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How to Improve Your Credit Score

I’ve been getting quite a few emails from readers on how to improve credit scores. Improving credit scores is a well covered topic on the net. However, based on my experience, lets highlight some of the reasons why high credit score is important and some of the main ways to obtain (or maintain) a high credit score.

Why a Credit is Important

Your credit score is used more than ever to check your “lending risk”. Some examples include eligibility for mortgages, credit cards, an apartment, a chequing account, even getting a cell phone contract. Not only is credit used for qualifying, higher scores mean better rates on mortgages and loans.

Credit Score Tips

Through a few quick and easy steps, you can keep your credit score at the top levels:

  • Always pay your bills on time with at least the min required payment.
  • Keep your amount borrowed less than 50% of your total credit available.
  • Avoid applying for multiple credit products within a short span of time.
  • If cancelling credit cards, avoid cancelling the ones with the longer track records.
  • If retaining a high credit score is top priority, then avoid loan consolidation. The reason being is that your total credit available will decrease while keeping the total borrowed the same.

Building a Credit Score from Scratch

There are some who have made some credit mistakes in the past and are now attempting to rebuild a decent credit score. The catch 22 is that in order to build credit, you need credit, and lenders are hesitant to give money to people with lower credit. So what do you do?

  1. Get a secured credit card. These are credit cards that are secured with a down payment and are typically offered with lower credit borrowers. Obtaining one of these cards and paying it off regularly will help build a track record.
  2. Get a loan from a credit rebuilding agency/bank. The interest rates may not be optimal, but these loans are for the sole purpose of making regular monthly payments.

Do you have any credit tips?







28 Comments, Comment or Ping

  1. Home Equity Lines of Credit are becoming a problem for credit rating. If you have your whole mortgage on a HELOC, your total debt to available credit ratio will be near 100%. Therefore, your credit score will automatically dropped.

    We didn’t have this problem until recently in Canada since financial institutions were not reporting their mortgages and HELOC (to keep competitors away). However, they started to report them. I guess that major credit reporting agencies such as Equifax will change their calculation of the credit score in the future.

    BTW, if you ask for the same product at different institution in the span of 30 days, inquiries will show but not hurt your credit score.

    Low balance and payments on date on credit cards are the best tips to build a strong credit history since the credit card companies are reporting your credit behavior on a monthly basis.

  2. Great tips FB! I have my mortgage with BMO and i’m pretty sure it gets reported to credit agencies, which is unfortunate. However, I believe that the Firstline Matrix mortgage does not get reported for some reason or another. Might need to confirm with a mortgage broker for that one.

  3. 3. DELeskie

    It sounds to me like you can’t maintain a good credit score if you pursue the Smith Manouver?

  4. 4. Rod

    I had the same concern about a HELOC and have never really gotten a straight answer on whether they affect your score or not. If it does negatively affect credit scores, what is the alternative?

  5. 5. Daniel

    Avoid any long term contracts with phone or cable/satellite companies. If for any reason you have a dispute or try to change/cancel the contract it will affect your credit score,

  6. 6. Chuck

    I think you can keep a good credit score with the Smith Maneuvre – mine hasn’t changed. As long as you’re making your required payments your credit score would not be impacted.

    Where the SM is going to get you is on your capacity for additional credit. Most banks will look at your HELOC as if its maxxed out when calculating your capacity for new debt.

  7. Rod;
    There are no alternatives if you want a HELOC besides (maybe) getting it from a mortgage company (i.i. not a bank) or a credit union (I don’t think they report their home lines yet…

  8. 8. Elvis K

    The SM will affect your score because of credit utilization calculations by the scoring model through the bureaus, unless it doesn’t get reported which I think is highly unlikely.

    I am 23 years old and am actually a discharged bankrupt as of November 2007 as I had an illness……since then I already have a BEACON of 620 from building through a secured card. 620 isn’t great considering what we’re all shooting for, but for 8 months out of bankruptcy, I think i’m doing alright.

