is another important factor considered when calculating your credit score in Canada, and it accounts for 30% of your score. The credit utilization ratio is based on the total available credit you have from all sources, and the percentage of that credit your currently using.

For example, let’s say you have a credit card with a maximum limit of $5000, and you currently have a balance of $4000 owing on it. This would equal a credit utilization of 80%, which is very high, and will negatively impact your credit score.

Creditors view a high credit utilization ratio as an indication of financial stress, which can make you appear less creditworthy. Therefore, it’s important to keep this ratio low to maintain a healthy credit score.

A good rule of thumb is to keep your credit utilization below 30% of your available credit limit.

To maintain a low credit utilization rate, you can make multiple payments each month or increase your credit limit. It’s important to note that while increasing your credit limit can decrease your credit utilization, it may also lead to too much debt if you are not careful.

Another tip is to spread your purchases across multiple credit card accounts to keep your credit card balances low or lines of credit, rather than using one account for all your expenses. This can help you to maintain a low credit utilization rate across all your accounts.

By keeping your credit utilization low, you can increase your credit score and improve your creditworthiness.

Credit History – 15%

Credit history is another factor considered when calculating your credit score in Canada. It refers to the length of time you have been using credit, and the types of credit accounts you have used. Credit history accounts for 15% of your credit score.

Having a long credit history with a mix of accounts such as credit cards, a car loan, and a line of credit, can have a positive impact on your credit score, as it shows that you have a track record of responsible credit use.

On the other hand, having a short credit history or only using one type of credit account can make it harder for creditors to evaluate your creditworthiness.

It’s important to note that closing old credit card accounts can negatively impact your credit history, as it reduces the length of your credit history. Therefore, it’s generally a good idea to keep your old accounts open, even if you’re not using them.

Building a strong credit history takes time and responsible credit use. It’s important to make all your credit payments on time, keep your credit utilization low, and avoid applying for too many credit accounts at once. By doing so, you can build a positive credit history and increase your creditworthiness over time.

Credit Mix – 10%

While establishing your credit score in Canada, several different types of accounts are considered. These are some examples:

A credit card account is a type of revolving credit that allows you to borrow money up to a set limit. When principal is paid down, the credit becomes available to borrow again.

Loans can come in many different forms including personal loans, car loans, and student loans. Considered instalment loans, payments are made up of interest and principal, but any principal paid down is not accessible to borrow again.

Mortgages: A mortgage is a type of loan that is used to buy a home. The size of your mortgage loan and the amount of equity you have in your property all contribute to your credit score.

A line of credit is a revolving credit account that allows you to borrow money up to a specified limit. Any principal payments made against the line of credit can be borrowed again in the future up to your maximum limit.

Credit Inquiries – 10%

Credit inquiries are another factor considered when calculating your credit score in Canada. A credit inquiry occurs when a lender or creditor checks your credit report to evaluate your creditworthiness, such as when you apply for a new credit card, loan, or mortgage.

There are two types of credit inquiries: hard inquiries and soft inquiries. Hard inquiries occur when you apply for new credit and are initiated by the creditor or lender.

Soft inquiries occur when you check your own credit report or when a creditor or lender checks your credit report for a pre-approval or promotional offer.

Hard inquiries can have a negative impact on your credit score, as they suggest that you are actively seeking new credit and may be taking on additional debt. Multiple hard inquiries within a short period of time can also be viewed as a red flag by creditors, as it may suggest that you are in financial distress.

Soft inquiries, on the other hand, do not impact your credit score and are not visible to creditors or lenders. Therefore, checking your own credit report or receiving pre-approval offers will not negatively impact your credit score.

Overall, credit inquiries are an important factor to consider when calculating your credit score in Canada. To maintain a healthy credit score, it’s important to limit the number of hard inquiries and only apply for new credit when necessary. By doing so, you can avoid negatively impacting your credit score and improve your chances of accessing credit with favorable terms.

Credit Bureau Agencies

There are two major credit bureaus that operate in Canada, Equifax, and Transunion. These companies provide credit reports and scores to lenders, businesses, and individuals.

Equifax and Transunion receive credit history, payment history, and outstanding debt information from a variety of sources, including lenders and financial institutions. They use this information to generate credit reports and scores that lenders can use to determine creditworthiness.

Free Credit Report

Equifax and Transunion both allow you to obtain a free credit report once a year.

You can access your free Equifax Report here:

https://www.consumer.equifax.ca/personal/products/credit-score-report/

You can access your free Transunion report here:

https://www.transunion.ca/product/consumer-disclosure#articleSection2

The Bottom Line

To summarize, increasing your credit score is an important step towards financial stability and success. A good credit score will give you more options when obtaining loans, credit cards, and other financial products. It will also help you get better interest rates on your loans, saving you thousands of dollars in interest.

Applying the tactics mentioned in this article, such as paying bills on time, minimizing credit utilization, and keeping a mix of credit accounts are all very important to the overall goal of increasing your credit score.

It’s vital to remember that developing good credit takes time and effort, but you can reach your financial goals and build a great credit profile by remaining disciplined and focused.

Start taking action today and watch your credit score skyrocket!