Hi, I am Lucia Gugliuzzi
How To Improve Your Credit Score To Help You Manage Your Finances Better
When you want to understand your finances better, one of the areas you need to look at is your credit score. The highest credit score in Canada is 900 and the lowest is 300. The three-digit number has a big part in how lenders perceive you as a borrower. In essence this affects your present and even future financial opportunities. Your credit score is an important pillar of your financial life.
We are always happy when we get granted more credit, but it is important to know how to manage it. Let’s look into this further.
In Canada, we have 2 credit bureau agencies, Equifax and Transunion.
Some creditors report your payment history to both, Equifax and Transunion, or to one of them only. These agencies are independent from each other. The score number may differ from one agency to the other. Another term used to say the score are “Beacon” and “FICO” scores.
How does credit score work?
Our credit score is a numerical representation of your financial standing. This computes various factors in your financial life.
Creditors report your credit history to TransUnion Canada and Equifax Canada. Any credit you incur starts from day 1. Usually, transaction history gets reported on a monthly basis. You often see an R or an I. This indicates the type of loan you have. The information available to the reader is not visible to everyone. A creditor can dictate to the credit agency what to show and what not to show to the inquirer.
Banks have their own internal score as well when they are evaluating an application. Therefore, make no mistake, that a credit score is not all you need when applying for a mortgage or any type of credit. Here is a quick overview of what your score means especially if you are wondering what is a good credit score.
760 – 900 = Excellent score and can qualify for low-interest rates
725 – 759 = Very Good score
660 – 724 = Good credit score
560 – 659 = Fair score
300 – 559 = Poor score and needs a lot of work
If you notice, the higher your credit score, the better and easier to qualify for a mortgage. When you make financial mistakes, your credit score decreases. This reflects your current situation. The method of any computation is not disclosed to the public. FICO uses five main criteriat to get a close approximation of your financial status. These are the following.
Loan Repayment History
This accounts for 35% of your score, making this, one of the most important component of your score. The balances you carry, have a lot to do with how you meet your payment obligations. All credit history, including proposals and bankruptcies. Sometimes, the consumer does not check and this will stay on the credit report forever.
This looks at how you have been meeting your financial obligations. It will reflect if you have been paying or if you have been missing your payments. The most important factor in your credit score focuses on identifying if you are paying on time or not. This helps lenders assess the risk they are taking on when you evaluating a loan application. This will also be a consideration of the interest rates you will qualify. If you have been paying on time, there is a good chance that you will do the same with them.
Total amounts owed
This accounts for 30% of your credit score. It looks at the amount you owe to the lenders as reported to the credit bureau agencies. This gives them an idea of your balances. It paints a pretty definite picture if you are stretching out your finances too thin.
You might come across a more technical term called debt-to-credit ratio. Creditors must assess our balances and the credit limits we carry. Creditors ca condition to close your credit cards when you get debt consolidation. We are going back in the days when this used to be on a constant basis. If you are consolidating to make your payments easier, you could re-use the credit. This is the creditor rationale.
Length of Credit History
Another factor in computing your credit score is your credit history. This makes 15% of your total score.
If you have never borrowed, you don’t’ have a history reported. this could present a bit of a problem to the lender.
Lenders cannot assess a risk if you do not have a score. It is important to start building your credit history as early as possible. You can start building your credit score even while you are in college.
Some people that are new to Canada may qualify for a mortgage without a credit score. This is because, when people are immigrating to Canada, they do not usually have a credit history yet. Banks are aware of that and do not put emphasis on the credit.
In some cases, it is a very good idea to get a secured card, this way they start building credit history. This will make it easier to qualify when applying for a mortgage. You may contact your broker and get some guidance on how to do this.
It goes without saying that you need to take care of your old accounts such as credit cards you took out years ago. The longer you have them, the more transaction there are on cards given the use. But, you also need to make sure that your credit history reflects positive habits. You need to make sure that you are making payments every time without delays. A valuable tip I give to my prospects is to set reminders a couple of days before the payments are due. In our busy lives, it is very easy to forget, this could be costly! We have at our disposal a wonderful technology that can remind us, let’s use it. This way there is no chance of forgetting to make payment house and thus risking to have a bad credit.
