Your credit score affects many aspects of your life. If you want to borrow money, take out a mortgage, rent a home or pursue your dream job, then your score matters.
In fact, your credit score can even affect how much interest you’ll pay on a loan or the type of cell phone plan you are offered.
Because credit scores demonstrate how creditworthy you are, companies may be concerned if your score is low. You’ll find that having a good credit score makes everything easier.
Many Canadians understand that making payments on time is essential when building a good credit score. However, achieving an excellent score depends on many other factors.
The good news is you have the power to nurture your credit score and make it grow, allowing you to unlock your financial potential.
So how do you improve your credit score in Canada? Here are some tactics you can use to increase your credit score in as little as 30 days.
Let’s get to work.
1. Check your credit report regularly
The first step in your credit building journey is checking your credit report for errors.
Even if you’ve been paying your bills as they become due, credit bureaus make mistakes, and fraudulent activity can occur. Fortunately, it’s easy to make sure this doesn’t happen.
Request your credit report from Equifax or TransUnion, Canada’s two major credit bureaus. It’s recommended that you request a report from both, as each bureau can hold different information about you.
You can get a free copy of your credit report once a year. While you should look to check your report at least once a year, many people choose to review it every month to avoid unexpected changes, identity theft and unauthorized credit inquiries.
What’s important to note here is that your credit score isn’t affected when you check your credit report, so look at it frequently.
From there, you’ll want to look over your credit report thoroughly and make sure the information is correct. File a dispute with the credit bureaus if you spot an error. You may also want to contact the creditor who made the mistake.
Pay particular attention to things like:
- Incorrect personal information.
- Misspellings of your name or address.
- Accounts that don’t belong to you.
- Unfamiliar accounts or credit inquiries.
- Payments made on time but recorded as late.
- Inaccurate credit limits.
- Accounts attached to debt collection agencies.
- Closed accounts reported as open.
Fixing these errors can result in a significant improvement to your credit score, and it could be the difference between passing or failing a credit check.
Ensure there are no open credit cards or other accounts in your name that you don’t recognize, as this could be a sign of identity theft.
A recent study by Equifax found that 71% of Canadians have checked their credit report within the last 12 months, including 57% in the last month.
2. Make payments on time
Making payments to your credit accounts on time is the single most significant factor affecting your credit score, making up 35% of your credit score.
It’s simple — always make payments on time.
Pay twice a month
Many of us are accustomed to paying bills at the end of the month, but why not try to make a smaller payment every two weeks instead?
By doing so, you are reducing your balances and overall credit utilization ratio regularly, which can have a positive impact on your credit score.
And when you pay a bill, such as a credit card, twice a month at a slightly higher rate than you usually do for the entire month, you can pay down your debt faster and save money on interest charges.
Regardless of whether or not you see an improvement in your credit score, there are money-saving benefits to bi-weekly payments. For example, if you pay your mortgage twice a month at a slightly higher overall monthly rate, you are making more payments throughout the year, saving you money on interest and allowing you to pay down your mortgage faster.
How do missed payments affect my credit score?
Making payments on time shows lenders that you can manage your money well.
Late and missed payments are reported to credit bureaus, damaging your credit score. If you miss one or more, this can affect your ability to get new credit for many months and sometimes even years. It can take months of making payments on time for your score to start to recover.
A payment is reported as late when you don’t make a payment after 30 days. Your credit rating is affected, and the creditor may also charge you a late fee.
More severe credit ratings are applied after 60 days, 90 days and 120 days, damaging your credit score even further.
Making a payment for less than the amount due will be considered a missed payment.
Likewise, withholding payment due to a dispute will also be classed as a missed payment, so it’s a good idea to continue to make payments while a dispute is in progress.
Payment history is recorded for every credit account you use, including utilities like your cell phone and Internet plans.
Always make the minimum payment but pay more, so you’re not just paying the interest. If you can, pay your bill in full. If you cannot keep up with your repayments, contact the creditor immediately to explain why or request more time.
Here’s a tip: If you pay off your credit card bill in full and on time every month, you’ll pay less interest.
The best way to ensure you don’t miss a payment is to set up automatic bill payments from your chequing account.
How to improve your credit score after a missed payment
If you miss a payment, make it as soon as possible before it damages your score any further.
