Did you know that having a good credit score is important if you ever need a loan, like a mortgage or a car loan? Lenders will look at your credit score as a quick reference to determine how creditworthy you are and what interest rate you should pay. Since this number can significantly affect your financial prospects, it makes sense to spend time making it the best it can be.
If you’re wondering how to get a better credit score, the good news is that it’s a relatively straightforward process. It just takes some strategy, effort, and time.
The first thing you need to understand is how credit scores work. Your credit score is a number between 300 and 900 that reflects how you’ve used credit in the past and changes based on how you’re currently using it. There are two credit bureaus in Canada, Equifax and TransUnion, that can tell you your credit score. Once you know your score, you can see where you stand.
Generally speaking, you’ll want your credit score to be at least 660 since that puts you in “good” territory and is arguably the bare minimum for you to be approved for things such as a credit card, mortgage, or car loan. That said, having a higher credit score is, of course, better, as you’ll appear more creditworthy.
Many people aim to get their credit scores above 760 since it’s considered “excellent” and they’ll often get access to better interest rates when applying for a loan.
» MORE: How to check your credit score
Now that we’ve covered what credit scores mean, here are some ways to improve your credit.
Whether it’s for your credit card or mobile phone, every bill you get needs to be paid on time. These payments are reported to the credit bureaus, and missing one could significantly affect your credit score — and not in a good way.
When you pay your bills, you’re establishing a payment history. Lenders want to see that you always make your payments, so they can trust that you’ll consistently pay them, too. Even if you’re in a challenging financial situation, try to make at least the minimum payment, as it’s better than not making a payment at all.
The amount of credit you’re using relative to how much credit you have available is known as your credit utilization ratio. For example, if you have a credit card with a limit of $1,000, but you typically maintain a balance of $800, your credit utilization ratio is 80%.
This ratio is relevant since it’s a big factor in determining your credit score. Even if you always pay your bill in full each month, the credit bureaus may not like the fact that you’re often near your limit. Try to keep your utilization ratio under 30% or 35%, which lenders see as less risky.
Whenever you apply for new credit, the lender performs a hard inquiry on your credit history, which generally results in a 10-point drop in your credit score. While one new credit application a year likely won’t be a big deal, applying for multiple forms of credit in a short time period is not a good idea, especially since each inquiry will hurt your credit score. Lenders will also wonder why you’re trying to access so much credit and may be wary of approving you.
Secured credit cards are a great option for people to want to rebuild or establish a credit score. These cards often come with guaranteed approval, but they’ll likely require you to deposit security funds, which will serve as your credit limit. The advantage of a secured card is that the issuer will report your payment history to the credit bureaus, so making consistent payments can help you slowly get a better credit score over time. Once your score is in good standing, you can apply for a traditional unsecured credit card.
Occasionally, you may see errors such as inaccurate information or even fraud when you check your credit report. If you spot an error, you’ll need to file a credit dispute and provide documents that back up your claim, such as copies of your bills, email conversations with customer service reps or even police reports if a card was stolen.
There are no quick fixes when it comes to improving your credit. According to the Financial Consumer Agency of Canada, it takes 30 to 90 days for new information to show up in your credit report, and each new piece of information could result in a small change to your score. That means it could take at least a year before you see any meaningful increase, such as moving from one credit score category to the next.
As long as you follow the tips outlined above, your score will eventually rise. While it’s not a quick or flashy fix, responsible use of your credit is the only way to get a better credit score.
Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.