Everyone's dream credit score is 900. It's the perfect credit score, the credit scores that banks, credit card companies, and other lenders want to see when they look your credit score up.
However, it's exactly that: only a dream.
In fact, the average Canadian has a credit score of 650. It's likely that you're somewhere around this number if you live in Canada yourself.
If that's true, you need to work on raising your credit score. In fact, everyone's score could use a little boost.
To learn how to improve your credit score, keep reading. We're going to cover everything you need to know about credit scores and how to increase them.
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What Is a Credit Report?
A credit report is a summary of your finances. It looks at how you pay all of your loans, including credit cards, student loans, and other kinds of borrowed money.
Your credit report looks at how you've borrowed money in the past and how you returned that borrowed money (if you returned that borrowed money).
Lenders look at your credit report to determine whether or not they want to lend money to you. They can see how much of your credit limit you've borrowed and how often you repay your minimum amount.
Some of the information that your credit report contains is used to compose your credit score.
What Is a Credit Score?
The infamous credit score is a number from 300 to 900 that gives lenders an idea of what your borrowing and repayment history looks like. The higher your score, the higher the likelihood that you will repay any debt that you may have with a lender.
Your credit score changes very frequently. In fact, most can change in just thirty days.
Each lender interprets credit scores differently, but every lender likes seeing a credit score of 660 or greater. Even better, they very rarely deny people with a credit score over 700.
This is because most lenders read a credit score like a probability statement. For example, someone who has a credit score of 600 tells the lender that 600 people out of 900 people are likely to pay the debt that that person has.
This is why people with higher scores are more likely to get loans.
How Is a Credit Score Calculated?
There are multiple factors that go into determining someone's credit score. If you're looking to increase your credit score, understanding these factors is crucial to take the necessary steps.
Let's walk through each credit score criterium and talk about how you can use the knowledge to your advantage.
Payment History (35%)
The most important factor that is affecting your credit score is your payment history. This is because this is a large factor that lenders want to look at if they're going to give you money. They want to know that you're going to pay them back.
Your payment history looks at all of the payments that you've made to your debts. Those who are currently lending you money (credit cards, lines of credit, car loans, student loans, cell phone, etc.) report every single time you may a payment. Keep in mind that mortgages are not reported on a credit report.
Your payment history shows each account separately. It looks at whether or not you've made the payment required of you and whether or not those payments were on time.
In addition, it shows if certain payments aren't due yet or if you have any other debts elsewhere like debts in collections.
Amount Owed (30%)
The amount owed tells lenders how much money you're currently borrowing. This matters because it tells lenders whether or not you have enough money to pay your current debts given your current amount of income.
You may think that you can handle more credit, but having a large amount owed on your credit accounts is a high-risk warning to the lenders who are looking at your credit report. Statistically, those who owe more money are less likely to pay off the debt.
Another piece of your debt that matters to lenders is how much of your credit you're using. This is called revolving utilization.
If you're using 60% or more of the credit that you're offered from all of your different lenders, you are negatively impacting your credit score. Even if you're paying every single cent that you owe each month, you are still hurting your credit score by using too much of your credit.
It may sound counterintuitive, but it's structured this way to prevent people from depending on credit payments too much. If you lose your job and still have a lot of money due on your credit, you wouldn't be able to pay what you owe.
Length of Credit History (15%)
Another factor that contributes to your credit score is your length of credit. If you haven't been using credits cards or other lines of credit for a long time, lenders cannot truly tell whether or not you know how to use credit properly. Therefore, they have to subtract some points off of your credit score to account for it.
If you have had credit for a long time, your credit report will show how you've handled your credit accounts over time. Whether it's good or bad, you should continue using credit minimally and responsibly.
The best thing about credit reports is that they only show the last six to seven years of credit history. This means that you can basically start fresh with lenders after nurturing your credit score for six to seven years. It's never too late to dig yourself out of debt.
The key here is that you have to keep using credit. Of course, you want to make sure that you can make payments. However, continually using credit and making those payments will help your credit score over time.
