There are several factors to consider when trying to improve your financial health. One is your credit score. This three-digit number not only affects your finances. It also significantly influences other aspects of your life, such as your ability to secure a residence and access various financial services.
Building credit has become a top priority for many Canadians, especially since consumer debt in the country rose significantly during the last quarter of 2022.
Mastering your finances involves taking care of your credit score. This article will discuss the fundamentals of credit scores and offer steps you can take to improve yours.
What is a credit score?
A credit score refers to a three-digit numerical representation of a person’s creditworthiness. Lenders and financial institutions use it to assess the risk of lending money to a particular person. In Canada, credit scores usually range from 300 to 900. Higher scores indicate better creditworthiness.
According to credit bureau Equifax, here’s how you can assess your creditworthiness based on your credit score:
- 760 to 990: Excellent
- 725 to 759: Very good
- 660 to 724: Good
- 600 to 659: Fair
- 300 to 599: Poor
Lenders use this scoring method to assess the likelihood of a borrower repaying their debts.
Higher credit scores make qualifying for loans, mortgages, and credit cards easier, often with more favorable terms, such as lower interest rates. Lower credit scores may lead to difficulty obtaining credit or result in higher interest rates and less favorable terms.
Ways To Improve Your Credit Score
Your credit score is a critical player in your financial life. It impacts your ability to secure loans and credit cards and even influences the interest rates you receive.
If your credit score isn’t where you want it to be, don’t worry. You can take different steps and strategies to improve it, such as the ones below:
Check your credit report
One of the first steps to improving your score is to check your credit report. Check your credit score for free through various platforms and credit bureaus.
Review your report thoroughly to ensure it has no errors, inaccuracies, or fraudulent accounts. These discrepancies can negatively affect your credit score, so correcting any issues is crucial.
Pay bills on time
Paying your bills on time is another factor influencing your credit score. Consistently making on-time payments shows your reliability as a borrower.
If you struggle with remembering due dates, consider setting up payment reminders or automatic payments. Timely bill payments will have a positive impact on your credit history.
Reduce credit card balances
High balances compared to your credit limit can lower your credit score. Ideally, keeping your credit utilization ratio below 30 percent on each card is best.
Reducing your credit card balances by paying down debt and minimizing purchases will improve your credit score.
Avoid opening too many accounts
Each time you apply for new credit, you make a hard inquiry on your credit report, which can temporarily lower your credit score.
Minimize the number of applications you submit and only open new credit accounts after careful consideration to avoid negatively affecting your credit score.
Keep old accounts open
The length of your credit history matters. Closing older accounts can shorten your credit history, which may lead to a lower score.
It’s generally advisable to keep older accounts open to maintain a longer and positive credit history, even if you don’t use them often.
Become an authorized user
If you have a family member or friend with a strong credit history, consider becoming an authorized user of their credit card. This practice can boost your credit score, as your credit report will include the positive payment history associated with the account.
Boost Your Credit
Improving your credit score involves a gradual process that requires commitment and responsible financial management. It might take some time, but the benefits you get from a high credit score are often worth it. Stay patient and maintain healthy financial habits to improve your score.