Here are 5 tips to help improve your credit score

Is your score under 700? Under 600? Wondering what to do if you don’t have any credit?

If so, then you’re in the right place.

Unfortunately, many schools don’t do a great job when it comes to teaching the younger generation about how credit works, what pitfalls to avoid, and how to use good credit to their advantage.

Today, I’ll give you a quick breakdown of how your credit score is determined and offer some actionable tips you can use to help improve your credit score by 100 points or more!

How your credit score is determined

Your credit score is a three-digit number derived from your credit report, reflecting your credit management and risk level for lenders.

In Canada, we have two credit bureaus – Equifax and TransUnion. These two bureaus track your credit and use your report to generate a score that ranges from 300 to 900. They use financial reports about your credit usage and loan payments to determine your score. Thankfully, they don’t keep track of parking tickets!

The average credit score in Canada ranges between 650 and 725, according to a 2019 report by Statistics Canada. All Canadians can receive their complete credit report for free from both Equifax and TransUnion.

The following factors play major roles in your overall credit score:

• Payment history: Timely bill payments improve your score, while late or missed payments can significantly harm it.
• Credit utilization ratio: Compares the credit you’re using to your available credit limit. Keeping this ratio low is beneficial.
• Length of credit history: Longer credit histories provide more data points, leading to more accurate scores. Public records, including insolvencies or bankruptcies, can negatively affect your score.
• Types of credit: Having access to multiple types of credit (i.e., credit card, personal loan, auto loan) combined with a good payment history can boost your score.
• Number of recent inquiries: Whenever you apply for a new credit card or loan, an inquiry will be made on your credit profile. Too many of these inquiries in a short period of time can reduce your score.

How to build credit history with no credit

If you don’t have any credit history yet, the best way to start building your history is to open a secured credit card. These are similar to prepaid debit cards. However, each payment is reported as a successful credit card payment, which will help build your credit history so you can get approved for a traditional credit card in the future.

Here’s how to improve your credit score

Now, let’s discuss some ways you can improve your credit score or start building a good credit history if you’re just starting your credit journey!

1. Keep your credit card balances low

There’s a common misconception that credit cards are bad. This is simply false. Credit cards are only bad if you use them irresponsibly to pay for things you can’t afford.

Ideally, you should only use your credit cards to pay for everyday purchases that you would otherwise use your own cash or debit card for. At the end of each month (or better yet – each week) try to pay your credit card balance off in full.

2. Pay your bills on time

Your bill payment history is one of the most important factors in determining your credit score. Just a single missed payment reported could hurt your credit score for years to come. Conversely, a year’s worth of on-time payments can greatly help your credit score.

To prevent missed payments, I recommend setting up automatically recurring payments for all of your credit cards and loan accounts

3. Avoid back-to-back credit applications

Diversifying your credit is good. However, applying for too many lines of credit within a short amount of time can make you appear “desperate” and can get your score knocked down. As a good rule of thumb, don’t apply for more than two lines of credit or loans within a 12-month period.

Most credit inquiries naturally fall off of your credit report within two or three years, and will stop affecting your score after this period.

4. Stay on top of your credit report and score

If you’re trying to build or repair your credit, it’s a good idea to stay on top of your score and report on a weekly basis by using TransUnion or Equifax’s monthly credit monitoring services. You may also use a dual credit-monitoring service like Credit Karma or Borrowell to monitor both scores at once.

5. Increase your credit limit and lines of credit

The more credit you have access to, the better your credit profile looks. As you use and pay off your cards responsibly, your credit card companies may offer to increase your credit card limits. If they don’t, you may call and ask them to increase your credit limit directly.

Another tip you can employ to boost your credit is to ask a family member with good credit and a high-limit credit card to register you as an authorized user. This will make their credit card appear on your account, even if you never use the card and they keep it stored away in a safe somewhere.

How long does it take for your credit score to improve?

Depending on your credit age and history, building and improving your credit score could take as little as two months or as long as two years. Generally speaking, if your credit history is young and you don’t have any negative items on your report (such as missed payments), you can build your credit score quickly.

However, the longer your credit history is and the more negative items you have on your report, the longer it can take for your credit to improve.

This is why it’s so important to be wise with your credit when you first start out. Pay your bills on time, pay your credit cards off every month, and don’t use credit to pay for things you can’t afford. If you follow these simple rules, you’ll avoid 99% of credit pitfalls that most people fall into.

One of the best ways to do this is by creating a set budget for yourself and sticking to it. Keep on reading to see my top tips for living on a budget and managing your expenses!

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Written for Daily Hive by Christopher Liew, a CFA Charterholder, former financial advisor, and the creator of Wealth Awesome.