Is your low credit rating holding you back? Here are some handy tips you might want to follow
Credit scores undeniably play a crucial role in the life of every Canadian. Although it is common knowledge that banks check your credit score before giving you a loan, there are other reasons individuals and institutions ask for a credit score.
For example, if you want to rent a house, your landlord may ask for your credit history or credit score. For some people, employers ask for their credit history before assigning them job opportunities.
In Canada, credit scores range from 300 to 900, with 300 being the lowest score and 900 the best score. With a score of 300, you are considered a high-risk borrower when it comes to taking out loans or paying off debt. Banks can refuse to lend to people with bad credit or give them loans at higher interest rates.
This is why it is important to improve your credit score. If you’re struggling with a low credit score and want to improve it, the tips below will help you achieve that goal.
Pay off your existing debt
A low credit score is most likely due to not paying your debt when due, so this may seem like an obvious solution. However, paying off debt may not be easy if you barely have enough income to meet your recurring financial needs.
You can increase your earning power by freelancing, taking on extra shifts, and starting a low-cost side business. Having a budget helps you allocate part of your income to paying off your debts.
Have a plan to pay off your debts and stick to it. You can get a responsible partner to help you stay committed to paying off your debts.
Avoid taking on more debt
Resist the urge to take on more debt, especially high-interest debt. Adding more debt to your existing liabilities can make it harder to pay off your loans and pay off your credit card balances.
If you have a low credit score, chances are your new loans will be granted at a very high rate. Servicing high-interest debt can worsen your ability to repay both existing debt and new debt.
Reduce your credit utilization rate
What is the credit utilization rate? Let’s use this very basic example.
If your credit card has a limit of $5,000 and you consistently use up to $4,000 per month, your credit utilization rate is high at 80%. A high utilization rate suggests that you are heavily dependent on debt and can lead to a low credit score.
To improve your credit score, you should aim for a low utilization rate, leaving a large portion of your available credit limit untouched.
If you’re very good at managing your money and your bank offers you a higher credit card limit or line of credit, you can accept this credit limit increase to improve your utilization rate.
Some other factors that can affect your credit score are rigorous credit history checks, poor credit history, and closure of your credit accounts.
Credit bureaus rely on sufficient credit history to calculate your credit score. Closing your credit accounts or credit cards can hurt your credit score, but only temporarily.
If you continue to pay your debt when due, your score may still improve over time. Also, when lenders do a rigorous credit check on your credit, it may indicate that you intend to take on more debt. This, in turn, can cause your credit score to drop.
Monitor your credit report
Finally, you can periodically track your credit score to see if your score is improving. Monitoring your credit score and credit report at least once a year is a good practice. Your credit file contains information about the loans, lines of credit, mortgages and other debts you have incurred.
Some financial institutions allow you to check your credit score for free. If your bank does not offer a free option to check your credit score, you can use other platforms such as Borrowell to check your credit report for free.
Using debt responsibly, consistently paying off your credit balances on time, avoiding rigorous credit checks, and maintaining a good credit history can help improve your credit score.