HOW TO IMPROVE YOUR CREDIT SCORE
The actual formulas used to calculate credit scores are the property of private companies and are not available to the public. This means it is not possible to know exactly how many points your score will go up or down based on the actions you take.
However, the main factors that are used to calculate your score include:
• paymenthistory
• useofavailablecredit
• useofavailablecredit
• lengthofcredithistory
• numberofinquiries
• typesofcredit.
1. Payment history
This is the most important factor for your credit score. It shows:
whenyoupaidyourbills
lateormissedpayments
debtsyoudidnotpaythatwerewrittenofforsenttoacollectionagency
whetheryouhavedeclaredbankruptcy.
Your score will be damaged if you:
makelatepayments—thelongerittakesyoutomakeyourpayment,theworsetheimpacton your credit report and score will likely be
haveaccountsthataresenttoacollectionagency
declarebankruptcy
withholdpaymentsduetoadisputeandthelenderreportsyourpaymentsaslate.
With certain financial products, any payments you make on time will not be counted and will not improve your credit score. However, if you miss payments and your account is sent to a collection
agency, this can be included and will damage your credit score. These products include: • chequingandsavingsaccounts
• studentloans
• prepaidcards(thesearenotthesameassecuredcreditcards).
Telecommunications accounts, such as mobile phone and Internet, are exceptions. Payments you make
on time as well as late payments may be considered for your credit score.
TIPS:
To improve your credit score
Always make your payments on time. If you cannot pay the full amount, make at least the minimum payment.
If you think you will have trouble paying a bill, contact the lender right away. See if you can work out a special arrangement to repay your debt.
2. Use of available credit
This is the second most important factor. It is also called “credit utilization.”
To figure out your available credit, add up the credit limits for all your credit products, such as credit cards, lines of credit and other loans.
What counts toward your credit score is how much of your available credit you actually use, not your credit limits by themselves.
When you use a large percentage of your available credit, lenders see you as a greater risk, even if you pay your balance in full by the due date.
TIP:
To improve your credit score
• Try to use less than 35 percent of your available credit.
For example, if you have a credit card with a limit of $5,000 and a line of credit with a limit of $10,000, your available credit is $15,000. Try not to borrow more than $5,250 at any time (35 percent of $15,000).
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3. Length of credit history
The longer you have had an account open and used it, the better it is for your score. Your credit score may be lower if:
• youhavecreditaccountsthatarerelativelynew
• youcloseyourolderaccountsandyourremainingcreditaccountsarenewer—forexample,if you close a credit card account and transfer the balance to a new card.
TIP:
To improve your credit score
• Consider keeping an older account open even if you no longer need to use it, especially if there is no annual fee. Use it from time to time to keep it active.
4. Number of inquiries
When lenders and others ask a credit reporting agency for your credit report, it is recorded as an inquiry. This usually happens when you apply for credit.
It is normal and expected to seek credit every so often. But if there are too many inquiries on your credit report, lenders may be concerned. It can seem like you are desperately seeking credit or that you are trying to live beyond your means without the ability to pay back the money you want to borrow.
“Hard hits” versus “soft hits”
Inquiries that are recorded on your credit report and count toward your credit score are sometimes called “hard hits.” Anyone who views your credit report will see these inquiries. An application for a credit card is an example of a “hard hit.” Rental and employment applications may be treated as “hard hits.”
“Soft hits” are the opposite. Only you can see “soft hits.” These inquiries do not affect your credit score in any way. Examples of “soft hits” include:
• requestingyourowncreditreport
• businessesaskingforyourcreditreporttoupdatetheirrecordsaboutanexistingaccountyou have with them. They do this to see whether you qualify for promotions, credit limit increases and so on.
Will shopping around for a car or mortgage hurt my score?
When you are shopping around for a car or a mortgage, try to do it within a two-week period. All inquiries related to auto or mortgage loans made during this time are usually combined and treated as a single inquiry.
TIP:
To improve your credit score
• Limit the number of times you apply for credit in a short period of time. It is a good idea to seek credit only when you really need it.
5. Types of credit
Your score may be lower if you only have one type of credit product, such as a credit card.
It is better to have a mix of different types of credit, such as a credit card, auto loan, line of credit or other loan. It can even help if you have a second but different type of credit card, such as an account with a store.
