Your credit score is more than just a number. A low score will impact your ability to qualify for a mortgage, get access to the best interest rates on the market, and will stand in the way of other important milestones you might encounter, like getting a line of credit for a master’s degree or a car loan.
Credit scores range from 300 to 920. If you have a credit score over 700, you’re in an excellent position to access a wide range of mortgage products. If your score is less than 650, you will run into issues qualifying with traditional lenders. Unfortunately, your lender doesn’t care if you’re a nice person who just found their dream home, with enough cash to bankroll it. Before handing an obscene amount of money over to you, they need the assurance that you won’t royally screw them over. Enter the credit check. “With a good score, you’re showing that you’re a good credit risk for the lender,” says Laurie Campbell, CEO of Credit Canada Debt Solutions.
If you’re thinking of buying a house in the next year or even a couple of years, Campbell suggests checking your credit score, right away — so you have time to course correct, if needed. I spoke to Campbell and Liz Schieck, a financial planner with the New School of Finance, for actionable steps you can take to boost your credit score.
DO: Make sure you’re building credit in the first place.
Before your lender gives you money to buy a house, they need evidence that you’re in the habit of repaying debt. “If you’re 30 and have never owned a credit card, lenders will be like, ‘What’s up with this person?’ They don’t know how you’re going to behave when you have access to debt,” says Schieck.
Luckily, you don’t have to spend a fortune on your Visa to build a healthy score. If you’re starting with a clean slate — for example, you’ve never owned a card before or you’re a new Canadian — it doesn’t take long to start building a healthy score. As long as you start paying for at least a few small transactions on a credit card (whether that’s a monthly internet bill or restaurant tab that gets paid off in full when you get home), you can start building good credit in less than 12 months. It’s not about how big the payments are, but rather that your bills are punctually paid every time.
If you recently declared bankruptcy, or have another insolvency on your file, it’s going to stay on your record for six years. This will certainly affect your credit score, but it doesn’t mean you should bury your head in the sand. Following these tips will help you trend in a positive direction, so you’re moving forward, not backwards.
DO: Have different kinds of debt (it’s actually a good thing — for once).
Having at least one credit card is essential to building credit, but you get bonus points for staying on top of a diversity of debt — whether that’s a car loan payment, a line of credit, a student loan, etc.
“It’s not to say that you should go and apply for debt you don’t need just to have that diversity,” says Schieck. “But if you’ve had various kinds of debt and you’re on top of payments, it helps your score because it shows you know how to handle debt in a multitude of ways.”
Cell phone and internet bills are also factored into your overall credit score — so don’t ignore them when the monthly bill rolls in.
DO: Bite the bullet and check your credit score — ASAP.
So, you’re using a credit card, and maybe you have a diversity of debts. Next, it’s time to check your score by pulling your report from one of the two credit bureaus in Canada — Equifax or TransUnion. There’s a myth floating around that your credit score goes down every time you check it. While rates do fluctuate slightly for relatively mysterious reasons, checking your score isn’t one of them.
DO: Dispute any mistakes on the credit report.
The quickest way to improve your credit score is to dispute mistakes, if there are any. “I encourage people to check not just their score, but read their full-on credit report, because there can absolutely be errors in there,” says Schieck. Aside from misinformation (for example, they’ve mixed you up with another dude named John Smith), there might be problems on your file that you didn’t even know existed — like an unpaid bill from five years ago. Schieck recently disputed a modem that Bell claimed she’d never returned. “I ended up going through a long, lengthy process to dispute it,” she says.
“If you find something that you’re not sure about, usually you go to whoever the account was with first. If they can’t help you, you go to TransUnion and Equifax to dispute it next,” explains Schieck.
DON’T: Close your old credit cards with history.
“The longer you’ve had an active credit account, generally the better it is for your score because they can see a real length of history,” says Schieck. Maybe you want to cut up your old card and trade it in for one with stellar Aeroplan points. The problem is that when you cancel a card you’ve been successfully repaying for a long period of time, you eliminate that history and start from scratch. If you’re sick and tired of paying annual credit cards fees for cards you don’t want to use anymore, try calling the provider to see if you can negotiate a no-fee or lower-fee plan.
DON’T: Open new credit cards all the time.
On the other end of the spectrum, you can get dinged anytime you open new cards.
“If you’re applying for a bunch of open credit, what it tells potential creditors is that you’re shopping for credit, and that doesn’t look good,” says Campbell.
DON’T: Increase your credit limit just to look good (because it won’t necessarily work).
“A lot of people think the more credit they have, the better their score is going to be,” says Campbell. “But it can actually work against you. For example, you may have five cards, and the total spending amount on those cards is $30,000. Even if you have zero debts, a creditor could say, ‘Well, you’re a risk, because you have the potential to get into $30,000 of debt.’”
That said, if you currently have a lot of outstanding debts, it could help to increase your limit, since creditors look at the proportion of your debt in relation to your spending limit. “If you are appearing to be basically maxed out — for example, you have a $10,000 card and you’re carrying $9,500 on it, then it’s bad for your credit score,” says Schieck. “If suddenly the credit limit goes from $10,000 to $20,000, now you’re carrying less than 50 percent, which can be a good move.” But Schieck stresses that this plan will easily backfire if you max out again. If you have trouble with credit and know you’ll spend it if you have it — avoid this strategy at all costs.
DO: Pay off outstanding debts in full, if you can.
In an ideal world, you pay your bills off in full every month. Credit cards charge a lot of interest (upwards of 18 percent), so it’s not in your best interest to leave high-interest debts hanging around.
DO: If you can’t do that, always, always, pay at least the minimum.
“If you’re not, you have a bigger problem than your credit rating,” says Campbell.
DON’T: Try to negotiate with creditors to clear your record.
Maybe you’re trying to buy a house and you happened to have a business bottom up half a decade ago. It’s destroyed your credit score, even though you haven’t had a discrepancy since. Can you get on the phone with Equifax and ask them to remove it from your record? The short answer is no. “It has to be a true history of what’s going on,” says Campbell. “If you could negotiate it, it’s really not a solid process.”
That said, there are some strings you can pull to help you pay down debts with creditors. “I’ve absolutely seen people negotiate with their lenders on individual pieces of credit,” says Schieck. Unhappy with your interest rate? Ask them to bring it down. Want to dispute a missed minimum payment? Bob’s your uncle! “I think we often forget that we’re the customer,” says Schieck.
DON’T: Fall prey to credit repair scams.
There are scams out there that claim to help you repair your credit. Stay away. Unfortunately, it’s a slow and steady race to boost bad credit — by making punctual payments over time. “Don’t fall victim to these companies that will try to charge you thousands of dollars for absolutely nothing,” says Campbell.
DON’T: Stress out if you miss the odd payment.
No one is perfect all of the time, and creditors understand this — I, for one, am not interested in meeting the one person out there with a 920 credit score. If you’re a pro at making payments every month, and then you run into a hard month or two or miss a bill by accident — it won’t make a notable dent in your overall score.
The trouble shows up when it becomes a pattern. One missed payment in an otherwise perfect record is no big deal. If you’ve missed four payments in a row, it’s going to show up as a delinquency. Pay it off as soon as you can and the creditors will be satisfied.