Basically, why is it important to have a good credit report?
Because your credit file (and the credit score it contains) allows a lender to assess the risk of a loan. It’s one of the big things that determine if you’ll get a loan, and at what interest rate. Think of the evaluations left on the Internet by customers of a service or business that interests you. The better the comments, the more confidence it inspires.
What is a good credit score?
Your credit rating (or credit score) is a number between 300 and 900 that fluctuates over time. And that’s okay. Like in a report card: the higher the mark, the better. In one case, it tells parents if you are good or tough, and the lender whether the risk of giving you a loan or credit is low or high. General rule:
- A score of 750 and above is considered very good.
- A score between 680 and 749 is good.
- A score between 640 and 679 is average.
A score of 639 or less makes access to credit more difficult. The conditions for obtaining a loan are likely to be more severe and less advantageous (higher rate, endorser required, etc.)
8 best practices to improve your credit
1. Pay on time
Very important to rebuild your credit: always make your payments on time. It doesn’t matter how much you owe. A late payment hurts your credit score, whether you owe $30 or $1,000. And when you accumulate delays, it is all the more negative.
How to avoid oversights and rebuild your credit? Write reminders in your calendar.
Even better: plan automatic transfers according to a fixed amount of your choice and paid at the time you want.
Practical tip: it’s also possible to program pre-authorized payments for your entire balance.
Our “safety belt” advice: you could provide yourself with overdraft protection, such as a line of credit that would be attached to the account in which your payments pass. If a payment goes through and the funds are unavailable in the first account, the second will come to cover the first. Note that this tip is especially useful to avoid a bad note on your credit report if something unexpected happens.
Keep in mind: to improve your credit score, you must pay off your credit card balance in full before the due date.
Check your credit report regularly
Request a copy of your credit report once a year from Equifax and TransUnion. Remember to make your request for both offices, since each of them may hold different information. Note that you can obtain your credit report for free on the Government of Canada website. That said, fees may apply to view it online.
Consulting your credit report allows you to:
- follow its evolution;
- ensure that it is in good condition;
- confirm that it does not contain errors or inconsistencies.
Is something wrong with your file? Ask to have it corrected. Asking for your credit report has no impact on your score.
Good to know: the credit bureaus offer services (for a fee) to be alerted in the event of irregular activities. Certain tools and services may also be offered by your banking institution, such as SECURIZONE TM. This can help to quickly detect identity theft, for example.
Avoid having too high a credit balance
Your credit card or line of credit balance should be relatively low compared to your limit. Like how credit cards work, this is one of the principles to know to rebuild your credit.
In an ideal world, it would be better if your balance remained below 30% of the maximum amount granted. Beyond 50% of authorized credit, your rating could decline. Make sure you don’t exceed the allowed limit.
Example: Let’s say your credit card limit is $2,000. The ideal is to stay below $600 in use. Going over $1,000 could even harm your credit rating.
Pro Tip: Do you often approach the authorized limit of your credit? Request a limit increase so your used balance gets closer to it. In proportion, $500 of $2,000 is less than $500 of $1,000. (Good. Promise. No more math for the rest of the article.)
Clean up your credit cards
Regular maintenance of your wallet allows you to reassess your needs and promotes good use of your credit cards. It is not bad to have two credit cards, among other things for emergencies. On the other hand, having several cards requires you to be careful to avoid oversights and delays. Misusing multiple credit cards can negatively affect your rating.
Did you know?
Your credit rating can also benefit from your responsible use of two cards.
Expert tip: Low-interest credit cards are a great option if you don’t pay your balance in full every month.
Avoid making many credit applications
We saw it in the previous point: too many cards is like not enough. This concept also applies to requests. Limit them. Whether for:
- credit card
- Line of credit
- personal loan
- car loan
These are all impact requests, ie requests for which lenders will check your credit report. Chaining these types of queries can give the impression that you are looking for several sources of additional credit and are less reliable.
Lenders like to see that you know how to manage your debts and have the ability to repay them. Too many new requests all at once can raise questions and set off alarm bells. In other words, it could hurt your credit.
“Car shopping” tip: It’s a good idea to shop around with several companies when buying a car. However, it is better to wait until you have made your choice before authorizing your credit check. Too many requests close together in time have = a potential negative impact on your file.
Never hesitate to seek help from specialists if you have financial problems, such as a bad credit report. You will be able to develop strategies together to repay your debts and improve your situation. Sometimes just one bad thing or habit can hurt your credit. Here are some ways to improve it:
- Adopt proven tips to save
- Learn to budget for groceries
- Create a personal budget that sticks
- Discover ways to use your credit card to your advantage
- Put into practice tips for saving for your projects
- Opt for systematic savings to put money aside without thinking about it
- Build an emergency fund
Think carefully before endorsing someone
When you endorse someone’s credit application, it’s a bit like lending them your good rating and your good record. It’s a serious boost that can get someone with bad credit (or bad credit history) approved for a loan. By the same token, you become responsible for this debt.
In the event of unforeseen events or late or non-made payments, your file will be tainted and you will have to repay the debt.
Sometimes the challenge is not to rebuild your credit, but rather to know how to build it. To achieve this, it may be beneficial to have a credit card from the age of majority. By using it responsibly and making your payments on time, you will begin to build your credit history.
Have you immigrated to Canada? Banking systems and credit principles vary from country to country. By discovering the ABCs of the Canadian banking system, you will learn how to build your credit.
Arrived in Canada for less than 5 years?
Discover our privilege offer for new arrivals.
What are the options for living comfortably with bad credit?
There are options to achieve your plans even if you have bad credit. While you are working to build (or rebuild) your case, it is sometimes possible to have access to traditional financing. It all depends on the status of your file. If not, there are other solutions.
The second or third chance at credit
Second or third chance credit: this is a temporary solution offered by lenders (often outside the circuit of the big banks) to access credit (such as for a personal loan, car, or mortgage).
Note that the interest rates associated with it are often higher. That said, once your credit improves, you could repatriate everything to a financial institution. By demonstrating that you can keep your commitments, second chance credit can help you rebuild your credit report.
Some credit card options
There are also more accessible credit cards if you have a bad credit history. Cards with a guarantee, for example, allow you to make purchases online and help to rebuild your file when they are well used.
How does it works?
Some credit card issuers will agree to take an amount as collateral that equals (or exceeds) the credit they extend to you.
Example: in exchange for a credit card with an authorized limit of $500, you should therefore deposit at least $500 as collateral. This amount will be “frozen” until your file improves.