New Credit Applications (10%)
If you're signing up for a lot of new credit accounts within a short amount of time, those signals financial difficulty. By signing up for multiple lines of credit at once, you're showing lenders that you're having trouble making payments right now. This means that you're going to be less likely to be able to pay back the money that you're lending from the credit that you're applying for.
For obvious reasons, this hurts your credit score. It's called 'credit shopping' and reflects poorly on your ability to make payments to your debts.
Lenders worry about the amount of credit people get because it's harder for someone to make payments if they have more credit.
This portion of your credit score looks at how often your credit was checked in the last five years, the number of new credit accounts you have, the last time you opened a new account, and your most recent credit inquiry.
Types of Credit (10%)
If you can, we recommend having a variety of types of credit. Show that you can pay different kinds of loans and handle all of these payments. Lenders see this as a sign of financial responsibility.
Try to differentiate your credit account to show that you can handle different kinds of credit. This will show your lender that you're more likely to make payments that you owe.
Additional factors that may go into creating your credit score include your income, your assets, how long you've been working in your current profession, and why you're applying for different kinds of credit.
The additional factors, as well as the percentage of the other factors' influence, depends on where you receive your credit score.
What Is a Good Credit Score?
As we discussed, your credit score ranges from 300 to 900. It represents the average of all of your credit transactions.
The closer your score is to 900, the more creditworthy you'll appear to lenders. On the other hand, the closer you are to 300, the more risky lenders may consider you.
Overall, lenders want to see a credit score of 650 or more. Of course, this preference will depend on the organization that you're applying for credit from.
To get a good idea of where you want you credit score to be, let's look at the credit score ranges:
- Poor: 300-560
- Fair: 560-660
- Good: 660-725
- Very Good: 725-760
- Excellent: 760-900
The higher the credit score, the better off you are in general.
Why Is My Credit Score Important?
Your credit score can determine the kind of loans you get and the interest rates you pay with those loans. Those with higher scores are more likely to pay a lower interest rate, whereas those with a lower score are more likely to pay a higher interest rate.
Insurers use credit scores to determine interest rates, premiums, and more. Phone plan companies use them to determine who gets lower-paid phone plans. Landlords use them to decide who can rent their apartments and who pays bigger deposits for utilities.
Credit scores are basically a financial tool for lenders to determine creditworthiness and trustworthiness in a buyer.
How Do I Check My Credit Score?
There are many places to check your credit score. You have access request a credit report once a year for free from both Canadian credit bureaus, TransUnion and Equifax. However, there are other alternatives like Borrowell and Mogo that can monitor your score for you and provide weekly updates for free.
How Do I Improve My Credit Score?
If you're looking to improve your credit score, keep reading. We're going to cover a few of the ways that you can work on improving your credit score today.
Then, we'll discuss how you can work on improving your credit score fast.
Pay Your Bills In Full and On Time
If you haven't already been doing so, you need to pay your bills quickly. As we discussed, payment history is the most important factor when it comes to paying bills.
Missed payments and late payments show up on your credit report and negatively impact your score. This means that missed payments and late payments affect your credit score for seven years after they've happened.
If you don't want this following you around for the next seven years, get your payments in on time.
Make Frequent Payments
If you can, make frequent payments to your credit accounts. This decreases your revolving utilization and ensures that you are paying back your debts quickly.
This reflects on your credit report and leaves you with less debt. It's a win-win.
How Do I Improve My Credit Score Fast?
One of the good things about credit scores is that you can improve your score pretty quickly, especially if you have a low score. In fact, someone with a low score is exceedingly more likely to increase their score by 100 points than someone with a high score.
So, if you're looking to improve your credit score fast, you need to make all of the changes we previously talked about and change your relationship with credit.
What Is My Credit Score?
After all of this talk about credit scores, you're probably wondering where you lie on the spectrum. Do you have a good credit score or a bad credit score? If you have a bad credit score, you may be wondering how to improve that credit score.
If you'd like to check your credit score for free, you can use our tool here at insurdinary. Since it is a soft check, it will not affect your score. Therefore, you don't have to worry about keeping up with your credit score over time.
Congratulations on making the decision to improve your credit score. You are now on your way to a bright financial future. Good luck!