/ Finance 101

How to improve your credit score

No matter what your credit score is, the good news is you can always increase it.

A healthy credit score can help you access loans or other types of credit when you need it. And, the higher your credit score, the more likely you are to qualify for lower interest rates (meaning more money in your pocket).

Here’s a step-by-step guide to help improve your credit score:

1. Monitor your credit

As with any goal in life, you need a way to measure progress. Before you even begin to take steps toward improving your credit score, you should get into the habit of monitoring your credit regularly. By doing this, you’ll see what activities impact your credit score (both positively and negatively). Watching your progress will also keep you motivated to continue building good credit habits. Here are some simple ways you can monitor your credit:

  • Request a free copy of your credit report from either Equifax or TransUnion (sent by mail)
  • Equifax and TransUnion also offer ongoing credit monitoring services for a fee. While there’s a cost associated with these services, it’s a better option for individuals concerned about identify theft or fraud.
  • Try a free credit monitoring service. A simple internet search can help you find a variety of different websites or mobile apps that help you monitor your credit for free. However, beware of scams – it’s important to do your research!

2. Dispute any errors on your credit report

Once you get a copy of your credit report, review it for accuracy. See something you don’t recognize or something that’s suspicious? Get in contact with the credit bureau right away. These errors can negatively impact your credit score, and clearing them from your report can help increase your score.

3. Make bill payments on time

Seems obvious, right? However, payment history makes up 35% of your credit history. So, if there’s one thing you’re going to change about your financial habits, it should be making on-time payments. And, another thing that might surprise you is that it’s not just credit card and loan payments that impact your credit report. Your cell phone provider, landlord and medical bills may also report to the credit bureau. Any late or missed payments on these types of bills could impact your credit score.

4. Let your lender know if you anticipate a late or missed payment

Even if you fully understand the importance of on-time payments, it’s easier said than done if your budget is tight one month, or if you encounter unexpected expenses. It may seem scary to let your lender know that you’re not able to make a payment. But, most lenders understand that things come up and you can’t always make payments on time. When this happens, call your lender and explain your situation. Sometimes they may be able to waive interest, or allow you to skip a payment and add it to the end of your loan term, helping to protect your credit score. Just make sure you don’t make this a regular occurrence. If it is, it may be worth talking to your lender about a different payment schedule that fits in your budget.

5. Pay down credit card balances

Regularly carrying a high credit card balance impacts your credit utilization. Credit utilization is reflecting how much credit you’re using vs. how much credit you have available. For a healthy credit score, you should aim to keep your credit card utilization at 25% or less of your available credit. Take a look at your credit card statement right now – are you over this limit? If you are, it’s time to start paying down your balance. Not to mention, you could save hundreds to thousands of dollars each month on interest charges.

Depending on your situation, a debt consolidation loan might be a good option for you. It can help you pay off your credit card balance and any other debt or outstanding bills you have. That means everything will be combined into one simple monthly payment designed to fit in your budget.

6. Find out when your activity is reported to the credit bureau

The problem with credit utilization is that it can vary day to day. For example, let’s say you have a credit limit of $5,000 and buy a $3,000 couch. You plan to pay your credit card off in a week. But, between the time you buy the couch and pay your bill, your credit card balance gets reported to the bureau. Your credit utilization at the time that your balance is reported will be 60% (significantly higher than the recommended credit utilization ratio).

Finding out when your balances are reported to the bureau allows you to strategically use this information to pay off your card at the time that’s most beneficial for your credit score.

7. Increase your credit limit

Increasing your credit limit might seem counterintuitive when it comes to increasing your credit score, but it can help lower your credit utilization. Let’s continue with our example above. If your credit card provider offers you a credit limit increase from $5,000 to $10,000 and you purchase the $3,000 couch, your credit utilization is then reduced by 30% instantly.

The risk with this strategy is that you might be tempted by an increased credit limit and could rack up an even higher balance. If this sounds like you, it may be better to keep your credit limit (and balance) on the low end until you develop stronger money management habits.

8. Use a mix of different types of credit

Diversification isn’t just for your investments – it can positively impact your credit score as well! Lenders want to see that you can proactively manage a variety of different types of credit like mortgages, lines of credit, car loans and credit cards.

So, if you have a mortgage or car loan and think that’s enough to demonstrate your credit activity, you may want to consider applying for a credit card or line of credit as well to help diversify your credit mix. You can set up one or two automated bill payments on a credit card and pay it off each month to generate some activity.

9. Limit credit inquiries

Hard credit inquiries can cause your score to dip, especially if there are several hard inquiries on your report in a short timeframe. Why? Lenders may interpret this as credit-seeking behaviour. If you’d like to maintain a high credit score, you should keep inquiries to a minimum. If you’re interested in shopping around for the best rates, most lenders offer a quote or estimate that uses a soft credit pull (meaning there’s no impact on your score).

Tip: Applying for a job, new rental accommodation or cellphone contract might trigger a hard inquiry so be sure to monitor this activity in order to keep inquires to a minimum.

10. Be patient

It can take a few months for you to start seeing results in your credit score, especially if you’re new to building credit. It’s important to remember that the length of credit history is also an important factor that affects our credit score. So, if you’ve only had your first credit card or loan for a year, it might still be a while until you start seeing impacts to your credit score. 

We’ll all likely need access to credit one day, so learning credit-building habits is just as important as money-management and budgeting habits. And with any new habit, it takes time and you’re going to make mistakes. Start by implementing one or two things a month on this list, and you’ll reach your desired credit score before you know it!

Check out the other articles in our credit series:

Interested in a loan? Learn how a Fairstone loan can help rebuild your credit over time. Or, get started with a free, no-obligation loan quote to find out how much money you could qualify for and what your payments might be.

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