Money & Career

How to improve your credit rating

It's not just a number – it’s thousands of dollars in potential savings. Follow these tips and polish up your score

1. Take it seriously
Even if you have a decent credit rating, you’re throwing money away if it’s not exemplary. Your rating, or score, sums up how much of a lending risk you are, and plays a huge part in how creditors decide whether they want your business and whether you’ll be able to get theirs. With a great score, you’ll be offered – and be able to negotiate – better deals: Those zero-percent car-financing bargains, for example, generally go only to those with spotless credit ratings. And better rates will save you thousands of dollars on everything from your mortgage to credit-card interest charges.

2. Play the numbers
Canada has two main credit-reporting agencies: TransUnion and Equifax. They analyze your financial history to create scores in an effort to predict your behaviour in 10 years’ time, based on how similar you are to those people who repay their loans promptly. Scores are measured from 300 to 900; you want to have a score of at least 650; one below that is considered “poor” or “very poor” and will make it hard to get credit. A score is labelled “great” if it’s above 750. According to Equifax, the average Canadian checks in at 751; TransUnion reports that 47 percent of Canadians have a score above 750 but also that 12 percent of Canadians have a score of less than 600.

3. Find out where you stand
To get the most complete picture of your credit rating, or if you’re about to ask for a loan and don’t want any surprises, check with both TransUnion and Equifax. They use different formulas, and since it’s impossible to tell which company your lender will contact, it’s best to review each of them. For about $30, they’ll email you a detailed report, which includes your score, your credit history for the past six years (essentially a record of whether or not you’ve made your bill payments) and an explanation of how you rank in the general population. Both companies provide tips for improving your score; if you really want to geek out, Trans­Union also offers a monthly subscription that lets you see your score anytime, along with pie charts and line graphs that track it over time and analyze other factors. If you need just the basics or want to check for mistakes or potential identity theft, you’re entitled to one free credit-history report – which doesn’t include your score – once a year.

4. Sweat the small stuff
When it comes to improving your credit rating, the one habit that will help you most is always making at least your minimum payments, on time. Agencies can’t see how much of your balance you’ve paid, but they can see if you hit the minimum – or if you miss payments entirely. “So many people say, ‘Oh, it’s only a $10 payment this month, I’ll miss it and make it next month,'” says Laurie Campbell, the spokesperson for Credit Counselling Canada, a nationwide non-profit agency that offers advice on debt repayment to consumers. “If you tend to do that every second or third month, you’ll have a spotty credit rating.” On the bright side, credit ratings are based on your financial behaviour in the past six years; any missed payments further back than that drop off your credit history.

5. Be debt-conscious
A common myth is that the more debt you qualify for, the better, says Campbell. “A lot of people make this mistake. But say I’m a potential creditor, and you ask me for a $10,000 loan. I look and see that you have six credit cards, with maximum limits on them that total about $40,000. You may not owe a cent on any of those cards, but I see that you could get yourself $40,000 into debt, plus whatever I give you.” Her rule of thumb is to use only one or two credit cards. (If you decide to cancel a few of your cards, terminate them in reverse chronological order, from the one you’ve had the least amount of time to the oldest; your score usually improves with a longer credit history.) After that, keep paying off your credit cards to lower your debt load (the amount of debt you are carrying compared with your income and assets). “Once you get above 50 percent of your credit limit, it can harm your credit,” says Tom Reid, the director of consumer solutions at TransUnion. He recommends keeping your balance to less than 35 percent of your limit. If you’re working on improving your score, put the credit cards away for a few months and pay off the balance to get that number as low as possible.

6. Reap the rewards
It won’t take you long to see an improvement; the good news is that most people can raise their scores in just a few months. “Most of this is common sense: Just go look at your credit report, see what you owe, and start paying it off as fast as you can,” says Mike Lofquist, marketing and communications manager for Equifax. “Everything’s going to improve.”

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