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How do you build or improve your credit score?
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So you know you need to have a credit score, and ideally a pretty good one, to be able to borrow money but what actually impacts your rating? If you’ve been trying to figure out how to improve your credit score, or build it from scratch, there’s lots of information out there that may feel confusing or contradictory. Unfortunately, there’s not a one-stop quick fix, so let's focus on the five most important things to do to build and maintain your credit, outlined by the Government of Canada.
Make your payments. This is the most important step to building your credit. A late payment will remain on your credit score for seven years and is one of the most common causes of low credit scores.
The most common example of a payment affecting your credit is paying your credit card balance each month before the statement deadline. It is critical that you at least make the minimum payment on your credit card so that the (the companies that keep track of everyone's credit scores) do not see a missed payment. If you can, try to pay off the entire balance to avoid the expensive interest that is associated with most credit cards. Other types of payments, like loan payments and rent (if your landlord reports payments to a credit bureau) also need to be paid on time! This is THE single biggest way to impact your credit score.
Never missing a payment is the best way to build your credit over time: set reminders in your calendar for when payments are due, get your phone to notify you through online banking when statements are ready, or set up auto payments for a portion of your debt that you can afford each month so you are reducing how much you owe as fast as possible.
Know your limit and stay within it (or well under it). Lenders of credit typically don't like you to use all of the credit you’ve got available. Ideally, they are most pleased with people that use 35% or less of their total available credit. For example, Faizan has a credit card with a of $1,000. The credit bureaus will increase Faizan's credit score the most, if he uses less than 35% of his credit limit on a regular basis (aka $350 of his credit card limit each month). Now Faizan does have a $1,000 credit limit, and it will not hurt his credit score if he uses up to his credit limit, but it will slow down his credit score improvements. BUT Faizan should never use more than his total available credit limit, if he borrows more than his agreed limit his credit score can decrease.
So in summary: less than 100% of your limit is good, less than 35% of your limit is GREAT!
The longer the record, the better. The longer you have a credit account open and in good standing, the better your score. Keep at least one older credit account open even if it is not your primary credit card because this increases the historical record of your credit. Just make sure you won't be paying any fees if you don’t use the account. Contact the credit provider to see if you are paying fees when deciding if you should keep an account open or not.
Credit checks, soft vs. hard. When you apply for a credit product, let's say a car loan, the seller of the car will want to know that three digit number - your credit score. The car salesman will have to do what is called a “hard credit check” where they ask a credit bureau for your credit score. A hard credit check will lower your credit score for 12 months, however after two years will be removed from your credit report entirely. The reason a hard check lowers your score is because lenders don’t want people applying for more credit products than they can afford, so they lower the score to prevent this. For example: If you apply for five or six credit cards at the same time, the credit bureaus will see this and could lower your score.
Soft credit checks on the other hand have no impact on credit score (this is what Credit Karma and Borrowell do). A soft credit check is when you want to check your own credit score, or if you have an existing credit account (eg. credit card, mortgage) with a business and they want to check your score to update your account.
Diversify your credit products.
One way to build your score is to have multiple types of credit products. Credit products include:
Mortgages
Car loans
Credit cards
A line of credit
When you have these different products, credit bureaus are able to see that you can keep track of multiple types of debt, and that different groups are willing to lend to you, and it builds your credit history. BUT, and this is a big BUT, do not take on debts that you can't pay back just because you want different credit products to build your credit score.
Plan in advance!
Remember, building a credit score takes time. Be patient! The government says bad information can stay on your report for up to 6 years in some cases(UGH!) SO stick to your plan and get started early to set yourself up for success.
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