To help ensure that it doesn’t happen again, set up automatic payments for your bills to avoid future damage to your credit score.
Keep a close eye on how much credit you are using so it doesn’t spiral out of control.
If you are unable to afford the payments, you should definitely read our comprehensive guide on debt help to resolve your debt problems. And you should also seek professional advice from a Licensed Insolvency Trustee.
Keep reading for more tips on how to improve your credit score.
3. Improve your credit utilization ratio
Many Canadians might be surprised to hear that using too much available credit has an enormous impact on your credit score.
This is called your credit utilization ratio (or your debt-to-credit ratio), which is the percentage of your used credit from the total credit limit across all your accounts. This has the second biggest effect on your credit score, so it’s important to keep your credit utilization ratio low.
For example, your credit score might change if your credit card balance is higher or lower each month or if your available credit changes.
Your credit utilization ratio should be less than 30% of your available credit. So, if you have a credit card with a $1000 limit, you should keep your credit utilization ratio below $300. This applies to all your credit products.
It’s easy to calculate your credit utilization. Just add up the credit limits for all your credit products, such as credit cards, loans and other lines of credit. Then, try to use less than 30% of this total.
As you might expect, going over your credit limit also lowers your credit score.
There are a few things you can do to improve your credit utilization ratio:
- Make more than the minimum monthly payment towards your credit card.
- Inquire about a credit limit increase and accept any offered, so you have more available credit.
- Spread out the balance over other lines of credit if one is being used more than others.
- Add more credit, which will increase your total amount of available credit.
Just as debt can be too high, it can also be too low. When you have low credit limits, it can suggest to lenders that you are less comfortable with higher limits and cannot make larger repayments on time.
Beware: adding additional credit or increasing limits comes with extra responsibility.
Find out when a late payment is reported to the credit bureaus
When you know when your credit accounts are updated, you can boost your credit utilization ratio.
Contact your credit company and find out when the balance is reported to the credit bureaus. The date varies for each line of credit because it is usually the last day of the billing cycle on your account.
When you pay your balance before this date, your reported balance will be lower than if you paid it after the reporting date, meaning your credit utilization is lower. This avoids any negative impact on your credit and can often boost your credit score.
4. Build a long credit history
Credit history is a historical record of your credit accounts. Lenders want to see multiple credit accounts that have been used responsibly over many years.
A long history of responsible borrowing will positively impact your credit score. Building a credit history takes time, and there’s no quick fix.
If you don’t use credit — or use it recklessly — it’s impossible to achieve your larger financial goals like buying a home. With little or no credit history, you are considered to have a thin file, which makes obtaining credit harder.
The longer you’ve used an account, the better, but you must keep accounts in good standing by using them regularly and paying them on time.
How to start building credit
People often ask, “How do I start building credit?” It’s clear that having a long history of making on-time payments usually leads to the best credit score. But lenders won’t take a chance on you if you don’t have a credit history.
Improve your credit history by following these tips:
- Most lenders want to see at least two active credit accounts being used.
- You should use these accounts over a minimum of six months, but the longer, the better (two years is a good benchmark).
- Most creditors prioritize your most recent two years of activity over the rest of your report.
- Make payments on time to ensure that you are establishing a positive credit history.
- Use your credit card to pay for small subscription services such as Netflix or Crave, then pay your credit card promptly afterwards to build a manageable credit history.
- Your credit score may be lower if most of your credit accounts are new.
- If you have an older account, make sure you use it regularly to keep it active.
- Don’t open too many accounts or apply for too many at once.
- Over time, any negative information will fall off.
- Don’t be disheartened by the length of time it takes.
- Never, ever use payday loans: these are a major red flag on your credit report.
- Report rent payments to the credit bureaus using FrontLobby.
The fastest way to build credit is to apply for a credit card and make payments on time. But, if you are younger, have poor credit, or have only recently moved to Canada, you may not qualify for one.
Instead, apply for a secured credit card. This is the same as a regular credit card, except you must put down a deposit that determines your credit limit. Making payments on time is reported to credit bureaus like a regular credit card, which helps you build or rebuild your credit history.
Here’s a tip: not all lenders are equal. Major banks are considered “A lenders” and are given more weight by credit bureaus.
