Improving Your Credit Score
In 2021, improving your credit score is more important than ever. Many Canadians are feeling the financial consequences of Covid-19 and are therefore needing more loans from banks. The problem is unless you have a good credit score, these loans are going to come with a high-interest rate. Improving your credit score is not difficult so long as you make responsible loan decisions and stay disciplined in your spending and repayments. In this article, we're going to discuss what a credit score is, how you can hurt your credit score, how to improve your credit score, and the benefits of having good credit.
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- What is a credit score?
- What hurts your credit?
- Tips to improve your credit score
- The benefits of having good credit
What is a Credit Score?
A credit score is a three-digit number, typically between 300 and 850. It is designed to represent your ability to pay your bills on time, based on how you've paid them in the past. A low score shows potential lenders you’re at a high risk of missing or skipping payments, causing any loans you receive to come with high-interest rates. A good score suggests that you are a responsible individual. An excellent credit score can even help you get more loans at low-interest rates. You can find your credit score online and follow all of its changes over time so you can adjust your debt/spending habits if needed to keep it high. The higher your credit score, the more lenders will have confidence in your ability to repay a loan, and in turn, offer you a loan at a lower interest rate.
Take a look at credit score ranges:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
What Hurts Your Credit Score?
Many experts say that in order to be approved for financing, you should aim to have a credit score of 650 or higher. This isn’t to say you can’t get a loan with a credit score under 650, but if you do, that loan will likely carry a high-interest rate. There are many reasons you may have a credit score below 650, below are some of the most common reasons.
1. Missed or short payments: If you miss making your loan repayments or don’t make your repayments in full, this will undoubtedly negatively affect your credit score. Be sure to pay your loans back in full and on time.
2. Starting or canceling too many accounts: If you activate or cancel many credit cards or other forms of loans, this will negatively impact your credit score. Only consider getting credit help if you have the means to pay it back.
3. Bankruptcy: While filing for bankruptcy is sometimes the best option to get your finances back on track, it will negatively affect your credit score and your overall ability to be approved for a loan.
4. Hard hit credit checks: Whenever you apply for a loan, lenders do what is known as a hard hit credit check. Every time they do a hard hit, it negatively affects your credit. So while it is completely necessary to do if you’re looking for a loan, avoid applying to multiple lenders at once because it will require several hard-hit credit checks, and in turn lowering your credit score.
All of these factors will inevitably lower your credit score so it’s important to be aware of them when dealing with credit. It doesn’t take long to negatively affect your credit, but it can take a long time to build it back up so ensure your handling your credit responsibly.
How To Improve Your Credit Score
In order to build your credit, you need to apply for credit or have credit and show lenders you are a responsible borrower. It’s important to have certainty that you’ll be able to repay any loans you apply for in order to rebuild your credit. Below are a few tips to help you improve your credit score.
Make payments on time: Being able to make your payments on time and in full is one of the biggest factors in determining an individual’s credit score so it’s critical that you repay all of your loans as per your loan agreement. Find a way to appropriately budget your income with your debt so you’ll be able to make your payments on time.
Pay off previous debts: This is similar to our last point, but it’s critical you pay off any of your outstanding debts before applying for other loans. If you overwhelm yourself with loans, you’ll only worsen your credit score. So before you apply for a new loan, be sure your outstanding loans are taken care of.
Use your credit card/increase credit limit: Using your credit card responsibly by making your payments on time and in full is a great way to improve your credit health. For example, if you’re grocery shopping every Tuesday, pay with your credit card. This is called credit utilization and it’s a big factor in calculating your credit score. A good rule of thumb is to not exceed more than 30% of your credit limit, if you are consistently going over 30% of your limit, consider increasing your credit limit.
Variety in your credit: Having a variety of credit products helps improve your credit score. So if you can responsibly manage to have a mortgage, car loan, personal loan, and credit card, this is a great way to build up a credit history and credit score.
The Benefits of Having Good Credit
Lower interest rates: Having a good credit score shows lenders that you’re a low-risk borrower. The more confidence that the lender has in your ability to repay the loan, the less they feel the need to give you that loan with a high-interest rate. For the lenders, they need to feel that the risk/reward benefit is worth it so if they feel like you are not at risk of missing payments, they’ll likely give you a favorable interest rate.
More Likely to be Approved for Loans: This point ties into the point above, any lender will feel much more willing to lend a borrower money so long as he/she has a good credit history.
Increased Loan Amounts: The higher the credit score, the less the lender worries about the borrowers’ ability to repay the loan. So having a good credit score will give the lender confidence in giving you a higher loan amount.
Looking for a Car Loan?
If you’re looking for a car loan, you’ve come to the right place. Car Loans Canada helps thousands of Canadians get behind the wheel of their dream car. Check out our rates page to see our list of lenders’ current rates. Once you’ve seen the rates, check out our car loan calculator to get an estimate of your monthly payments. Once you’re ready to get pre-approved, complete our application!