Some numbers in your life are crucial; your phone number, your house number, your Social Insurance Number and your credit score. These numbers have a big impact on your life. They can also be packed with information about you.

For example, your credit score gives lenders information on your past financial history. Yet despite the importance of this number, almost half of Canada has never requested their credit score.

What is a credit score?

A credit score is a number that a majority of Canadians have even if they are unaware of it. If you deal with a financial institution, have taken out loans, have a credit card, a mortgage or personal line of credit, you’ll have a credit score.

It’s a three-digit number that measures your financial situation. Your credit score changes based on actions or inactions that you take. For example, if you default on a loan, your credit score will drop. On the other hand, if you pay off a debt, you could see your credit score go up.

Your credit score is calculated using a mathematical algorithm that considers factors like how much debt you have, your income, and if you have been making regular payments on your debt.

Credit scores can be anywhere between 300 and 900. The average Canadian has a score of around 650. It’s important to know that you can request your credit score from Equifax Canada or TransUnion for free.

The Importance of a High Credit Score

Understanding how credit scores work can give you a good idea about the benefits of having a high credit score. These include:

• Lower interest rates
• Better chance of loans being approved
• Increased chance of credit card approval
• Access to better cell phone plans
• Save money
• Negotiating power

While you can still be approved for loans, credit cards and cell phones, the higher your credit rating, the better offers and terms you will be given.

Ways to Improve Your Credit Score

If your credit score is not as good as you would like it to be, don’t be discouraged. There are ways that you can improve your credit score. In the industry, we call that consumer credit management. If you take these steps, you’ll be on your way to a higher credit score and a healthier financial position.

1. Know your score

   The first thing you want to do is to know what your score is. As mentioned earlier, in Canada, you can apply to get your score for free from Equifax Canada or TransUnion. You can apply either on their websites or over the phone for this.

   Once you see your score, you should also review the information to find out everything you can about what accounts are used to measure your score. This will give you a good idea of what debts or issues you should tackle first.

2. Pay your bills on time

   Payment history makes up a significant portion of your credit score. You’ll want to build up a good history of paying your bills when they are due, not late. Paying them even a couple of days late may still negatively impact your credit score.

   If you are behind on paying a bill, try to bring it up-to-date as soon as possible. To simplify the process and ensure you are paying your bills on time, consider automating it. This is easy to set up at your bank and give you peace of mind knowing that you are getting your bills paid on time.

3. Reduce your debt

   Another important factor in your credit score is how well you manage the debt load you have. This is known as the credit utilization ratio. You can work out your credit utilization by adding up all the credit available to you and subtracting your debt.

   For example, if you have two credit cards with a limit of $5,000, your total available credit is $10,000. If you have $1,000 on each card, your total credit utilization is $2,000, and your credit utilization ratio is 20%.

   Financial institutions and lenders prefer to deal with borrowers with less than 30 percent of credit utilization. If your rate is higher than you’d like, there are two ways that you can improve your rate in this area; one is to pay down your debt, and the other is to keep your credit cards balance low.

4. Be cautious about new credit

   While it can be tempting to apply for more credit, it won’t necessarily help your credit score. It’s important to understand that with each credit application, you will receive a credit inquiry on your credit account. Too many of these can negatively impact your credit score.

   Additionally, having the extra credit, there can be a temptation to spend it. Don’t apply for new loans, lines of credit or credit cards unless you truly need it.

5. Keep old credit cards alive

   Once you pay off a credit card, it can help you leave the account open but unused. Sometimes closing it can increase your credit utilization rate and lead to a lower credit score. A better way to use these cards is to keep them active by using them occasionally to pay for something small. Then, immediately pay it off. This is a trick that you can use to keep your credit utilization rate low, which will help you earn a higher credit score.

6. Monitor your credit score

   It’s important to monitor your score over time. If you see any inaccurate information on your reports, you should dispute that information. Any inaccurate data can bring down your credit score, so it is important to monitor your score regularly.

When it comes to improving your credit score, time is on your side. If you follow these six steps and be patient, you’ll start to see your score improve.

If you are interested in learning more about improving your credit score, call Charles Advisory Services at 416-915-9007 or contact us here.