Your credit history makes up 15% of your credit score, so you are more likely to be accepted by a lender if you have a good credit history.
5. Use different types of credit
Did you know that if you only use a credit card, you’re missing an opportunity to strengthen your credit score?
When you have a mix of different types of credit, it can improve your credit score. There’s no perfect mix, but it helps to use a combination of installment credit and revolving credit.
Four different types of credit may appear on your credit report:
- Installment credit: making fixed payments over a set term, typically with interest. When you’ve repaid in full, you cannot reuse it. Examples include mortgages, vehicle loans, student loans and personal loans.
- Revolving credit: can be reused up to the agreed limit as long as the account is open and payments are made on time. Examples include credit cards and home equity lines of credit (HELOC).
- Open credit: you can borrow up to a specific limit, but you must pay every month. Typically, it’s a type of credit that facilitates the use of a service and allows you to pay at the end of the month. Examples include a mobile phone account or a utility bill.
- Mortgage loans: Mortgages are recorded separately on your credit report because they are different from regular installment loans. Interest rates can be fixed (never changes) or variable (can change).
For example, having a credit card (revolving credit) and a loan (installment credit) is more advantageous than just having a credit card.
Lenders like to see that you’ve successfully managed different types of credit accounts over time.
Not having a mix can hurt your credit score but don’t open an account you don’t need or can’t afford.
As long as you’re using various credit products responsibly, you can establish a positive credit history, boost your credit score and demonstrate to lenders that you are a versatile low-risk borrower.
6. Don’t make too many credit applications
Inquiries are worth 10% of your total credit score calculation and are useful to lenders because they record the frequency of credit applications.
Avoid applying for too much credit too quickly, and always check whether a company will perform a hard or soft inquiry before proceeding.
When you apply for credit, rent a property, or apply for a job, a lender may carry out a credit check. This is called a hard inquiry.
A hard inquiry negatively affects your credit score and remains on your credit report for three years, regardless of whether you end up being approved or denied. This means that anyone who looks at your credit report will see these inquiries.
Multiple hard inquiries in a short space of time can indicate to lenders that you are desperate for credit or in financial distress, thus making you high-risk. Try to space out credit applications, especially if you have been rejected recently.
Fortunately, credit bureaus combine inquiries for applications like mortgages and car loans if they’ve occurred in a short period of time.
So, if you are looking for a car loan and you’re making multiple applications to determine the best deal, be sure to do so within a short period of time, around two weeks or so. Although all the inquiries you make will appear on your credit report, only one will affect your credit score.
Beware that some credit applications, such as credit cards, are treated as individual hard inquiries, regardless of the timeframe.
However, some credit card companies, such as Capital One’s Quick Check, allow you to determine which credit cards you’ll be approved for before applying without affecting your credit score.
Soft inquiries, such as checking your credit report, do not affect your credit score. These are credit checks that only you can see.
7. Understand public records
Public records are pieces of financial information that appear on your credit report, but they are also on file with the government. Examples include court proceedings, liens, foreclosures, bankruptcies and consumer proposals.
This information is reported to the credit bureaus and appears on the public records section of your credit report.
Public records can negatively affect your credit score for many years. If you think it’s a mistake, you can raise a dispute with the credit bureau to have it removed.
8. Resolve accounts in collections
When an account is left unpaid, it’s passed to a debt collection agency. When this happens, you must liaise with the collection agency to resolve the debt.
An account in collections is reported with a credit rating of 9, which is the worst possible credit rating, with the damage appearing there for six to seven years. As a result, this will lower your credit score.
How to improve your credit score when you have collections
If you have collections reported on your credit report, contact the collection agency to establish the amount owed and when the debt was passed from your creditor to the collection agency.
Always ask the creditor for proof that you owe the debt.
If you owe the debt, make arrangements to pay it. Not only does this stop further action, it means that you can request the information to be updated on your credit report.
Sometimes, the collection agency won’t report to the credit bureaus if you pay it off within a specific timeframe, so when you pay, make sure to ask them if this is the case.
Once the debt has been settled, ensure you obtain a receipt from the collection agency and send a copy to both Equifax and TransUnion so that they can update your credit report accordingly.
