Easy Tips to Help You Build a Strong Credit Score

October 07, 2021

Easy Tips to Help You Build a Strong Credit Score

Almost every financial decision you make will affect your credit score at some point, which means it’s important to understand & build a strong score.

Why? Having a poor credit score Canada will prevent you from taking out a loan or borrowing money, which could prevent you from financing a business, purchasing a home, financing a vehicle, or taking out a tuition loan.

As Alyssa Davies of Mixed Up Money explains:

“If it were a sport, a credit score of 650 would get you in the game. 800 would get you on the starting lineup and 850+ would make you an all-star.”

Building a good credit history will set you off on the right path, help support healthy financial standing, and ensure you have access to credit when you need it.

Let’s go over top tips to help you build and maintain a strong credit score in Canada.

1. Understand Your Credit Score

Understanding your credit score is the first step towards building a strong financial foundation in Canada.

You can’t improve what you don’t understand, so let’s start with the basics.

What Is A Credit Score?

Your credit score is a numerical representation of your creditworthiness, ranging from 300 to 900. The higher the score, the better your creditworthiness.

This score is calculated based on several key factors: payment history, credit utilization, length of credit history, types of credit in use, and recent credit inquiries. 

By understanding how these elements contribute to your credit score, you can take informed steps to maintain your score, or take steps to repair it if it falls.

How To Check Your Credit Report

Checking your credit report is a simple way to understand your personal credit score and keep an eye on what’s affecting it.

In Canada, you are entitled to request a free copy of your credit report from the two major credit bureaus, Equifax and TransUnion. 

There are even online services like Credit Karma that offer free access to your credit report and score, along with monitoring tools to help you stay on top of changes. 

When you receive your credit report, review it carefully for errors such as incorrect personal information, accounts you did not open, or late payments that you believe were made on time. If you find any inaccuracies, you can dispute them with the credit bureau by providing supporting documentation. Regularly checking your credit report helps you catch potential issues early, protect against identity theft, and ensure that your credit information is accurate.

Plus, building a habit of checking your credit report will help familiarize you with the different areas affecting it, and keep you on track month-by-month.

2. Only Borrow What You Can Afford

Managing your credit score can be a challenge if you over-borrow, which is why one key tip is to only borrow what you can afford.

Prioritizing responsible spending and timely payments will pave the way for a healthy credit history, opening doors to favourable loan options for important investments like business ventures, home purchases, vehicle financing, and education loans. 

In a nutshell: don’t borrow lightly. Even seemingly easy loans or credit cards can add up and make it difficult to make payments, leading to long-term effects on your credit.

3. Pay Your Bills On Time

Paying your bills on time is a simple but effective habit that demonstrates your reliability and financial responsibility to lenders, and supports your credit score.

Timely payments not only help avoid late fees and penalties but also contribute to boosting your creditworthiness over time. By consistently meeting payment deadlines for loans, credit cards, utilities, and other financial obligations, you can maintain a good credit score. Even if your credit score is not ideal right now, making on-time payments can help you build it back up!

Every on-time payment is a step towards building your score, and ultimately securing better loan terms and opportunities for the future.

Quick Tips To Never Miss A Payment

You’d be surprised how many missed payments are just about forgetfulness or lack of systems!

A tiny bit of work up front can set you up for success, and allow you to meet all your payments without even noticing it:

• Set up automatic payments or reminders for all of your bills.
• Stay organized by creating a budget and tracking payment due dates.
• Prioritize payments based on their due dates and importance to prevent any oversights.
• Consider utilizing online banking tools or apps to streamline the payment process.

4. Don’t Open Too Many Accounts

Did you know that opening or applying for a credit account, such as a loan, typically causes a “hard inquiry” on your credit report?

A hard inquiry can cause a negative impact on your score, and a high number of inquiries can indicate instability to lenders.

Opening unnecessary accounts can also negatively impact your credit score by lowering the average age of your accounts, so being selective and strategic is key.

Focus on maintaining a manageable number of credit accounts that align with your needs and repayment capabilities. The same rule that we talked about previously applies here: don’t borrow lightly.

If you need to open a new account, be mindful of when and why you’re opening it. Prioritize quality over quantity when it comes to your credit portfolio to optimize your credit-building efforts effectively.

Avoiding the Cycle of Debt

One danger of opening up too many accounts is what’s called “the cycle of debt”. Essentially, this refers to opening up a new credit to pay off a current debt. This decision should be avoided, as it could lead to a cycle of debt that’s extremely difficult to get out of. The cycle of debt can cause damage to your credit score that takes a long time to repair, so it’s another reason to consider loans very carefully.

💡 Reminder: Any lender that encourages this kind of cycle may be predatory, and you should be cautious about engaging with them. Always read the fine print and get a second opinion before opting for a loan you’re unsure about.

The Importance Of Improving Your Credit Score

Building a strong credit score in Canada can help you get access to better loan and credit card offers with lower interest rates and higher credit limits.

It can enhance the ease of getting approved for mortgages, car loans, and rental properties, and even result in lower insurance premiums, better job prospects in sectors where credit checks are part of the hiring process, and reduced security deposits for utilities and services.

It also provides access to premium credit card rewards and benefits, ensuring financial security and preparedness for emergencies, ultimately contributing to long-term financial stability and peace of mind.

All in all, having a good credit score is key to healthy finances, and the good news is, you’ve already completed the first step of learning about your credit score and understanding how to build it.