    My suggestion is get an RRSP loan, it builds you up at the banks because they think you are a saver and it gets you some ‘installment loan’ payment history. Plus you’ll get a tax refund you can use to pay some of it off. Not a bad deal. Also if you use it as a down payment on your first house, the RRSP withdrawal is tax free as long as you replenish it within 15 years…..I suggested that my brother do this (as I researched credit as I wanted to re-build from bankruptcy), and he did that twice (RRSP loan) and managed a 700 BEACON from scratch within 6 months, and ended up qualifying for the best mortgage rates available and car loan rates, just a few months back after only establishing credit for about 7 months.

    Just my input.

  9. yea yer best bet is to start out with what they offer, use it frequently, pay it on time, and be consistent.
    -Jake

  10. 10. sid

    Is there anyway to actually find out what my credit score is? I’ve looked at my credit report, which does not show your score, and I have a perfect payment history and my debt is about 10% of my available credit, but what score does that translate into? I have too many credit cards because the longer you keep them open, the better your score, right? And with the older cards, they keep increasing the amount of credit available without me asking them to. Does too much available credit hurt your score?

  11. Elvis K,

    The rrsp loan is a great idea since it’s easier to get than a regular loan. Just make sure that the loan is reported to your credit bureau. Some institutions tend to forget them since they are most of the time small and short term loans.

    Don’t forget that your credit score will also affect your rate on all kind of insurance (home, life, car, etc.)

  12. Sid, there are a couple ways to find your credit score. You can go on the site equifax.ca and pay to get your score. OR, if you have a mortgage broker friend, they can pull your score for you.

  13. 13. Elvis K

    FB,

    Yeah definitely, I told him to make sure everything is reported.

    Sid,

    Go here: https://www.econsumer.equifax.ca/ and here: http://www.transunion.ca …….these are the main two bureaus in Canada (although Experian is trying to get going here).

    As you can see they cost money, but the benefit is, you can review your credit reports and scores without getting an inquiry, which too many of those will kill your score. Yes too much available credit can hurt your score. Although it’s not being used it looks like in a time of emergency you could possibly overextend yourself financially. Too many credit cards are never a good idea, even aside from credit scores. Canadians have a ton of credit card debt, and the credit card companies like it that way. Interest is what lines their pockets.

    Just on a side note to everyone, if you ever go to a car dealership and test drive a car, they always ask for your license, NEVER give it to them, as soon as you do that, you’ve given them everything they need to run a credit check on you, and they will, even if you’re not buying a car, no sense in having that extra inquiry on there….I now know more than ever before that a great credit report sets up your future by either costing or saving you tens of thousands of dollars.

    So guard your credit file. I suggest checking it every 6-12 months to make sure everything is accurate. You’d be surprised at the percentage of credit reports that have errors, ranging from minor to major. You need every point so keep an eye on it folks!

  14. 14. Elvis K

    FT, it’s your site and all and I respect 99% of what you say, BUT I wouldn’t give advice to have a mortgage broker friend pull it, that’s an inquiry you don’t need unless you’re buying a house. In which case I suggest checking your score ON YOUR OWN 3-6 months before making any major purchases that way you have time to polish it up to qualify for a great rate.

    It may cost a little money to check it, but it’ll save you a lot down the road. This is one area I wouldn’t cut corners by having someone else pull it just to check.

  15. Why wouldn’t a HELOC count against your credit score – you are borrowing money.

  16. FP,

    the problem is not the HELOC itself. If you have a 200K mortage for example, you will be deemed to have a loan of 200K with a required payment (monthly for example). If you make your payments on time, your credit score will be good as the amount of the mortgage won’t influence much your credit score. Only your payment assiduity.

    However, if you have a HELOC. You will be deemed to have a line of credit of 200K maxed out. Therefore, even if you make your payments on time, you will still be deemed to use 100% of you available credit. Right now, this hurts your credit score.

    the mortgage doesn’t affect your total debt to available credit ratio, the HELOC does. This is why I think they should rethink the calculation of credit score.

  17. 17. Elvis K

    FB you hit it right on…I think the credit scoring model is flawed, not based on this though, this is 100% correct as 100% utilization is still 100% utilization even if you are trying to beat the tax man :)…. just one the many disadvantages of the SM, but with everything, you weight the positives against the negatives and make the best decision you can with the information at hand.

