When I first moved to Canada, I struggled to understand the credit system and how it worked. It seemed like an impenetrable fortress that only long-time residents could navigate. But after some hard work and dedication, I was finally able to boost my credit score and achieve my financial goals.
And let me tell you, it’s a great feeling when you see your credit score climb higher and higher! It opens up doors to better credit products and lower interest rates, making it easier to achieve your financial dreams.
So, if you’re feeling discouraged about your credit score, don’t give up just yet! With this guide, I’ll walk you through the steps to identify practical tips to slowly build your credit score. Trust me, it’s not as scary as it seems, and with the right tools, you’ll be well on your way to a better credit future.
For the first few years, I struggled to access credit and had to rely on secured credit cards to slowly build my score. But after 3.5 years of diligent effort, I finally hit an excellent score of 800!
If you’re a newcomer to Canada, it’s important to understand the different ranges of credit scores and what they mean. A score between 300 and 579 is considered “poor”, while a score between 580 and 669 is “fair”. A score between 670 and 739 is “good”, and a score between 740 and 799 is “very good”. Finally, a score of 800 or higher is considered “excellent”.
Why should you worry about your credit score?
Imagine this: you are trying to buy a new car, but the finance department tells you that your credit score is too low to get a loan. You know that you have the money to pay for the car outright, but you want to take advantage of the lower interest rates that are available with a loan. In this situation, improving your credit score can be the difference between getting the car you want and having to walk away empty-handed. Or, imagine this: you are applying for a new apartment, and the landlord tells you that your credit score is too low to get the rental.
Again, you know that you have the money to pay for the rent upfront, but you want to take advantage of the fact that you would only have to pay for rent every month instead of every week. In this situation, improving your credit score can be the Deal Breaker between getting the apartment you want and having to keep looking.
One of the common challenges people have when it comes to their credit score is not knowing how to improve it. People often don’t know what factors affect their score, or they don’t know where to start when it comes to fixing their credit. Another challenge that people face is not being able to maintain good credit habits over time. This can be due to a number of different reasons, such as not having enough money to make all of their payments on time, being overwhelmed by how much needs to be done in order to improve their credit score or simply forgetting about their credit score altogether.
However, no matter what the reason may be, it is important to remember that improving your credit score is possible. By following the steps in this guide, you can create a plan to improve your credit score that is tailored specifically to your needs. And, by monitoring your progress and making necessary adjustments along the way, you can reach the goal of improving your credit score!
Understand what a credit score is
Your credit score is important because it is a reflection of your creditworthiness. This number is used by lenders to determine how risky it would be to loan money to you. If you have a low credit score, it may be difficult to get a loan or rent an apartment. On the other hand, if you have a high credit score, you may be able to get a loan with a lower interest rate.
There are a number of different factors that can affect your credit score. Some of these factors are within your control, while others are not. The following list includes some of the most common factors that affect your credit score:
1. Payment history -This is probably the most important factor when it comes to your credit score. Your payment history includes information about how often you make payments on time, how often you are late with payments, and how much debt you have.
2. Amount of debt- This factor includes information about the total amount of debt that you owe, as well as the types of debt that you have.
3. Length of credit history – This factor includes information about how long you have had different types of credit accounts.
4. Types of credit accounts – This factor includes information about the different types of credit accounts that you have, such as credit cards, car loans, and mortgages.
5. New credit accounts – This factor includes information about how many new credit accounts you have opened in the past 6 to 12 months.
6. Credit utilization – This factor includes information about how much of your available credit you are currently using.
7. Recent credit inquiries – This factor includes information about how many times your credit has been checked in the past. You can easily check if there is any recent credit inquiries with Credit Karma. The tool is completely free and very easy to use.
It is important to have a plan to improve your credit score because this number is used by lenders to determine how risky it would be to loan money to you. If you have a low credit score, it may be difficult to get a loan or rent an apartment.
Make a plan to build your credit score
Pay on time, always
Paying your bills on time is the most important thing you can do to improve your credit score. It’s also important to pay your bills in full and on time. If you can’t afford to pay your entire bill, try to at least pay the minimum amount required.
Reduce your debt
The more debt you have, the lower your credit score will be. That’s why it’s important to work on paying off your debt as quickly as possible.