Keep this receipt or proof of payment in case you ever need to prove the debt was paid.
Paying off the debt will slightly improve your score. More importantly, you’re demonstrating to future lenders that you were responsible enough to contact the collection agency and pay off the debt.
9. Reduce your debt
If you have mounting debts and find it challenging to keep up with your monthly payments, do something about it before the situation spirals out of control.
If you have credit card debt, the interest and fees can cause your balance to skyrocket very quickly, so aim to prioritize debts such as these.
You may wish to pay off your debts with a low-interest consolidation loan. However, you’ll only be accepted if you pass a credit check. If you have a low score, you may want to consider a co-signer or use an asset as collateral.
If you have racked up a high balance on a credit card and are struggling to meet repayments, look at a balance transfer card with a low-interest rate to help save on your credit card debt.
After you’ve dealt with your debts, you’ll find it much easier to manage your money, allowing you to make payments on time and avoid creditor action.
Consequently, this avoids further damage to your credit score.
10. Budget and save money
Budgeting is essential because it allows you to plan to pay your bills on time while saving money.
After you’ve subtracted monthly expenses from your income, such as rent or mortgage, car payments and utilities, you’ll be able to set limits for other expenses like groceries, transport and entertainment.
Track what’s going in and out of your bank, set up automatic bill payments and live within your means.
How does this benefit you? Simple: saving money offers a safety net for use in emergencies or if you’re behind with a bill payment. Having savings also allows you to make a down payment when applying for credit.
The best way to save effectively is to use a separate savings account. Consider using an RRSP to build a nest egg while reducing your income tax.
See also: How to save money in Canada
Bonus tips to improve your credit score
Your credit score changes regularly
It’s normal for a credit score to go up and down. As discussed earlier, many factors affect your score, so don’t panic if your score changes.
Each credit bureau and company uses a slightly different scoring model, so your score will differ slightly depending on who generates it.
Fortunately, you can improve your financial literacy and ensure a healthy credit score by doing all the responsible things we’ve discussed in this guide.
The higher your credit score, the higher it can drop
When you have a high credit score, missed or late payments will cause a larger drop than someone with a lower score. So, it’s important to make payments on time and avoid an account going to collections.
Beware of identity fraud
If your credit score takes a massive drop, this could signify identity fraud. If this happens, do the following:
- Access your credit report and look for anything suspicious such as accounts that you don’t recognize.
- Review your statements and bank account activity for suspicious transactions.
- If you find something, report it to your bank and lender immediately and cancel the affected card.
- Update your online passwords if necessary.
- Contact the police and report the incident to the Canadian Anti-Fraud Centre.
You’ll want to monitor your credit score as much as possible to ensure this doesn’t happen again.
Consider using an identity protection product that alerts you when something changes on your credit report.
These are offered by the major credit bureaus and some credit providers.
Use a secured credit card
One way to improve your credit score is by establishing a consistent payment history with a credit card. If you are having difficulty being approved for a credit card, consider using a secured credit card.
A secured credit card is guaranteed to be accepted with all the benefits of a regular credit card, but you must secure funds by making a cash deposit. Your deposit usually determines your credit limit. For example, if you deposit $400, you’ll typically be given a limit of $400.
Purchases are not deducted from your deposit, and you make repayments like a regular credit card.
A secured credit card can help you establish or rebuild your credit because it reports payment activity to credit bureaus. As long as you make payments on time, you can use the card to improve your credit score.
Here’s a tip: prepaid cards do not help build your credit history.
Joint credit cards impact your credit score
If you are a co-signer on a credit card, any activity by either person will impact your credit score, good or bad.
Use older accounts regularly
If you have an older account that you haven’t used for a while, such as a credit card, start to use it again so a record of this activity can be added to your credit history.
The average account age on your credit report is a positive factor in determining your credit score. As long as you use the account responsibility, this will help your credit.
Credit card usage tips
Credit cards can be dangerous if not managed sensibly.
- Don’t use credit cards if you don’t have the income to cover it.
- Use your credit card only for pre-planned expenses.
- Live within your means and set budgets.
- Ensure you are receiving the best rate available.
- Performing a balance transfer (using a credit card to pay the debt on another credit card) could save you money.
- Stay within 30% of your available credit limit.