  18. 18. Cannon_fodder

    What about borrowing on margin at a broker? Is this easy for a credit bureau to see or is it somewhat ‘hidden’?

  19. 19. Faisal

    Margin does not seem to be reported, but it could vary from broker to broker. I was with Interactive Brokers for a couple years and my margin account has not shown up on any of my credit reports.

  20. 20. Brian

    Another alternative would be having money and not bothering with playing the credit game – that one always works well.

  21. 21. July

    I recently just got married and my credit is really poor. Will that also affect my husband’s credit rating also? Will it be hard for us to apply for a mortgage in the future??

  22. July, if your credit is really poor, it might be best for your husband to apply for the mortgage by himself. You should double check with a mortgage broker though to see what your options are.

  23. 23. Cannon_fodder

    Does anyone know how to rank themselves based on their credit score? I.E., I now know my credit score and my wife’s but I don’t know if we are a B+ or in the 25th percentile (or whatever other ranking metric you can think of) when compared to other Canadians.

    I’m trying to understand how a bank would view us and I presume they have various formulas based on credit scores.

  24. 24. Cannon_fodder

    I received this response on another forum which answers my question perfectly.

    “My Equifax credit report+score from August 2007 has the following:

    Score from 0 to 549: 4% of the population. Delinquiency rate = 78%
    Score from 550 to 599: 4% of the population. Delinquiency rate = 60%
    Score from 600 to 649: 6% of the population. Delinquiency rate = 39%
    Score from 650 to 699: 4% of the population. Delinquiency rate = 23%
    Score from 700 to 749: 19% of the population. Delinquiency rate = 12%
    Score from 750 to 799: 27% of the population. Delinquiency rate = 5%
    Score from 800 to 849: 24% of the population. Delinquiency rate = 2%
    Score from 850+: 5% of the population. Delinquiency rate = 1%

    A score of 650 or more should qualify you for most loans.”

  25. 25. dayLateDollarShort

    Greetings:
    This is a great Topic. The advice given here is to check your credit with Equifax or Transunion regularly. I would like to do this but I am confused as to which agency to use.

    1 – Do I need to query both sites? If not which one?

    2 – Do I have TWO credit scores, one at each agency?

    3 – Do they share information?

    4 – It seems to cost money to get credit information from them. Once again, what services should I consider? Each site offers different options ranging from 8 to 24 dollars as well as 15 dollars a month. I assume that I would double this in order to evaluate both my wife and I.

    Any Help would be appreciated.

    Thanks.

  26. 26. worried wife

    Hi,
    I see that all of you have good knowledge of credit scores. Please help with my current situation:

    My husband and I need to get a mortgage approval by July 2009 for our pre-sale home. We have about 28% down. So we’re borrowing around 290-300k.

    My husband has a really bad credit score (0, unavailable), but his income is a lot higher than mine. Approx. 58k. He has worked in this company for 3 years, and it’s a government subsidiary job. very stable.
    I have a very good credit score of 760, but my income is only 37k. so i can’t get the mortgage by myself.

    My husband’s current credit score is so bad that the bank won’t even issue him a credit card, we had to get him a secured credit card, which is a good start.

    How is it possible to increase his credit score in 10 months so we’ll get a mortgage approved for sure? Well, at least get a credit score high enough to get a mortgage approved.
    Will my good credit score help enough though he has the higher income?

    Please let me know!
    Thanks!!!

  27. 27. DAvid

    worried wife,
    You may be wise to speak with a number of lending institutions (both banks & credit unions) about your situation, and see their individual responses. If your husband has no credit score because he has not used any credit, then then get busy building his credit score by using credit wisely. If on the other hand, his credit score is poor due to past behaviour, then it may take longer to make a repair than you have before you need the mortgage and you will need to take other actions.

    Have you someone who can guarantee the loan, say a parent?
    Is there any support from the builder to carry the mortgage?

    You also might wist to speak to a non-profit credit repair organization for options for your particular situation.

    DAvid

  28. Pay your bills on time. This is always a good practice, and it’s especially critical that you make prompt payments close to the time you need a loan. That’s because a late or missed payment in the last few months is likely to lower your score much more than an isolated late payment five years ago.

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