When talking especially to first-time buyers, it seems that the phrase “credit score” is either foreign to them or is a mystical creature that is not understood at all. So I have decided to write about it today to demystify it for everyone so that by the end of this post, you will know how to improve your credit score.
What is a credit score?
First, before even talking about how to improve your credit score, we need to define what it is. Your credit score is a 3-digit number that relates to how likely you are to repay a debt. It is primarily based on a credit report (not too dissimilar to a report card or a transcript in school) that lists all the debts you have (and you had) and how good you are at repaying them on time. In Canada, it ranges from 300 to 900 and the higher your score, the better. If you’ve ever applied to a college or a university, you may recall them asking for your transcripts showing all your marks to decide if you’re going to be accepted into a program or if you’re going to get a scholarship. Banks do the same when they want to decide if they are going to give you a mortgage and if they are going to give you a good rate and they use your credit score and credit report to do so instead of your transcripts. So it is worthwhile not only to know what your score is but how to improve your credit score as it can have a huge impact on your financial situation in life.
Who decides what your credit score is?
There are two companies in Canada (most often referred to as credit bureaus) that create your credit profile based on information they receive from all the companies that have ever lent you money or allowed to use services without paying up-front for it. This is where the transcript analogy breaks down. While your high school transcripts are set for life once you’re out of high school, your credit score and report are living documents that keep changing pretty much daily or at least as often as companies report changes to your file to the credit bureaus. This is good news for you because as you’re reading this, if you have noticed that your credit score is not so great, there are ways to improve it. Keep reading for the details below.
The two credit bureaus in Canada are Equifax Canada and Transunion Canada. They both use their own algorithm to compute what your credit score is based on information that banks, credit card companies, cell phone companies, etc send them about you and that combined make your credit report. You may wonder who gave them the right to keep sending them regular information about how you pay your bills on time and how much of your credit card you use…the answer is YOU! Yes, in the fine print, whenever you sign a contract with a phone, internet, credit card, line of credit, or mortgage company, you authorize them to provide this information to Equifax and Transunion.
How to get your credit score?
The first thing to do is to know what your score is and what information is on your credit report. While you can always fill out a form and send it to each credit bureau to request a free copy of your credit report, there is no way to have access to your score unless you pay for it or unless you bank with an institution that provides it for free as part of their services to you. So my advice is: don’t waste a stamp and an envelope to wait for them to send you only your credit report through Canada Post sometime soon because if you want to take charge of monitoring and improving your score, you will need to know what it is first and bite the bullet by going to Equifax or Transunion websites to purchase your score and report to receive it instantly online.
At the time of this writing, it is $23.95 at Equifax and $19.95 at Transunion but you will need to cancel as soon as you receive your report with Transunion otherwise they will charge you monthly for an on-going service. If you only want to purchase one, my recommendation would be to purchase the Equifax one as they are the market leader used by a majority of banks whenever you’re looking to apply for a mortgage so you really want to see what the lenders see in your Equifax file. Avoid using any service that claims to give you a free credit score. They will ask you for a lot of personal information and will sell it. So go to the source (Equifax or Transunion) directly to make sure the information you provide them is safe and will not be sold to third parties.
How to improve your credit score?
Now that you know your score and your report, they are many ways to improve it but here are my top 3:
1. Pay all your bills on time – by this it doesn’t mean you have to pay the full balance of a credit card every month but you need to at least make the minimum payment on time every time.
2. Keep your credit card utilization at no more than 65% of their limit – if on a monthly basis you use over 65% of your limit, try to ask for a limit increase.
3. Don’t do too many credit inquiries/applications – each time you apply for a credit card, a mortgage, a line of credit, internet, cell phone, TV packages that are not pre-paid, it will be considered a credit application in your credit report (whether you end up buying the product or not) and will affect your credit score negatively.
How can a mortgage broker help your credit score?
On the last point about credit inquiries, if you go bank to bank to shop around and make inquiries and see how much of a mortgage and at what rate they would be willing to lend you, all these inquiries will be reflected on your credit report and will negatively affect your credit score. One of the many attractive features of using a mortgage broker is that you only need to have one credit inquiry done and it is valid for 20 institutions as opposed to having 20 inquiries which would destroy your score if you were to go bank to bank to get the same result.
While there are many other ways to help improve your credit score, my top 3 are the most crucial ones. If you have any questions give me a call at 647-225-0356 or send me an email at firstname.lastname@example.org and I will be happy to walk through your own credit report and show you what each line means as well as give you more specific tips on how to improve your credit score to get better mortgage rates or credit card rates.