This makes up 10% of the total weight. One of the elements of your credit score is looking at the frequency of your credit applications. When you apply for any type of credit or loan, the potential lender performs a “hard inquiry” on your credit. This is for the simple fact that they have to assess the risk factor.
As you do this many times over a short period of time, there will be several “hard pulls” on your credit. This can lower your score. This is because lenders might think that you are in some form of financial trouble and would make you a risk. That is why your score dips down a few numbers with several “hard pulls”.
I would approach a mortgage broker. This pulls only 1 credit bureau and can present it to several lenders when applying for a mortgage. It is better to be safe than sorry. Mortgage brokers, have many options available and will work in your best interest.
Types of credit
Although it only consists for 10% of the total weight, this is also part of your credit score. The idea is to have a good credit mix .
Great tips to protect your credit:
Try to carry balances only on 1 credit card.
Keep your balances low.
Take a look at your budget. It’s a lot of discipline, but “we reap what we sow”.
What you need to look out for. Opening several accounts to build a history, can be detrimental. Lenders will perform “Hard pulls”. Remember that this will lower your score as well. Stagger your applications. A hard pulls is when a lender makes an inquiry while you are applying for the loan. This gets reported to the agency.
What I usually recommend is not to apply for more than 2 credit cards or lines in any given time.
One thing to remember, do not take out more credit than you need. This will show that you are spreading yourself too thin and shows signs of troubles.
How to improve credit score
Now that you have a pretty good idea of the credit criteria, the next thing to do is manage your score and keep it in check. You have to know your score and how to take advantage of the financial benefits it brings. Here are some steps you can take to improve your score.
Pay your bills on time
Some of the steps to help you increase your credit score is to make a habit to pay off your bills on time and all the time. This will have a significant effect on how your credit score moving up. . Remember that this is one of the biggest criteria, making it 35% of the total score. When you make your financial obligations, you are showing if they can trust you and if you care. People that will never default on a mortgage or a car loan but will default on all other. This does not show a good pattern to most lenders. Take consideration, you can get better mortgage rates with a better history and score.
The misconception is: “I never defaulted on my mortgage and car loan, thus, I deserve a good rate”. Lenders don’t find this to be the case. After all, if you lose your house or car, you have no place to live or a way to get to work. This shows the character.
To avoid late payments, you can set automatic payment reminders . You can also schedule payments.
Some of the steps to help you increase your credit score is to make a habit to pay off your bills on time and all the time. This will have a significant effect on how your credit score
Here are some tips:
- Pick a time of the month that you can sit down and work your finances, this should take 1 hour.
- Pick a time to pay the bills a couple of days earlier. You want to do this because the payment will not post the same day. This will also avoid late payments
- Set monthly payments from your account
- Keep track in a folder or online applications
- You can also consider a debt consolidation loan to help you manage your payments every month. As the name suggests, you combine most your payments under one account. This helps you focus on one payment and manage your debt. But there are pros and cons with different debt consolidation loans.
Another helpful way of managing your money better is to keep a budget. You may download it here. I have included a template on this site that will help you manage your debts. You may download it and use it. Contact me if you have any questions.
Leave old debt and credit accounts on your report
There are times when you might want to do some spring cleaning . To streamline the accounts you hold, the old ones are the first to go. You might be trying to focus on the new ones that you use. You might also want to lessen the credit cards in your wallet.
It is good to want to clean up your finances, but you have to be careful which cards you cut up. Now that you know that credit history plays a big part in computing your score, it pays to keep old accounts active. This helps credit reporting bureaus have a basis for your credit score. It is challenging to predict your financial risk if there is no basis from your past.
Be proactive in fixing credit errors
You need to understand that there is nothing perfect in this world. As such, there is a chance that your credit report would contain errors. To make it clear – your credit score is the three-number representation of your credit report. Your credit report contains the payments you made or missed in the past.
You need to ensure that your credit report reflects only the true information, old and new. Errors made can affect your score. The best way to go about it, is to get your free credit report. Once you find errors, report them immediately. When you set up an online account, you can access the account at any time. There is a form you can use to send in a report to them so they can have it corrected. This can take some time, but it is worth the exercise.
Look for a credit limit increase
This is a risky financial move but if you play your cards right, it might help you bump up your score. The idea is to increase the your credit limit in ratio to your balance. Once you do that, you lower down your debt-to-credit ratio and your score should go up.
