Personal Finance

How to Improve Your Credit Score

by Erin Zorde
December 12, 2020
Lawyer & Real Estate Investor
December 12, 2020

Summary: How to Improve Your Credit Score

To improve your credit score, you need to take little steps which eventually amount to big results. A strong credit score will assist you in many ways (borrowing, rental applications, mortgage applications, etc.), so get started on these steps today.

What is a Credit Score?

A credit score is a number between 300-900 that rates your reliability and consistency as a borrower of money. Long story short, the higher the score, the better you look to lenders. To learn more about what exactly a credit score is, click here.

Monitor Your Payment History

Your payment history is, without a doubt, the most important factor for your credit score. To ensure that you’re working towards a strong score: 

  • always make your payments on time
  • make at least the minimum payment if you can’t pay the full amount owing
  • contact your lenders right away if you think that you can’t make a payment (you may be able to structure an alternative payment plan)
  • don’t skip a payment (even if the bill is in dispute, pay it as you dispute it so you can avoid a non-payment)

Use Credit Wisely

Never go over your credit limit and, ideally, try to use less than 35% of your available credit. So, for example, if you have a credit card with a $10,000 limit, don’t go over that limit as borrowing more than the authorized limit on a credit card can lower your credit score. Ideally, use less than 35% of your available credit as it’s better for your score to have a higher credit limit and use less of it each month. 

If you use a lot of your available credit, lenders see you as a greater risk. Unfortunately, this is true even if you pay your balance in full by the due date so it’s important to be mindful of this. 

To figure out the best way to use your available credit, calculate your credit usage rate. You can do this by adding up the credit limits for all your credit products.

For example, if you have a credit card with a $10,000 limit and a line of credit with a $20,000 limit, your available credit is $30,000. 

Once you know how much credit you have available, calculate how much you are using. Try to use less than 35% of your available credit (so, with the example above of the available credit of $30,000, try not to borrow more than $10,500 at a time, which is 35% of the $30,000). 

Another consideration to avoid using too much credit is to use a credit card that works best for your spending habits so you don’t have to use numerous cards. To learn what credit card might be best for you, check out the Modern Money Credit Card Rewards options.

Increase the Length of Your Credit History to Improve Your Credit Score

Remember your first ever credit card that you opened? Yeah, that one. Keep it open and keep using it (even for small amounts every so often). Why? Because the longer you have a credit account open and in use, the better it is for your score. Your credit score may be lower if you have credit accounts that are all relatively new, as your history with this new credit is limited. 

If you transfer an older account to a new account, the new account is considered new credit. For example, some credit card offers come with a low introductory interest rate for balance transfers. This means you can transfer your current balance to this new product. The new product is considered new credit. 

Limit Your Credit Applications/Credit Checks

It’s normal and expected that you’ll apply for credit from time-to-time. When lenders ask a credit bureau for your credit report, it’s recorded as an inquiry. Inquiries are also known as credit checks. 

If there are too many credit checks in your credit report, lenders may think that you’re urgently seeking credit or that you’re trying to live beyond your means. Either way, lenders won’t like seeing this. 

To control the number of credit checks in your report: 

  • limit the number of times you apply for credit
  • get your quotes from different lenders within a two-week period when shopping around for a car or a mortgage (your inquiries will be combined and treated as a single inquiry for your credit score)
  • apply for credit only when you really need it

Hard Hits” versus “Soft Hits

“Hard Hits” are credit checks that appear in your credit report and count toward your credit score. Anyone who views your credit report will see these inquiries. Examples of hard checks can include an application for a credit card or a rental application. 

“Soft Hits”, on the other hand, are credit checks that appear in your credit report but only you can see them. These credit checks don’t affect your credit score in any way. An example of a soft check would be checking your own score on TransUnion (more on this here).  

Use Different Types of Credit

Your score may be lower if, for example, you only have one type of credit product such as a credit card. It is better to have a mix of different types of credit, such as a credit card, line of credit and a mortgage. 

A mix of credit products may improve your credit score (assuming everything is paid on time), as it shows a more diverse credit history on your report. Before taking on different types of credit, make sure that you can make the payments for any amounts that you’re borrowing. If you can’t, you may end up hurting your credit score by taking on too much debt without having the means to pay it. 

About Erin Zorde

Erin is a co-founder of Modern Money, lawyer and real estate investor based in Winnipeg, Manitoba.

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