How to improve your credit score this spring

Are you trying to improve your credit score? Working to bump up your credit is a common goal amongst Canadians. Your credit score can play a crucial role in your ability to do many things, including buying a home. As you likely know, your credit score can range from 300 to 900, according to Equifax. Scores above 660 are considered good, with “very good” and “excellent” scores sitting at 725 and 760. Scores below that 660 threshold can often use some improvement. Whether you already have good credit and you’re simply trying to make it better, or you’re starting from further down the scale, here are some common strategies to help you improve your score.

Always pay at least the minimum amount

It’s a common misconception that when paying off debt, you should prioritize those with the highest interest rates, even if it means neglecting your lower interest debts. The thought behind this reasoning is the quicker you can eliminate your high-interest debt, the less money you will owe in the long run. However, delayed or missed payments can result in hefty penalties, even for low-interest debts. This means the amount you might save by paying off those high-interest debts will likely be balanced out by the costs of ignoring your other payments. We recommend paying the minimum amount on all of your debts before paying extra on specific ones. By covering the minimum payment, you are avoiding potential penalties. This will help you improve your credit score, because it will show you have a history of reliable payments. If you can afford to pay more than the minimum on high-interest debts, go for it, but make sure you have covered your bases first!

Make a point of paying on time

As we mentioned above, late or missed payments can result in penalties. These in turn might affect your credit score for the worse. If your credit history shows periods of spotty payments, it will reflect poorly on your score. Be sure to always make your payments on time. Often, late payments are a result of disorganization and forgetfulness, and not necessarily an inability to pay. If this is the case, the good news is it is easily preventable. You can set reminders for yourself on your phone or in your calendar when your due dates are approaching. You might be able to set up auto deposits, which will eliminate the need to manually make your payments. Whatever method works best for you, use it to hold yourself accountable.

Be cautious with credit limit increases

Increasing your credit limit has the potential to both help and hinder your credit score. If you currently use $2000 of a $4000 limit each month, your credit utilization ratio is 50 per cent. Generally, you want to keep this rate on the lower end. If you bump up your credit limit to $5000, and still only spend $2000, your radio is now down to 40 per cent. However, the important point to note is this only works if you don’t start using more credit as a result of your limit increase. If you suddenly start spending $4000 a month, you may find yourself in a spot where your payments are becoming too expensive. This will bring back the risk of missed or late payments, and the accompanying penalties. It’s hard for many of us to resist spending when we have room for it. If you fall into this category, we recommend leaving your credit limit as is. 

Reduce your utilization

We touched on credit utilization ratios above. This measures the amount of credit you owe versus your remaining balance. For many lenders, a ratio of 39 per cent or less shows good credit, and can help improve your credit score. This indicates you have room for more debt, such as a mortgage or other loan. The simplest way to lower your utilization ratio is to spend less. At least, you should spend less on credit. Try to use cash or debit accounts for future expenses, and avoid charging items to credit if possible. This will help your utilization deflate, which can help your credit score rise.

There are several ways to improve your credit score, and the method you choose will depend on your unique situation. Whether you are hoping to buy a home, secure a different loan, or just better your overall finances, there is a solution for you. If purchasing a house is on your radar, we encourage you to reach out to a broker as well! We can work with you to determine the best way to improve your credit so you can secure the right lender and mortgage product.

If you have any questions about your mortgage, get in touch!