How Can I Build My Credit Score?

You can build your credit score by following these tips:

  1. Ensure your credit card payments are up to date and avoid late payments
  2. Maintain a credit utilization rate of less than 30% 
  3. Maintain a good credit history
  4. Limit credit inquiries on your account

What’s the fuss about credit scores?

Lenders regularly use credit scores as screening tools to determine if borrowers are creditworthy or not. The credit score is a 3-digit figure that evaluates your creditworthiness as a consumer, with most lenders using it to predict your likelihood of debt repayment. While a credit score can be between a range of 300 to 900, higher scores are associated with better creditworthiness and the closer your score is to 900, the more financially trustworthy you’re considered to be. You don’t have to reach 900 though (and most people don’t); a score above 800 is considered to be the highest level you can achieve. 

How your credit score affects your financial plan

Your credit score is an important aspect of your financial plan, and shouldn’t be overlooked. You don’t want your financial plans to be messed up by something avoidable, like a bad credit score. This is because whenever you want to borrow money, lenders assess the risk of lending you money by carefully going through your history – regardless of whether you’re taking a loan for a mortgage, credit card, phone contract, or even an insurance policy. 

You need a good credit score to secure a mortgage to buy real estate, which is considered a leveraged investment. The higher your credit score, the more low rate mortgage options will be available for you. In the long run, this will save you a lot of money. Thinking of buying your first home? You’ll need to make sure to have a high credit score so that you can get a good mortgage. Leaving your credit score to chance is not a smart idea.

Steps to take to improve your credit score

The two major credit bureaus in Canada (TransUnion and Equifax), as well as Canadian lenders, including banks, often use the following criteria to calculate if a potential client is creditworthy: payment history, credit usage, the age of the credit accounts, credit mix, and new credit inquiries. Addressing each criterion can help increase your credit score.

Here are things you should consider if you want to improve your credit score:

1. Avoid late payments at all costs

Payment history is the most important determinant of your credit score, taking up to 35% of the eventual score. You should ensure your payments are made consistently because missed payments have the most significant impact on your score, especially if payments are 60-90 days late.

If you’re prone to forgetting when payments are to be made, some helpful tips include:

  • Using financial applications (e.g. Mint Budget Tracker) to help keep track of all your monthly bills 
  • Using automated bill payments directly from your bank or credit cards
  • Setting reminders in advance for the due-dates of your bills

2. Keep your credit utilization rate below 30%

After payment history, your credit utilization rate is the next most important factor used to determine your credit score. This is simply the amount of outstanding debt divided by your total credit limit across all revolving accounts i.e. the portion of your credit limit that’s in use at any given time. This does not apply to fixed loans, such as a car loan or mortgage. 

While you should aim to keep your credit utilization rate low on each of your accounts, the total rate of utilization has a greater impact on your score. How can you keep your credit utilization rate low?

Pay your credit balances in full monthly

This is the best way to keep your utilization low. However, if this isn’t possible, aim for your balance to be at less than 30% of your credit limit. You can then work on getting it to as low as 15%.

A pro tip would be to use the high balance alert feature of your credit card. With this, you can monitor your credit utilization rate and know when to stop adding new charges to your card.

Request an increase in credit limit

All things being equal, credit card companies usually oblige requests for higher credit limits. This helps your credit utilization rate provided you don’t also increase your credit balance. This process can sometimes be done over the phone or online. Many of the major banks, including Scotiabank and RBC, allow you to apply for a credit limit increase directly from your account management profile online.

3. Maintain a good credit history

Before creditors choose to finance your plans (e.g. a mortgage), a review of your credit history is carried out. Your credit history provides a record of how much you’ve demonstrated responsibility to repay your debts. The types of information contained in the credit history are: the types of credit accounts you have, how long each of these accounts have been opened, the amount owed on each account, amount/percentage of available credit used, timeliness of payment of bills, and the number of credit score inquiries. In your credit history, details on whether you have any bankruptcies or liens are also spelt out. All of these factors are considered in a comprehensive review of your credit history by creditors, and this is another strong determinant of your eventual creditworthiness.   

Even if you have diligently made your payments on time and have a low credit utilization rate of 20%, building a high credit score is still subject to your credit history. Common considerations include the average age of all your accounts, as well as the age of your oldest account. If there are records of prompt payments on your accounts over a reasonable period of time, you are likely to be seen as more credible for substantial financing. Therefore, closing out credit accounts is not advisable, even if you’re no longer using them. Keeping your first/oldest account open (e.g. an account used for payment of old student loans), and on your credit record, helps you maintain a higher credit score.

What if you have a thin credit file, or you don’t even have any credit history? 

You could fatten up your credit file by asking for your rental payments to be reported to credit bureaus and thus increasing your credit score. Another option could be to apply for a beginner credit card with a low credit limit, allowing you to demonstrate your responsibility in handling credit – prior to taking on bigger debts. If you don’t qualify for a typical credit card, you can also consider a secured credit card, or a credit card that is backed by a cash deposit, to help you build your credit. 

If you haven’t done so, you can order a copy of your credit report, which will reveal your credit history. Negative information stays on your credit report for about 6 years (it’s kept for 7 years in Ontario/Quebec by TransUnion), while positive information stays for a longer period, as it helps your credit score. Not to mention, it’s free! You are entitled to one free copy of your credit report from both Equifax and Transunion every year, so don’t miss up on the opportunity!

4. Limit credit inquiries on your account

When a lender performs a hard inquiry on your account, which they will do whenever you ask for a new line of credit or loan, your credit score might be temporarily dented in the short-term. If you’re not planning on applying for a mortgage or a car loan anytime soon, you don’t need to worry too much about this as the effect is only temporary. But if you are, make sure to not apply for other lines of credit before applying for your mortgage - lenders don’t want to see a borrower that appears desperate for money! 

The bottom line

Credit scoring systems are designed to favour smart users of credit. Build a good credit score by avoiding late payments, utilizing less than 30% of the credit available to you, leaving your old accounts open (while monitoring them annually for signs of identity theft) and limiting the number of inquiries on your account. By following these steps, your credit score will rise over time and you will be able to take advantage of the benefits of being a good borrower.