Building your Credit Rating
Why it matters and how to do it.
If you’ve ever been turned down for a loan because of your credit rating, you’ll already know how important it is when it comes to having financial options.
Your credit report contains a lot of information about your financial history, along with your credit score. These combined help lenders decide whether they should offer you a loan or not.
Credit Scores in Numbers
There are two credit report providers in Canada: TransUnion and Equifax. While their methods for calculating scores vary slightly, they both use a range between 300 and 900. In general, any score above 660 is considered good, but interpretations of credit scores fluctuate between lenders. Some financial institutions only consider 720 and higher to be a good score.
Why does a credit score matter? Your credit score will determine not only whether a company will give you a loan, but also the rate of interest they will charge you. High scores will get you the lowest mortgage rates and lowest interest rates for credit cards and personal loans.
If your score is under 660, you’re considered below average and therefore a greater risk of defaulting on the loan. Some companies will flatly refuse you the loan while others will only offer you a high interest loan. Scores under 560 are considered poor and will make qualifying for any sort of credit extremely expensive, if not impossible.
Thankfully, if you have a below average or poor credit rating, there are a number of strategies you can use to build it up to a good rating.
Request a Copy of Your Credit Report
Credit reports are not always perfect and can have errors within them that can bring your score down considerably. Equifax and TransUnion will provide your report for free. If you find an error, speak to the financial institution involved and have them take the error off your report.
Use Credit and Manage it Well
It’s ironic that, if you never use credit, you won’t have a credit score. You need a couple of credit lines (credit cards, lines of credit, auto loans, etc.) to start building your credit history. And the most important part is to consistently manage it well. Make sure to:
- Always pay at least the minimum payment amount, every month, on time: every late payment lowers your score
- Never go over your credit limit
- If you’re struggling to pay a bill, contact the lender to explain why and ask for a deferment
- If you have an item you are disputing, still make the minimum payment until the dispute is settled
Don’t Max Out Your Credit Limit
The higher the percentage of your credit limit you use (and carry a balance on) the lower your score will be. Ideally, try to only carry a balance of 30% or less of the credit limit.
If you are struggling to pay down your credit to this level, ask for an increase in your credit limit. This will reduce your credit use ratio, but just don’t be tempted to spend more of it.
Don’t Apply for Too Much Credit
Every time you apply for a credit card or loan, the lender pulls your credit report, which is known as an inquiry. Too many inquiries could suggest that you’re in financial difficulty and will substantially reduce your credit score.
Apply for a Secured Credit Card
If your credit score is so low that you can’t qualify for any credit, take out a secured credit card. You will need to provide a security fund, and this will be the money you can then spend on the card.
Use the card regularly and pay off the balance every month. This will prove you can manage credit well, will build your credit score and pave the way to you qualifying for a regular credit card and other loans.