How to Build Good Credit
Credit scores are Canadian’s financial identity - it is the three digit number that informs future lenders, creditors, or employers how financially responsible an individual is. This score will dictate a person’s ability to rent an apartment, buy their own home or vehicle, and qualify for loans at reasonable interest rates. Despite being such a pivotal part of determining Canadian’s quality of life, many are unaware of their score!
So what can you do to bulk up your credit score and ensure that there won’t be hiccups or massive interest rates when you need to take out a loan?
Know your Score
Knowing what your credit score is on a regular basis allows you to understand where you sit in the eyes of potential lenders. By checking on a monthly basis, you can dispute errors on your score - which is a surprisingly common occurrence - and also hold yourself financially accountable. Discover’s 2017 survey showed “those who checked their score 12 or more times were almost twice as likely to improve their credit than those who checked their score once” 1.
Contrary to popular belief, checking your credit score does not negatively affect it. These ‘soft’ inquiries make no impact, however ‘hard’ inquiries such as applying for a new line of credit will slightly damage your score. Don’t be scared to look at your score, ignorance is not bliss!
Pay your Bills
This is an obvious one, but it will have the largest impact on your credit score. Consistently paying your bills on time and in full over an extended period of time demonstrates a pattern of financially responsible behaviour.
One way to maintain your bills is to set up automated payments. This eliminates that lump in the throat feeling when you remember your phone bill was due yesterday. Automated payments are another safeguard to keep you accountable to debt repayments. However, keep track of your various accounts - you may still need to make a manual payment if you’ve spent a little extra on your credit card this month.
Establish Different Types of Credit
Lenders look kindly upon individuals with numerous accounts as it shows that you are not relying on a single loan or credit card. Despite this, your score will take a negative hit if you go overboard and apply for endless amounts of credit. Find a delicate balance - applying for a few loans or credit cards annually is optimal.
Also, do not close your oldest accounts! Creditors check the average age of your accounts and “a higher number shows that you have a long established credit history” 2. Make a few small payments on your lesser used and older cards, then pay them off right away.
Do not Exceed your Credit Limit
Credit card debt is a huge factor in assessing your credit score. Individuals that are constantly exceeding 75% of their credit limit “is a red flag to the credit scoring system” 3. You have to use credit in order to establish that you are financially responsible, but do not utilize too much - teetering on the edge of your limit indicates that you have minimal financial flexibility and are therefore a high risk to lenders.
One way to negate this is to increase your credit limit. In doing this, assuming your debt remains the same, the percentage of your credit limit used will decrease. Another method is to spread out your spending. Rather than have a single card at 80% of its limit, your credit score will be far higher with two cards at 40% capacity.
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