Turned away from a loan or mortgage application because of your credit score?
Weak credit scores are not only a major barrier to receiving financing from a bank or alternative lender but they also negatively impact your ability to attain the best rate possible.
Improving your credit score is a slow but sure process – like fixing up an old car, it definitely won’t happen overnight.
Below, we’ve outlined some simple steps you can take to better manager your credit scores which will help you gain access to the affordable financing your personal or business needs.
It should be noted though that these are not comprehensive, as your credit score is affected by numerous other factors.
- Make your payments on time: While obvious to many, this is the one many people seem to forget. It’s important to note, that up to 35% of your credit score assessment is based on your payment history, so making timely payments is crucial to improving your credit score. Automated payment methods, such as direct debit withdrawal, can be beneficial if you have a tendency to simply forget paying your bills.
- Reduce Applications for Credit: When searching for new financing, it can be tempting to apply to many different sources over a period of time to find the best rate. However, this can actually have significant negative effects on your credit score. This is due to what is called a “soft inquiry vs. hard inquiry”. When you check your own credit score, or you are pre-approved for a loan, this is referred to as a “soft check”, and will not be factored into your credit score calculation.
However, if a bank or lender checks your credit score as part of an application, it becomes a hard check, which can both lower your score and remain on your credit report for up to two years. An important factor to note, many reporting agencies take into account shopping for the best rate, so multiple inquiries within a short time frame for one type of financing is not as harmful.
- Monitor Balance: Debt utilization ratio is a large percentage of a credit score – how much debt you are using relative to the line of credit extended. According to the Financial Consumer Agency of Canada, it’s best practice to keep this ratio at 35%.
High debt utilization ratios may indicate you are over-leveraging yourself or struggling to pay down current debts, which will certainly raise red flags to credit reporting agencies. One strategy is to pay off your smaller balances on different credit lines, as you will be documenting multiple instances of successfully paid-off debt.
- View your Credit Report: Requesting your credit report, from an agency such as Equifax or FICO, can be beneficial for two reasons – you will know where you stand in terms of score, and be able to note and correct any mistakes. Additionally, this is a good way to ensure you are not a victim of fraud, like identity theft, which can deteriorate your score.
- Avoid Scams & Have Patience: Many companies claim they can provide a “quick-fix” to your credit score problems – which is both highly untrue, and deceptive. Credit bureaus are required to follow federal and provincial regulations that govern what data can and cannot be changed. There is no way to rapidly alter your score unless a mistake in your credit file has been made and gets corrected. Any company that claims to be able to do so is taking advantage of you.
Ultimately, improving your credit score is a long process, dependent on hundreds of different variables. Following the steps outlined in this article is a great way to start getting your credit back-on-track. Remember, an improved credit score won’t happen overnight, so when following these steps, it’s important to be patient and consistent.