/ Finance 101

How to improve credit score: Understanding credit reports

You may have heard the terms “good” or “bad” credit, but what does credit really mean, and how can you build credit to allow you to do the things you want to do? It's always possible to improve your credit. But first, you need to understand how your credit report and credit score work.

What does it mean to establish credit?

The first time you get a credit card, take out a personal loan or a car loan, apply for a line of credit or finance a retail purchase, you are opening credit. Once you begin borrowing, your credit history is established and you can build your credit standing.

Your credit report: The biggest factors that affect your credit 

Details about your borrowing history — like whether you pay on time or make extra payments — are sent to one or both of the Canadian credit bureaus (TransUnion and Equifax) and become part of your credit report.

Here are the 5 biggest factors that affect your credit:

  • Payment history: Lenders can see how often you make on-time payments, and even if you make extra payments. Limiting late payments is important for maintaining a healthy credit score. 
  • Credit utilization: Credit utilization refers to the ratio of credit you're using compared to what's available. It's recommended to keep credit utilization below 25% (for example, carrying a balance of $250 or less on a credit card with a $1,000 credit limit).
  • Length of credit history: your length of credit history dates back to the first credit card, loan or other type of credit you opened. The longer your credit history, the more positively this will reflect on your credit report. 
  • Credit inquiries: Too many credit inquiries can negatively impact your credit score, so it's best to minimize how often you’re having your credit checked. 
  • Credit mix: The types of accounts that make up your credit report (credit cards, student loans, car loan etc.) are your credit mix.

Each time you apply to borrow money your credit report is updated. Your report also includes information from public records (for example, bankruptcy).

Understanding credit score ranges

Your credit report includes your credit number, or your ‘credit score.’ Canadian credit scores range from 300–900. Most lending and financing companies use credit scores and credit bureau information to help determine a person’s credit risk level and, from there, the interest rate they qualify for. Generally, the higher the credit score, the cleaner the credit history – and based on past behaviors, the more likely the person is to pay back their loan and make payments on time. Want to know more? Here’s everything Fairstone considers when determining your interest rate.

What is a "good" credit score? 

An excellent (760+) or very good (725-759) credit score will likely get your approved for most loans and credit cards at the lowest interest rates. A poor credit score (300-559) will likely cause issues when trying to apply for credit – there may be very limited options. Then, there are credit scores that fall somewhere in the middle of this range: fair (560-659) and good (660-724). People with fair to good credit scores will likely qualify for some or most loans and credit cards. However, they may not qualify at a bank and will likely have to pay a higher interest rate. Is your credit score not as high as you'd like it to be? Don't worry – it can always be improved. We'll teach you how to rebuild your credit in the next section. 

  Poor Fair Good Very good Excellent
Range 300–559 560-659 660-724 725-759 760+
Canadian Population (%) 4% 10% 15% 15% 57%

Source: Financial Consumer Agency of Canada 

How to improve credit score: 5 steps

Now that you understand what affects your credit report and credit score, here are 5 steps to help you rebuild your credit (or how to establish credit if you're just starting out): 

1. Make on-time payments, every time. 

One or two missed payments won't damage your credit score overnight. However, multiple missed payments can negatively impact your credit score over time. The best way to stay on top of payments?

  • Make sure you can afford any mortgage or loan payments. If you're struggling to fit these payments in your budget, work with your lender to see if they can create a more affordable repayment schedule.
  • Never spend more on your credit card than you can afford to pay back.
  • Set up automated payments so you never have to worry about forgetting to make a loan or credit card payment. 

2. Lower your credit utilization. 

It's not a good idea to regularly max out your credit card or line of credit. Instead, carry less than 25% of your credit limit – returning to our earlier example, if you have a credit limit of $1000, try not to carry a balance of any more than $250. It may even be a good idea to increase your credit limit (if you're comfortable doing so) to keep your credit utilization regularly below 25%. 

3.  Haven't established your credit? Do it as soon as possible. 

If you're young, a car loan or mortgage may feel like years away. But in order to access the lowest interest rates when it comes time to apply for a loan, it's important to establish your credit early. Look into a student credit card or secured credit card to start building up your credit report. And don't forget to always make your minimum payments on time. 

4. Only apply for credit as needed, and understand when a company is doing a hard credit check.

Most people don't realize that applying for a new apartment, starting a new job or switching cellphone companies can all count as an inquiry on your credit report. Multiple inquiries will negatively impact your credit score, so make sure you always ask if a company will be doing a hard credit check before signing.

5. Monitor your credit.

​​​​Sign up for a free credit monitoring service to see your progress over time – it will help motivate you. Plus, it may help you identify fraudulent lines on your credit report, which could put you at risk of identity theft.

Remember: Your credit score will naturally change over time. As you use credit and pay back your debts, your credit score may go up (which is why it’s called building credit). However, if you have a difficult time managing credit, your credit score may drop.

The perks of a high credit score?

By demonstrating responsible borrowing habits over time, you can improve your credit score and access lower interest rates on loans. If you're just starting out, you're well on your way to establishing a healthy credit score. For those who are looking to improve their credit score, you're now equipped with the information and tools you need to create a healthier financial future. It may take time to improve your score, but stick with it – you'll get there before you know it! 

To learn more about your credit history, you can request your credit report online, in person, by telephone or by mail by contacting Equifax Canada or TransUnion.

This article is for informational purposes only. For personalized financial advice, you should contact a qualified financial advisor.

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