How to Build Good Credit
by Thomas Hanes on Jan 30, 2021
Credit scores are Canadians' financial identity - it is the three-digit number that informs future lenders, creditors, or employers how financially responsible an individual has been. This score will present a person's ability to rent an apartment, buy their own home or vehicle, and qualify for loans at reasonable interest rates. Despite being such a crucial part of ascertaining any Canadian's quality of life, many are oblivious of their credit scores!
So what can you do to build up your credit score and ensure that there won't be blunders or interest rate snafu's when you want to take out a loan?
1) Know your Score
Understanding your credit score consistently allows you to know where you stand in the eyes of potential lenders. By monitoring every month, you can dispute errors on your score—a surprisingly common occurrence—and hold yourself financially responsible. Discover's 2017 survey showed "those who checked their score 12 or more times per year were almost twice as likely to improve their credit than those who checked their score once".
Contrary to popular belief, monitoring your credit score with 'soft' inquiries does not negatively alter your credit score. However, 'hard' inquiries, such as applying for a new line of credit, will slightly damage your score. Don't be afraid to monitor your score; ignorance—in this case—is not bliss!
2) Pay your Bills
This is an obvious one, but it will have the most substantial impact on your credit score. Consistently paying your bills on time and in full over an extended period demonstrates a pattern of financial responsibility.
One way to manage your bills is to set up automated payments. This eliminates that 'lump in the throat' feeling when you panic because your phone bill was due yesterday. Automated payments are an extra safeguard to keep you responsible for debt repayments. Still, keep track of your different accounts—you may even need to make a manual payment if you've spent a little extra on your credit card this month.
3) Establish Diverse Types of Credit
Lenders look kindly upon individuals with several accounts as it shows that you do not depend on a single loan or credit card. That said, your credit score will take damage if you go overboard and apply for unending amounts of credit. Find a delicate balance—applying for several loans or credit cards annually is ideal.
Also, do not close your oldest accounts! Creditors check the average age of your accounts, and "a higher number shows that you have a long-established credit history" You will want to make a few small payments on your lesser-used and older cards, then pay them off right away.
4) Do not exceed your Credit Limit
Credit card debt is a massive part of evaluating your credit score. Individuals that are continually exceeding 75% of their credit limit "is a red flag to the credit scoring system." It would be best if you used credit to establish that you are financially responsible but do not use too much! Dangling on the edge of your limit shows minimal financial flexibility and is, therefore, high risk to lenders.
One way to retract this is to increase your credit limit. In doing this, assuming your debt stays the same, the percentage of your credit limit utilized will decrease. Another approach is to spread out your spending. Rather than having a single card at 80% of its limit, your credit score will be far higher with two cards at 40% capacity.
More than ever, we need to remain informed and responsible in our personal and business activities through this unprecedented time.
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