Looking for a raise? Of course you are, aren’t we all? But I’m talking about a raise in your credit score!
In Canada, credit scores typically range from 300-900, with 700 and above considered good to great. (If you’re at a most-excellent 750 or above, you get a high-five!) And while it varies from province to province, TransUnion Canada reports that our nation’s average credit score is around 650. Respectable, but still a lot of room for improvement!
A low credit score makes you look risky in the eyes of lenders. For this reason, it can affect your insurance rates, ability to get a loan, and probably most importantly, your ability to get a mortgage. It can even affect your ability to get a job within certain industries where fraud or theft can be prevalent.
Unfortunately, a low credit score can’t be improved overnight; it takes time and effort. But there are some surefire techniques that can positively affect your credit score, it’s just a matter of prioritizing! So without further ado, here are my top 5 tips.
1. Check and dispute any errors
First things first: Checking your credit score is not the same as checking your credit report. The credit score is just a summation of the report with a number attached that tells lenders how much of a default risk you are. A report, on the other hand, will show you your history of payments, what types of credit you have, how much you're using, and more.
So to check for errors, you need to check your credit report. And why not? You shouldn’t be penalized for someone else’s mistake! If you see something that’s inaccurate, or simply just doesn’t belong, you’ll want to dispute it. You can contact the offending creditor directly, and if you’re able to resolve the issue with them you’ll need to ask them to contact the credit bureau to have it removed. Otherwise, you need to contact the credit bureaus directly (Equifax and TransUnion) and complete their process for correcting inaccurate information on your credit report, which can take some time.
2. Get current on missed payments
Unless you’re Cher, you won’t be able to turn back time and erase a history of missed payments. But, you can get up-to-date on current debts that have not yet gone into collection. Missed payments are a credit score killer, so taking care of those (again, before they’ve gone into collection) can work wonders.
3. Pay bad debts
You might be thinking, isn’t all debt bad? Not necessarily. Lenders consider debt good if it’s attached to something that's expected to grow in value, such as a home or an education fund. Of course, you need to maintain your payments on these as well, but they shouldn't be the focus to pay down to get a quick credit fix.
Bad debts are those you’ve acquired by purchasing items that aren't expected to appreciate in value over time. This includes credit card debt, personal loans, and long-term auto loans. Paying these down first is a win-win: lenders like to see less of them on your report, plus these types of debts likely have the highest interest rates too, so paying them down first will save you money.
Pro Tip: Once you’ve paid off a credit card, try to stop using it (of course) but do not close the account. Having unused credit improves your credit utilization ratio (credit available versus credit used) which factors heavily into your overall credit score. It also keeps your credit diversification level higher. Again, this is good because it shows lenders that a variety of creditors have offered you credit, but you’re not using it, so you can be responsible with credit.4. Pay debts in good standing
Some people looking to give their credit score a lift might start making payments on debts that have already gone into collection; surely taking care of these credit score eyesores first is your best bet, right? Wrong. Debts in collection have already done their damage; they will remain on your credit report for up to seven years, regardless of whether you’ve taken care of them or not. So while it’s a good move to eventually pay up, it won’t help you in the short term. For this reason, focus on paying down the debts in good standing so they don't end up in collections too, and further tarnish your score.5. Choose your payment strategy
Okay! Now that we’ve prioritized what should be done and what should be paid first, which method of payment should you take? There are two schools of thought on debt repayment: the snowball and avalanche methods.
The snowball method focuses on paying off the smallest debt first, regardless of the interest rate, while still making minimum payments on your other card cards and debt. So any extra payment you can make on top of your minimum payment goes towards paying off the smallest debt. Once that balance has been paid off in full, you move onto the next smallest debt, and so on, so your efforts “snowball” into faster debt repayment.
The avalanche method on the other hand focuses on paying off the debt with the highest interest rate first, while still making minimum payments on your other credit cards and debt. Once that debt has been paid off in full, you move onto the next highest-interest rate card, and so on. The idea is that by paying off the debt with the highest interest rate first, you're saving more money in interest, which means you can contribute more to your payments, knocking off more debt faster. The more debt you pay off in full, the more money you'll have to pay off your other debts.
So which technique is best for a short-term credit score boost? While many people who aren’t fixated on their credit score might prefer the snowball method, because it provides the psychological satisfaction of eliminating a debt quickly (and thus having one less debt to deal with), we typically recommend the avalanche method for a quick credit score fix. By paying down the card with the highest interest rate first, you slow down your debt growth due to the interest saved, which can help pay down other balances faster, thus improving your credit utilization ratio.
If you’re feeling overwhelmed and don’t know where to begin, you can speak with one of our caring credit counsellors. They can offer advice, point you in the right direction, or suggest a debt consolidation program if that's the right choice for you. Whatever you decide to do, we're always here to help you raise the bar on your credit score!