- Try to pay your statement in full by the due date.
Frequently asked questions
How long does it take to improve your credit score?
Unfortunately, you cannot improve or repair your credit score overnight. How long it takes depends on much negative information is on your credit report — it could take months, or it could take years.
The good news is that your lenders report account behaviour to your credit report every thirty days, meaning there’s a chance that this information could boost your score fairly quickly.
What’s more, you can take steps now to nurture your credit score.
It’s best to review your credit report to check for negative information such as late payments and collections. You’ll want to get a copy of your credit report from both major credit bureaus in Canada — Equifax and TransUnion.
If you’ve ever been bankrupt or entered into a consumer proposal, it will appear on the public records section of your credit report. A first-time bankruptcy will appear for at least six years. A consumer proposal will appear for three years after completion (or six years from the date you filed your proposal — whichever comes first). While each will lower your credit score, dealing with your debts will benefit your credit in the long run.
As discussed earlier, the five pillars of a good credit score are:
- Making payments on time.
- Keeping credit balances less than 30% of your available credit.
- Building a long credit history using a variety of credit.
- Limiting the number of credit applications made.
- Ensuring there are no negative public records.
After you’ve completed these steps, you’ll find that your score should improve.
How much credit should you have?
There’s no magic number of credit accounts, but most lenders want to see at least two active credit accounts being used responsibly over a minimum of two years. The longer your credit history, the better. Too many accounts can damage your credit score.
When using credit, you should aim to keep your balances less than 30% of your available credit and ensure that you always make payments on time.
Can someone have no credit score?
If you have never used credit or you are new to Canada, you won’t have a credit file yet. So, you won’t have any credit score.
I have no credit score, what do I do?
A secured credit card is an excellent way to start building credit.
It’s easy to get one. You make a deposit equal to your credit limit, but purchases are not deducted from it. Instead, you make payments like you would with a regular credit card.
Payment activity for a secured card appears on your credit report within a month or two. Simply make on-time payments, and your credit score will improve.
Your bank or financial institution may be willing to take a chance on you by offering you other credit-building products. Inquire to find out more.
How many credit cards are too many?
There’s no exact answer to this question, but too many credit cards can impact your credit. However, having no credit cards can also negatively affect your credit. Instead of thinking about how many, consider why you need a credit card and the benefits it may bring.
Pay particular attention to whether the card has a low APR, making it affordable to use. Sometimes a credit card rewards you with cashback incentives or air miles when you use it. You might solely use another card to build credit until you can access better credit products.
Once you’ve established whether you need it, you can decide whether to keep the card. If you want to ensure a credit card is beneficial to your credit score, make sure you use it regularly, or it won’t report positive information to the credit bureaus.
What happens if I have missed payments on a credit card?
If you miss a payment on a credit card, it’s only reported as late when you don’t make a payment within 30 days.
So while you may be charged a late payment fee, your credit score won’t be affected if you make a payment a few days late.
You’ll find that the longer you don’t pay, the worse it is for your credit score.
If you don’t pay within 30 days, your credit score will be affected. Further damage to your credit score occurs when you don’t pay within 60 days, 90 days and 120 days. This information is recorded on your credit report.
As mentioned earlier, you may also be charged a late fee, and you may see an increase in your credit card interest rate due to not making payments on time.
Mortgage and credit scores
A mortgage is one way to show financial stability to lenders and boost your credit score. According to Equifax, successfully managing a mix of credit such as credit cards, loans and mortgages will have a positive impact on your credit score.
Do credit repair companies in Canada work?
No, companies that offer credit repair services are scams. Only you can improve your credit score by being a responsible borrower. Make payments on time, keep credit balances low, establish a long credit history and don’t apply for credit excessively.
By following this guide, you can take steps to improve your credit score, giving you the freedom and convenience of access to credit when you need it.
Having a good credit score gives you a better chance of borrowing money while also benefitting from the best interest rates. You can also achieve your financial goals like getting approved for a mortgage or car finance.
While your credit score is vital, companies consider other factors, such as your income and employment.
Despite its hype, your credit is not the most important factor when improving your financial health. First and foremost, ensure that you have enough money to live on by budgeting your money and saving for the future.
However, credit does make life easier. The next step is to check your score.
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