Strategically use a credit card to pay for purchases that you can afford to pay off 100%
One effective strategy is to use your credit card to make purchases that you can afford to pay off in full each month.
This approach can be helpful for a few reasons. First, it can help you establish a positive credit history by demonstrating that you can use credit responsibly and make timely payments. Second, it can allow you to take advantage of rewards programs or cashback incentives offered by your credit card issuer, allowing you to earn money or other benefits simply by making purchases that you would be making anyway. Finally, it can help you avoid carrying high levels of debt, which can quickly spiral out of control and damage your credit score.
To make this strategy work, it’s important to only use your credit card for purchases that you can afford to pay off in full each month. This might include things like groceries, gas, or other regular expenses that you would be paying for anyway. It’s also important to keep track of your spending and ensure that you’re not overspending or exceeding your budget, as this can quickly lead to high levels of debt and financial stress.
In addition to using your credit card responsibly, it’s also important to choose a card that fits your needs and offers the best rates and rewards. Look for cards with low interest rates and no annual fees, and compare rewards programs to find one that matches your spending habits and priorities.
Maintain a low utilization ratio: optimally < 35%
Your credit utilization ratio is another important factor that affects your credit score. This number is calculated by dividing your total credit card balances by your total credit limit. Try to keep your ratio below 35% to improve your credit score.
Let’s say you have three credit cards with the following credit limits and balances:
- Card 1: $5,000 limit, $1,000 balance
- Card 2: $3,000 limit, $500 balance
- Card 3: $2,000 limit, $0 balance
Your total credit limit across all three cards is $10,000, and your total balance is $1,500. To calculate your credit utilization ratio, you would divide your total balance by your total credit limit:
$1,500 (total balance) ÷ $10,000 (total credit limit) = 0.15 or 15%
In this example, your credit utilization ratio is 15%, which is well below the recommended 35% or lower.
To maintain a low credit utilization ratio, you can take steps such as paying off your credit card balances in full each month, avoiding carrying large balances, and increasing your credit limit if possible. If you’re struggling to keep your credit utilization ratio low, you may want to consider spreading out your purchases across multiple credit cards or reducing your overall spending.
Don’t open new credit accounts unnecessarily
Opening new credit accounts can negatively affect your credit score. This is because it increases your overall debt level and it can also increase your credit utilization ratio. For me, personally, I have 3 cards (which I think decent, but 2 is ideal): one from my bank, one for Amazon (to get cashback- as I shop on Amazon quite often and it’s free- no annual fee. The last one is NEO card from Neo Financial which has better cashback/rewards program than my bank credit card. I mostly use only two cards at one time, instead of three to avoid any payment delay in case I don’t remember.
Request an increase in credit limit
utilization ratio, as long as you don’t increase your spending as well. However, you should be aware that requesting a credit limit increase can result in a hard inquiry on your credit report, which can temporarily lower your credit score.
Keep old credit cards open
The length of your credit history is an important factor in determining your credit score. Closing old credit accounts can shorten your credit history and lower your score. If you have old credit accounts that are in good standing, it’s generally a good idea to keep them open.
Become an authorized user
If you have a family member or friend with good credit, you may be able to become an authorized user on one of their credit cards. As an authorized user, you can benefit from the primary cardholder’s good credit history and responsible credit use. However, it’s important to choose someone you trust and who will continue to make timely payments on the card.
Dispute any error
Mistakes can happen, and errors on your credit report can negatively impact your credit score. Review your credit report regularly to ensure that all the information is accurate, and if you find an error, dispute it with the credit bureau reporting the error.
In conclusion, improving your credit score can be a daunting task, but it is an essential step towards financial stability and independence. By following the tips we discussed, such as paying your bills on time, reducing your debt, maintaining a low credit utilization ratio, and monitoring your credit report regularly, you can make significant progress towards achieving your goals.
It’s important to remember that there are no quick fixes to improving your credit score, but with patience and dedication, you can get there. If you found this guide helpful, be sure to follow my website or blog for more tips and insights on personal finance in Canada. You can also check out other blog posts on similar topics to help you on your journey to financial wellness. Good luck!
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