Credit can be an enabler and a disabler, depending on how you use it. Use it the right way and you can create wealth; use it the wrong way, and it can lead you to bankruptcy.
Either way, in order to access credit or financial products, you need to prove that you’re financially responsible and that you’re in a good position to pay off everything that you’ve borrowed, on time.
One way to prove this is by having a good credit score — this will make it easier for financial institutions to trust you. A bad credit score on the other hand, will make you come across as a risky borrower.
Want to get approved for that next loan without any hurdles? We recommend that you work on your credit score and start building credit the right way.
In this article, we’ll discuss important factors that impact your credit score and take you through a few tips on how to bump it up.
What Is a Bad Credit Score in Canada?
Credit scores in Canada range all the way from 300 up to 900. A bad score is a score of 574 or less. Below you’ll find some ballpark figures that you can use to gauge your credit score.
According to TransUnion and Equifax:
300 to 574: Bad
575 to 659: Needs Improvement
660 to 724: Above Average
725 to 759: Good
760 and above: Excellent
About 20% of Canadians score below 600.
How Long Does It Take To Build and Improve Your Credit Score in Canada?
Fixing your credit score takes time. It can take anywhere between six months to six years depending on how bad the situation is.
For example, if you notice errors in your credit report, you’re going to have to draft a dispute letter and gather necessary documents and statements to prove the error as incorrect. When your dispute is submitted, expect some back and forth between you, the bureau and the lender. This process can take at least 30 days.
If there are no errors on your report, and the marks are authentic, it can take up to six months to start rebuilding your score. Some marks can stay on your report for years. If you want to fix your credit score fast, we recommend resolving disputes and implementing repair strategies at the earliest.
Factors That Impact Your Credit-Worthiness
Missed payments, inability to repay your loans, and a loss of your source of income can work towards greatly depleting your credit score.
The four most important factors that credit bureaus use to determine your credit score include:
Payment History
Payment history accounts for up to 35% of your credit score, making it the most important factor that lenders consider. While a few late payments won’t hurt your score, multiple late payments most certainly will.
Being negligent about credit card payments and loan payments can seriously hurt your credit-worthiness. Late payments stick around on your credit report for years. Thankfully however, reviving your score by quickly paying back debt is a possibility.
Credit Utilization
In the eyes of credit bureaus and financial institutions, having a lot of debt is not really a problem. However, using a high percentage of available credit is something that might raise red flags. This is a factor that accounts for 30% of your credit score.
If you have multiple credit channels that are regularly maxed-out, your chances of availing loans at a good interest rate are thin, especially compared to those applicants who consistently pay down their debt in full.
Credit History Duration
The math is simple; the longer your credit history, the better your credit score. However, this is not a factor that has a lot of weightage on your report as it accounts for only 15% of your credit score.
That said, the sooner you start building credit, the better your chances of securing financing at reasonable rates. A long credit history shows that you have experience when it comes to managing and paying off debt.
Varied Credit Channels
Borrowing from different types of credit channels (responsibly) can have a positive impact on your overall credit score. People with mixed credit accounts tend to have higher scores.
New Credit
One of the first things that lenders look at while allotting loans or any form of credit is the amount of new credit that you’ve accumulated. If you borrow too much, too fast, your score will drop. Doing this can also reduce your average account age, affecting the length of your credit history.
How To Build a Good Credit Score and Retain It
Building credit is usually a long process, which takes years to wipe from your credit report. However, many lenders often focus on the recent times. There is no surefire way to magically increase your credit score overnight, but with a few tips and tricks, you can boost it up to achieve the score that you want.
Timely Repayment of Debt
When repaying your loans, if you can, always pay more than the minimum amount. In the long run, it is more beneficial than you realize. Paying off your loan faster not only saves your money on interest, but also drastically improves your credit score — you are seen as someone who has the resources to pay off their loans.
Underutilization of Credit Limit
If you can, increase your credit limit. Usually the best credit scores are achieved by keeping your spending under 30% of the credit limit. While a higher credit limit means you can spend a lower percentage of available credit, it also comes with the risk of you overspending — something which might decrease your score even more.
Therefore, only increase your credit limit if you are sure you can remain disciplined. Having a sudden amount of extra money is a miracle for anyone. Remember that, in the long run, you will spend more of your actual money returning the larger borrowed amount.
Responsibility and Self Discipline
You will need to become more responsible with your money. This entails budgeting your money, so as to curb extra and wasteful expenses. Doing this will prevent you from defaulting on your bills, while keeping your spending to an absolute minimum — at least until the time your credit score is restored.
How To Improve Your Bad Credit Score Quickly
The first step towards solving any problem is to acknowledge that the problem exists. Identifying the root cause of your credit problem will help you to see things clearly and to assess the situation in a rational manner.
So if find yourself asking questions like, “How do I improve my credit score in Canada?” or “How do I fix my debt problem?” here’s where you can start:
Pay Down Your Balances
Set aside an amount every month to pay off your loans. The amount should be not too little, but also not so much that you cannot live off it. Paying off your loan in such a manner is not only financially responsible, but also works towards increasing your credit score as well.
Live Below Your Means
If you want to rebuild a good credit score, the best way to do this is to start buying only what you can afford. Do not overindulge yourself just because your card has the balance. Furthermore, stop using multiple credit cards, and only use one or two. Otherwise, managing your accounts can get hard to handle.
Follow These Extra Tips
Once you’ve mastered the art of financial discipline, some more important things you can do to bump your score up include:
- Use your credit
- Correct errors in your credit report
- Increase your credit limit but use less of it
- Pay bills on time
- Automate all monthly payments
- Leave old debts on your credit report
Building a good credit score may not be a quick fix for many, but by being financially responsible and following this guide, you can work to improve and maintain your credit-worthiness.