By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, November 26, 2022
Due to inflation, the cost of living has increased significantly and has affected the monthly cash flow in many households. As a result, some individuals are using their credit cards to help them manage costs.
Your credit score (also known as your beacon score) is a three-digit number that lenders use to predict your creditworthiness. Credit scores range from 300 to 900 points. The higher the score, the better, as it represents to the lender a lower risk and that you are less likely to become delinquent on credit. Credit reporting agencies calculate your score based on your payment history, how much you owe, how long you have had credit and how often you apply for new credit.
Since your credit score and credit report are constantly changing, it’s important to review them on a regular basis, at least once a year. There are two main credit reporting agencies in Canada — Equifax and TransUnion — and it’s a good idea to check your records with both companies. When you request your own credit report, it won’t affect your credit score. By checking it, it will help you identify and correct any inaccurate information, detect any fraudulent activity and gauge your overall credit health. The following are several steps to help you have a high credit score and to stay in control of your finances.
1. Components of the credit score
• Payment history (35 per cent): Each month you pay your bills on time is positive to your account. You receive bonus points every year that you continue to pay your accounts on time. You will lose points if you have a late payment, collections, a foreclosure or a judgement placed on your report.
• Utilization (30 per cent): This refers to the balances you have on each credit card. This is the fastest way to increase your credit score in a short period of time. You get the maximum amount of points when your balance is one to nine per cent of your available credit line. You gain points for every 10 per cent you reduce your debt, so if you go from a balance of 80 per cent to 40 per cent of your credit line, you will also gain points. It’s also important that you only have balances on about half of your credit cards.
• History (15 per cent): You receive points every year that you have a positive trade line open.
• Inquiries (10 per cent) If you have too many inquiries into your credit score, you will lose points in your score. Inquires remain on your report for two years, however they stop deducting points for those inquiries after one year.
• Mix credit (10 per cent): This refers to the different types of credit: Mortgages, car loans, credit cards, and student loans. You will gain points by diversifying your credit file and using another type of credit.
2. Timeline
Credit bureaus update your scores daily based upon the information given by your creditors. Therefore, if you substantially pay down your debt, make sure you have a good mix of credit, pay on time and don’t open too many new lines of credit at once.
3. How to build up credit history easy and fast
• Open one or two credit cards. If you can’t get approved for a credit card, try a secured card. It’s easy. Secured credit cards require a small savings account that will usually secure the entire credit line on your new card.
• Use your credit card to make daily purchases instead of using cash or debit card. Don’t use it as a form of financing, but as way of payment. Pay the total balance at the end of the month to build up your credit and avoid paying interest.
• Always pay your other bills on time such as hydro, rent, and especially your cell phone. Cell phone companies report your cell phone bill to the credit bureaus, so make sure you pay them on time.
4. How to improve your beacon score
• Pay off any outstanding balances immediately on loans and credit cards. If you have a lot of debt and want to pay some of it off, you should consider debt consolidation.
• Always pay your credit cards and other loans on time. A late payment on a $10 bill will have same impact on your credit as not making a $1,000 payment will. Credit is based on trust, no matter what the amount is.
• Never exceed your credit limit.
5. Planning on buying a new home or getting a loan?
If you are planning on applying for a mortgage or a loan, it’s especially important to check your report a few months in advance. To maintain a good credit score or if your score is lower than you would like, here is how to raise it.
• Pay all your bills on time. Paying late or going into collection can reduce your score.
• Make sure your credit limit appears. If your credit card limits aren’t listed, your cards are assumed to be maxed out, which damages your credit score.
• Staying within your credit limit. By staying below 65 per cent of your limit, it will help you maintain a higher credit score.
• Pay past due accounts. Delinquent accounts reduce your score more than anything else. Pay these accounts first.
• Don’t close credit cards. Credit score software totals your available credit limits across all your cards. If you close an old card, suddenly you have a lower total limit, which means your credit-to-debt ratio is higher. This drives down your score. Only close old cards if you have no self-control.
• Keep old credit cards active. The longer you have had an account open, the less likely you are to default on it, and the higher your credit score. But it’s not enough to simply keep old accounts open, you must use the card, even if it’s only once every six months.
• Don’t apply for credit you don’t need. Too many inquires over a short period can reduce your score. When using a mortgage expert, only one credit report will be pulled, and it can be used to go to various lenders.
• Correct any negative inaccuracies on your credit report. Inaccuracies can increase your score.