The Secret to Improving Your Credit Score

by Jay Calafiore

mortgages101So you want to improve your credit score?

You may not realize how much money your credit situation is costing you.

If you have large credit card balances, too many credit accounts and have missed making some of your payments, you’ll probably have some strikes against your credit score.

The first thing you should do is make sure you have copies of your credit report from all three of Canada’s credit agencies. There is a good chance there could be some inaccuracies or errors in your report that may be negatively affecting your credit score so this is a good place to start.

Known as a FICO score – with a range from 300 to 900 – your credit score tells lenders what kind of a risk you are likely to be as a borrower.

The Five Factors that Make Up Your Credit Score

Your score is based on the following five attributes, with some attributes weighted more heavily than others.

  • Previous payment history (approx. 35% of score): Your track record of paying your credit accounts on time is the most heavily weighted attribute. Events such as late payments, collections, judgments, liens, foreclosures, bankruptcies, and wage attachments are part of this category and are considered quite serious. More recent events and large amounts will affect your score more than older events and small amounts.
  • Current level of indebtedness (approx. 30% of score): This portion of the score considers whether you are overextended or not. Too many credit cards or keeping your accounts at or near their maximum limit can signal that you don’t manage credit responsibly, and that you may have trouble making payments in the future.
  • Length of credit history (approx. 15% of score): The longer you have had credit in good standing the lower the risk indicators. This score considers the age of your oldest account and an average age of all of your accounts. New accounts will therefore lower your average account age.
  • Pursuit of new credit (approx 10% of score): Opening several credit accounts in a short period of time is a risk indicator. The number of enquiries done on your behalf can also have an effect. However, FICO scores try to differentiate between rate shopping for a single loan and searching for many new credit accounts.
  • Types of credit available (approx. 10% of score): This attribute considers the mix of credit accounts you have: credit cards, retail accounts, installment loans, accounts with finance companies, and your mortgage. The goal is to determine if you have a healthy mix of credit. For instance, having a car loan, mortgage and credit card is more positive than a concentration of debt in only credit cards.

Improving Your Credit Score

The first thing you need to understand is that there is no magic bullet.  That being said, by understanding how your credit score is calculated, you can begin to target those areas to try and make improvements.

Your credit score captures your perceived lending risk at a moment in time: your score can change from month to month. The companies that hold your credit accounts and loans report transactions to credit bureaus regularly.

That’s a great opportunity for you, because it means you can improve your score with the right credit “behaviours”.

Examine the five factors that affect your credit and see what opportunities already exist for you to start making improvements. Here are some tips that can help:

  • High interest credit card are the worst kind of debt.  Pay these debts down first above all other debts.
  • Don’t have a credit card yet? You need credit history to get a mortgage so get yourself a credit card at the lowest possible interest rate – but be disciplined about purchases and pay your bills on time!
  • Limit your types of credit. You don’t need more than one credit card so don’t sign up for that credit card in exchange for a free t-shirt at a sports event.

What areas of your credit score are you struggling with and which ones have you not cultivated enough?

The earlier you get a copy of your credit report and target your weak points, the easier it will be to qualify for a great rate when it comes time to apply for a mortgage loan.

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