Jan 19
Written ByMelissa Houston
Your credit score is a three digit number that lenders use to assess how dependable of a lendee you are. Whether you are applying for a credit card, car loan, mortgage – the lender will always refer to your credit score.
If your credit rating needs improvement, you are not alone. Improving your credit score takes time, but the quicker you address the issue, the quicker you will get that rating back up.
Check your credit score that you are currently at, and take note of that number. You can check your score online (in Canada it is Equifax), and when you get that information they will also provide you with the factors that are affecting your scores the most.
The two main credit score factors are payment history and credit utilization ratios, and these two can make up approximately 70% of your credit score
1.Pay your bills on time
Lenders are very interested in how reliable you are for paying your bills. Past performance is usually a good predictor of future performance, and that is how lenders assess your reliability of repayment.
Paying late or settling an account for less than you originally owed can negatively affect credit scores. All it takes is one late payment for your credit score to drop.
2.Pay off debt and keep balances low on credit cards and other revolving credit.
The credit utilization ratio is a valuable tool in credit score calculations. Lenders typically like to see a ratio of 30% or less. Pay off your debt and keep your credit card balances very low. For example, if my borrowing limit on all my credit combined is $25,000 and I owe $20,000, my ratio would be $20,000/25,000=.80 or 80% which is much higher than what lenders like to see. Therefore, chances are I would be declined for any future credit.
Credit Utilization Ratio = Your Total Debt/Your Total Available Credit
3.Do not open new credit accounts, unless absolutely necessary.
Don’t open accounts just to have a better credit mix. Unnecessary credit can harm your credit score, from creating too many hard inquiries on your credit report or the ability to spend this credit unnecessarily.
A hard inquiry is when a credit request is placed on your file. This occurs when you are applying for new credit such as a car loan, new cell phone plan, furniture financing. Lenders do not like to see these because it shows that you are trying to get too much credit to your name, and reducing your repayment chances.
4.Do not close unused credit cards.
Keeping unused credit cards open is a good strategy for lower credit utilization ratio. If you have a credit card that you never use, but have an available credit limit, keep the card open, just don’t use this credit card. So to add to my example from above, if I have $20,000 on a credit card that has a limit of $25,000, and I have another card open that I never use but it carries $5,000 credit limit, this changes my credit utilization ratio.
20,000/30,000 = .6667 or 67%. This improves my ratio. Although I’m not there yet, it has brought my ratio level down.
5.Do not apply for too much new credit, resulting in multiple inquiries.
Opening a new credit card creates a hard inquiry on your credit report. Too many hard inquiries can affect your credit score negatively. Hard inquiries remain on your credit report for two years.
6.Dispute any inaccuracies on your credit report.
Incorrect information on your credit report should be corrected immediately. Verify that the information on your report is correct. You can request a copy of your credit report at Equifax (in Canada) and examine that report. If there are any inaccuracies, contact them to work it out and have errors removed on your report.
Rebuilding your credit score takes time and there are no shortcuts.
For optimal financial health, it is in your best interest to keep on top of your credit history. Check out How To Recover From Debt for more tips.
Have you at one point successfully repaired your credit score? I’d love to hear your story. Comment below to share.
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