20% of Canadians have a credit score below 600. This is lower than the national average of 650.
Your credit rating is not just a figure; it could impact your life in many ways.
For example, it determines whether you can access business loans, mortgages and the interests you are charged for them as well as the premiums you pay for life insurance.
The importance of life insurance cannot be overemphasized. Unfortunately, insurance companies usually conduct a credit check to determine the premiums you will have to pay.
A lousy rating means you will have to pay more for a smaller policy.
In this article, you shall learn some of the measures you can take to boost your score before taking up a policy.
Check Your Credit Report for Any Inaccuracies and Report Them
It is essential to know how you fare on the credit rating scorecard before applying for a credit facility. Go through your report and check for errors.
In case you find any errors, report them to the credit bureaus as they can lower your score.
Begin the error correction processes as soon as you can because it may take a while before it’s complete.
Additionally, you can contact your creditors directly to have them review your accounts to verify if you are listed erroneously.
Ask them to reach the credit bureaus for the appropriate corrections to be made on your report if they confirm the error. Have them give you any documentation for the same. It will be useful if you need to go back to the credit bureaus.
Start Reducing Debt and Keep Balances Low on Credit Cards and Other Revolving Credit
Debt reduction is the best way of improving your credit rating. It is important to start reducing debt as soon as you realize your score will be required. This will help you reduce your credit utilization ratio.
The credit utilization ratio is a comparison of the amount of credit you have with your total credit limit. A ratio of 30% and below makes you appealing to lenders. It shows them that you can manage credit well.
As you pay off your debts, focus on the ones that are still in good standing. Avoid accounts that have already been forwarded to collection agencies as their mark on your report has already been made.
Paying off an account that is already in collections can even do you harm as it could be reactivated. Put your attention on accounts that will help improve your rating.
A good way of reducing your debt quickly is by utilizing savings. Regardless of how much savings you have in your account, your credit rating is not impacted. Paying off debts will however improve your credit score.
Start Paying Your Bills on Time
When assessing your application, lenders are very keen on how well you pay your bills. And not just credit card bills and loans.
It includes rent, phone bills, and utilities. How you have fared in the past will help them predict how responsible you might be in the future.
Avoid late payments and pay your bills on time to boost your rating. Even a smaller payment after the due date will affect you negatively.
The full amount should be settled on time. Come good on all payments you may be behind on as soon as possible.
At times busy schedules are the primary cause for late payments. To avoid such situations, set up automatic payments for your bills to be deducted directly from your bank account.
Alternatively, you can opt to receive reminders from creditors as to when your payments are due.
You can also use phone reminders for the same. Such tools will help you avoid unnecessary hits to your rating.
Keep Unused Credit Cards Open
Having many credit cards is not bad for your credit score; bad credit is. Most people close out credit cards with a zero balance or even attempt to pay off cards in order to close them.
This okay but it might not do much for your credit rating. Having unused credit cards, on the other hand, can help improve your credit utilization ratio which makes you a better candidate for lenders.
Get Listed as Someone Else’s Authorized User
Do you know someone with an impeccable credit score? Get them to agree to list you as an authorized user on some of their credit cards.
They do not have to give you the cards, but this will help improve your score.
One thing though, before you get listed, it is important to ascertain that their record is indeed flawless. Any credit issues they may have will also reflect negatively on you.
Get a Secured Credit Card
Secured credit cards are credit cards that have a cash collateral deposit which functions as your line of credit for that account. These are quite helpful when building or rebuilding your credit rating.
Typically, you will need to make a security deposit of $300-$500.The amount of credit you get correlates with the security you put down.
For a $500 security, you can get a line of credit worth $25-30 which can increase as your rating improves.
Secured credit cards have the following benefits:
- You can qualify with a poor credit rating
- Some offer interest on security deposits
- Spending may earn you rewards
Some secured credit cards come with annual fees of $25 to $50 per year. Try to find one that does not have a yearly fee. Use the card for making small purchases and pay it off periodically.
As you make a habit out of this, your credit report will reflect your habit of making regular payments.
Avoid Habits That Make You Look Bad to Lender
As you try to improve your score, make sure you avoid suspicious activity. Some habits may not affect your credit rating as such, but they raise red flags for lenders.
These include requesting for cash advances frequently, multiple credit inquiries within a short period from lenders or opening new credit card accounts.
Such behavior might indicate to the lenders that you are cash strapped and may also impact your credit score negatively.
Balance out Your Credit Card Utilization
To be safe, your total credit card utilization for all your credit cards should be at 30 percent or below.
However, some agencies will do an individual assessment for each card to ensure that they are all under 30%. This may be problematic if you have a card with a zero balance.
Due to such instances, it may be better to transfer some of the debt to another empty card. However, this can only be done if both cards share the same APR.
Setup a Rainy Day Fund Account
Financial advisors often encourage people to set funds aside to help cushion them from economic challenges that might arise.
The fund should be equal to or more than six months of your annual income. By doing so, you will insulate yourself from any credit rating damage in case you encounter financial challenges in the future.
Consolidate Your Debts Before a Credit Check
Debt consolidation is a service that allows people to bring small loans together into one loan with a single monthly payment.
Though debt consolidation may cause a temporary dip in your credit score, it has the following benefits that will help you restore and improve it:
- The single monthly payments are easy to track and monitor
- A low-interest rate debt consolidation loan will help you reduce the interest rate at which you repay
- You can pay off the debt faster if you take up a low-interest rate loan and retain the same repayment period
A debt consolidation loan will help make life easy for you as you try to improve your credit rating.
How Long Does it Take to Rebuild Credit?
It is impossible to quote a specific duration for improving your credit score.
It all depends on the negative information you have on your report – late payments, bankruptcy, regular credit applications, etc and the efforts you make to improve it.
However, with good credit habits, you can see noticeable changes in your rating in 3 to 6 months. You can then shop for a life insurance policy.
Even as you rebuild your score, negative information will remain on your report for some time even after clearing your debts. Bankruptcies and loans forwarded to collection agencies last longer than late payments.
When Should You Start Improving Your Credit Rating?
Your credit score is a significant factor in your life. A bad rating can hinder you from achieving life goals such as owning a house or growing your business.
Therefore, you should not wait until you need a credit check to start working on your rating.
Make it a habit to continually improve your score. This will require discipline and commitment. With an excellent rating, you will access low-interest loans and the best rates for your life insurance.
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