The success depends on two things:
- Your lender agreeing to a credit limit increase and
- Your ability to manage your spending.
If you add to your balance because you feel you have a higher credit ceiling than before, then this is a useless move. In fact, it can even put you under a tremendous amount of debt if your shopping expenses get away from you. So, consider this only if you have a handle on your expenses and you don’t plan to exceed 50% of the new balance.
Get a secured credit card
When you want to either improve your credit or start from the beginning, this is a perfect solution. A secured credit card is the same as a unsecured credit card except for holding a security by the creditor. Payments on a secured credit card, will make a positive reflection on your credit report.
The biggest difference of a secured card is the fact that you need to make an upfront deposit to the card. This way, your lender can re-assure that you will be able to meet the payments on the card. The amount of your upfront deposit is your credit limit. This is an excellent way to build your credit score. There are some other loans that you can arrange to build your score. You may contact me and I can connect you.
Manage your credit card use
As you know by now, your debt-to-credit ratio is a big factor in determining your credit score. One way to improve it is to keep an eye on your credit card use. Try to avoid maxing out your credit card balance. This will increases the debt-to-credit ratio and your score can suffer. Try to keep it low and more important, pay your credit cards on time. Keep your outstanding balances below 75% of the limits at all times.
Here is my advice when you have many cards with a balance:
- List all your cards from the smallest to the highest
- Do now delay the smallest payments required
- Bring down balances not exceeding 75% of the limits
- Pay down the smallest card first, the next smallest and so on.
- Do not use the cards that you have paid down except for making small purchases that you can pay off in full
- This makes a psychological positive impact as you now have paid down some cards.
How long does it take to improve your credit score?
This is one of the most asked questions when it comes to credit score, there is no generic answer. No two people are alike. As such, the approach and the timeframe to improve your score will vary. It can be a matter of one month for one person, but it could take six months for another. This all depends on what you are working on.
The important thing is, start taking steps today. This is a good start to buiding your score.
You already know what are the areas of your finances are. With that idea, do your best to focus on those financial areas with the intent of improving your score.
One thing you need to work on as well is creating a habit of positive financial practices. It can be checking your credit report to making on-time payments or even keeping an eye on your credit card use. The idea is do these things consistently, so it becomes second nature to you. How long it will take to improve your score will depend on where you are starting and what you are doing.
How to check my credit score?
One of the recurring themes is taking a proactive approach in monitoring your report. Your credit report is the basis for computing your score. This is why it is a good idea to check it on a regular basis. I would suggest monthly. The good news is that you can reach out to Equifax Canada and TransUnion Canada to get your free copy.
You can also get your credit score from these two credit reporting bureau agencies for should you be in a hurry. This is because the free copy usually takes anywhere from two to three weeks to come in.
How will good/bad credit score affect my mortgage loans in Vaughan, Ontario, Canada?
How will affect your mortgage when talking about a credit score? You need to understand that your credit score is proportional to your interest rate. This means that the higher your credit score is, the lower your interest rate can be. Same as the lower your score, the higher your interest rate; the higher the score the lower your rate will be.
This means that when you are applying for a mortgage, you need to make sure that you have a high credit score. This will increase your chances of a low interest rate, which translates to savings. This is a big deal because the funds you can free up will lower your payments.
When you are trying to renegotiate your mortgage, your credit score pays a be a big factor in your interest rate. To lower the morgage payments, there are times when people refinance their mortgage.
Pay attention that the score is not the only rule to refince.
Most schedule A banks will not refinance if you have a score less than 700 or 720. In Canada, there have been many mortgage rules implemented in the last years. This has made it much more difficult to get any type of financing. The best thing is to contact me, visit your score and take the next plan of action. This will ensure less shopping between lenders while finding a mortgage solution. Getting one credit inquiry when dealing with a broker, will bring significant benefits.
When you do not have the score required to get the best rates, we can find alternative solutions. We will work on improving your credit and as a team and can find a solution together.
Your credit score is one of the most important focus when obtaining finance. It affects many aspects of your financial situation. Lenders need to assess their risk factors when granting a mortgage. This makes it all the more important to create positive habits. Contribute to improving your score over time and get the right advice.
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