By Laurie Boudreau, Credit Counsellor, Creditaid
During the past 20 years, I have analyzed thousands of Canadian credit reports from Equifax and Trans Union and can tell you an interesting fact. People with the highest credit scores pay the least amount of interest. Why? Because the higher your credit score is, the lower the risk is for a creditor to lend you money. It’s the same concept as for why young people pay less for life insurance than old people pay. You are less likely to die when you are young. Same goes for credit scores. If you have managed your credit well chances are you will continue to do so, and the creditor will get their money back. This is why they are willing to offer you a low-interest rate.
If you have not seen your credit report recently, you need to do this now by going to www.equifax.ca and www.transunion.ca
You need to know what your credit report contains before you can take the steps necessary to improve your score. No matter how low it is today, the good news is that your credit score can go up very quickly. By following the steps below, you can dramatically increase your credit score within two years.
1. Starting today make all your payments on time.
One of the key behaviors that creditors like to see is on-time payment of bills. Since this is one of the strongest predictors of a consumer’s likelihood to make their payments in the future your credit score will be high if you have made all your payments on time.
2. Do you have any judgments or collections on your credit report?
Having this type of information on your credit history will impact your credit score no matter how small the collection is. So don’t ignore it even if it was not your fault. Save up at least 60% of the amount you the credit report says you owe and contact the collection agency handling the debt. Offer them a settlement. Chances are good they will accept it you can send them the money immediately. Make sure you get a receipt proving the ‘debt was paid in full’ or ‘settled in full’. In a month check with Equifax and Trans Union to make sure the debt has been reported as paid. If your credit report has not been updated, then fax in proof and ask them to update it. Check again in a month to make sure it has been updated. And always keep receipts to prove this in case a discrepancy arises in the future.
3. Do you have different types of credit accounts?
Credit reporting agencies look at the mix of different types of credit you have, such as credit cards, car loans, personal loans, lines of credit and mortgages. Creditors like to see that you’re able to manage different types of accounts and your credit score reflects this. If you have 3 or more different types of accounts, your credit score will be higher than someone who just has three credit cards.
4. Are your balances high relative to your total available credit limit?
Creditors prefer to see a lower ratio of how much debt you’re carrying compared with how much available credit you have on a particular account. What this means is don’t let your credit cards and line of credit balances be higher than 75% of your limit amount. If your limit is $1000, never owe more than $750. Using this strategy will help increase your credit score.
5. How many new credit accounts have you opened?
Be mindful of opening too many accounts at once. Credit reporting agencies look at how many new accounts you have as well as how many new accounts you’ve applied for recently. This may indicate you are planning on taking on lots of new debt which could indicate a greater credit risk. Creditors might think you are spending too much money (or racking up too much debt) if you apply for more than one credit product per month.
6. How old are your credit accounts?
In general, creditors and lenders like to see that you’ve been able to handle credit accounts over an extended period properly. So if you get a new credit card that gives you more points don’t cancel your old credit card that you’ve had for many years. Unless it has an annual fee of $75 or more. If there is a large annual fee, I’d personally cancel it. But if the card has a low annual fee or better yet, no fee, use it two or three times per year to keep it active. Your credit score will be higher because of it.
7. Nothing lasts forever.
This is true for both bad and more, unfortunately, GOOD credit. If you paid off your car loan six years ago and never had a missed payment, it will ‘fall off your credit bureau’ (that’s the lingo we use when we want to say it got erased from your credit file). So even if you had an excellent credit rating but have not had any recent credit, you may have a very low score or none at all. So it is important to keep one or two credit cards open plus a line of credit even if they are usually at $0 owing because they will help to maintain your high credit score just in case you need to apply for a car loan or mortgage in the future.
8. Don’t co-sign for anyone.
No matter how much you want to help your brother, friend or even your child, if they miss one payment, your credit score will go down. Likely you won’t be contacted by the creditor until 2 or 3 payments are missed. Even worse, these late payments will remain on your credit report for six long years. You are better off to give this person (or lend them) a down payment so they can qualify on their own rather than co-sign for them. When you co-sign, you are responsible for paying 100% of the debt if they default. So even if they are working now and assure you, they can afford the payment what happens if they get laid off or fired? You will have to make the payments for them. Another fact about co-signing- this will limit your future buying power especially if you want to get a mortgage.