TIP:
To help your credit score
• Having a mix of credit products could get you more points, but don’t go overboard! Make sure you can afford to pay back any money you borrow. Otherwise, you could end up hurting your score by taking on more debt than you can handle.
• typesofcredit.
1. Payment history
This is the most important factor for your credit score. It shows:
whenyoupaidyourbills
lateormissedpayments
debtsyoudidnotpaythatwerewrittenofforsenttoacollectionagency
whetheryouhavedeclaredbankruptcy.
Your score will be damaged if you:
makelatepayments—thelongerittakesyoutomakeyourpayment,theworsetheimpacton your credit report and score will likely be
haveaccountsthataresenttoacollectionagency
declarebankruptcy
withholdpaymentsduetoadisputeandthelenderreportsyourpaymentsaslate.
With certain financial products, any payments you make on time will not be counted and will not improve your credit score. However, if you miss payments and your account is sent to a collection
agency, this can be included and will damage your credit score. These products include: • chequingandsavingsaccounts
• studentloans
• prepaidcards(thesearenotthesameassecuredcreditcards).
Telecommunications accounts, such as mobile phone and Internet, are exceptions. Payments you make
on time as well as late payments may be considered for your credit score.
TIPS:
To improve your credit score
Always make your payments on time. If you cannot pay the full amount, make at least the minimum payment.
If you think you will have trouble paying a bill, contact the lender right away. See if you can work out a special arrangement to repay your debt.
2. Use of available credit
This is the second most important factor. It is also called “credit utilization.”
To figure out your available credit, add up the credit limits for all your credit products, such as credit cards, lines of credit and other loans.
What counts toward your credit score is how much of your available credit you actually use, not your credit limits by themselves.
When you use a large percentage of your available credit, lenders see you as a greater risk, even if you pay your balance in full by the due date.
TIP:
To improve your credit score
• Try to use less than 35 percent of your available credit.
For example, if you have a credit card with a limit of $5,000 and a line of credit with a limit of $10,000, your available credit is $15,000. Try not to borrow more than $5,250 at any time (35 percent of $15,000).
17
18
3. Length of credit history
The longer you have had an account open and used it, the better it is for your score. Your credit score may be lower if:
• youhavecreditaccountsthatarerelativelynew
• youcloseyourolderaccountsandyourremainingcreditaccountsarenewer—forexample,if you close a credit card account and transfer the balance to a new card.
TIP:
To improve your credit score
• Consider keeping an older account open even if you no longer need to use it, especially if there is no annual fee. Use it from time to time to keep it active.
4. Number of inquiries
When lenders and others ask a credit reporting agency for your credit report, it is recorded as an inquiry. This usually happens when you apply for credit.
It is normal and expected to seek credit every so often. But if there are too many inquiries on your credit report, lenders may be concerned. It can seem like you are desperately seeking credit or that you are trying to live beyond your means without the ability to pay back the money you want to borrow.
“Hard hits” versus “soft hits”
Inquiries that are recorded on your credit report and count toward your credit score are sometimes called “hard hits.” Anyone who views your credit report will see these inquiries. An application for a credit card is an example of a “hard hit.” Rental and employment applications may be treated as “hard hits.”
“Soft hits” are the opposite. Only you can see “soft hits.” These inquiries do not affect your credit score in any way. Examples of “soft hits” include:
• requestingyourowncreditreport
• businessesaskingforyourcreditreporttoupdatetheirrecordsaboutanexistingaccountyou have with them. They do this to see whether you qualify for promotions, credit limit increases and so on.
Will shopping around for a car or mortgage hurt my score?
When you are shopping around for a car or a mortgage, try to do it within a two-week period. All inquiries related to auto or mortgage loans made during this time are usually combined and treated as a single inquiry.
TIP:
To improve your credit score
• Limit the number of times you apply for credit in a short period of time. It is a good idea to seek credit only when you really need it.
5. Types of credit
Your score may be lower if you only have one type of credit product, such as a credit card.
It is better to have a mix of different types of credit, such as a credit card, auto loan, line of credit or other loan. It can even help if you have a second but different type of credit card, such as an account with a store.
TIP:
To help your credit score
• Having a mix of credit products could get you more points, but don’t go overboard! Make sure you can afford to pay back any money you borrow. Otherwise, you could end up hurting your score by taking on more debt than you can handle.
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