Unlocking Financial Freedom: How to Improve Your Credit Score in Canada

AJAY SAINIJanhavi Ramesh Kowligi
AJAY SAINI Janhavi Ramesh Kowligi Lifestyle
13 Min Read

Your credit score plays a crucial role in your financial life, affecting your ability to secure loans, obtain credit cards, and even rent an apartment. A good credit score is essential for achieving your financial goals. 

A credit score is a numerical value given by the credit bureaus. Unlike a 2-digit number, it is a three-digit number that helps banks, lenders, and other financial institutions determine the individual’s ability to repay the loan.

In Canada, with excellent credit scores, you can have a car loan, a new credit card, a business loan, and a mortgage loan at low interest rates.

1. Why Do We Need Credit Scores?

Good credit scores let you buy any product on credit. A decent credit score has many benefits, but getting loans at low-interest rates is the best without surrendering any collateral.

Credit scores serve as a representation of your financial character within the banking and financial industry.

2. What Should Your Credit Score Be?

The higher the credit score, the better it will be. In Canada, credit scores range between 300 and 900. A person with a score of over 660 can get a personal loan. If you are a Student, your credit score will be 0 or -1.

  • 300-559 – If your score ranges between these numbers, lenders or banks will not approve your applied loan. This bad credit score can be due to a lousy payment history.
  • 560-659 – If your score ranges between 560-659, you can get loans at a very high interest rate.
  • 660-724 – You are in an era where you can get loans at better interest rates.
  • 725-759 – 725-759 is a range where you can purchase any product on credit at a low interest rate and quickly get plenty of credit limits in your credit card accounts.
  • 760-900 – It’s challenging to reach between this range. You can get credits at low interest by just sitting at your home.

3. Credit Bureaus In Canada – Check Your Credit Report Today

Primarily, there are 2 Credit Bureaus in Canada. Most lenders take help from these bureaus to decide whether the borrower will return the money.

These credit bureaus offer comprehensive credit reports that show detailed information about an individual’s payment history. You can download free credit reports from these credit reporting agencies.

3.1 TransUnion

TransUnion is a Credit Bureau in Canada whose work is to create a detailed credit report. To get a credit report from TransUnion, You have to pay $24.95 monthly. You get unlimited access to your credit report, personalized debt analysis, and ID theft insurance of $50,000.

It’s difficult to pay a TransUnion subscription amount to monitor your credit scores. You can use 3rd party product called Credit Karma to get a free credit report.

3.2 Equifax

Equifax is another trusted Credit Bureau available in Canada. This bureau also charges $24.95 per month to provide a detailed credit report for individuals and businesses, which includes your payment history details, credit score, credit cards, and outstanding accounts.

This credit bureau offers up to $1 Million in ID Theft insurance with a dedicated ID restoration specialist. For an individual or student, it is hard to pay.

4. Reasons For Having Low Credit Scores

credit score in canada
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Having a low credit score can have various underlying reasons. Here are seven common factors that can contribute to a low credit score

  • Late or Missed Payments – Consistently missing payments can lead to a decrease in credit scores.
  • High Credit Utilization – Utilizing a large percentage of available credit can negatively affect your credit scores.
  • Defaulting on Loans – Failing to make loan payments can result in being labeled as a defaulter, significantly negatively impacting credit scores.
  • Settlement of Loans – Many lenders settle your loan by taking the principal amount. Still, many borrowers don’t know they will get settlement remarks in their credit reports, impacting their credit scores.
  • Closing Old Credit Cards – Keep using and running your oldest credit cards, as it will show your sincerity toward lenders.
  • High Debt-to-Income Ratio – Having a high level of debt in your income can indicate financial instability and negatively affect your credit score.
  • Identity Theft – Becoming a victim of identity theft, such as unauthorized credit card usage, can negatively impact your credit score.

These were some prevalent reasons for having low credit scores. However, apart from these Civil Judgments, Tax liens, Inaccurate Credit Reporting, and Lack of Credit History can also be the reasons for having bad credit scores.

5. How do you improve credit scores in Canada?

Credit Scores depend upon various aspects such as payment history, your credit account age, and the number of settled accounts.

5.1 Inspect Your Credit Report

Firstly, you must review your credit report downloaded from Equifax or TransUnion. You should check missed payments, settled accounts, and outstanding amounts. If you find any inaccuracies, report them to the credit bureau to have them corrected.

Occasionally, fraudsters may fraudulently obtain a loan under your name, causing it to appear on your credit report and posing a potential risk to your credit score.

5.2 Paying Bills on Time

One of the most critical factors in improving your credit score is making timely payments on your bills. You can set up auto payments for your credit card bills and loans.

This will help you repay your loan quickly and create a better payment history. Credit bureaus will not tolerate late payment practices and, hence, can lead to bad credit scores.

5.3 Credit Card Utilization

credit card utilization
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Never utilize your credit card balances to 100%. Try to keep 25-30% as an outstanding amount. Example: If you get a credit limit of $10,000, then don’t spend more than $2,500-$3,000 through your credit card.

Also, always pay your bills through your credit card, but it is essential to remember not to utilize more than 30% of your credit limit.

Utilizing a 100% credit card limit decreases your credit scores as it shows a lack of control over expenditures. Credit card companies tend to hide certain secrets, as they earn interest if an individual cannot repay their outstanding balances on time.

5.4 Clear Credit Card Outstandings

a man dragged in debt
Photo by Rilsonav at Pixabay

If you have old credit card accounts showing outstanding, clear it as soon as possible. Not clearing outstanding will not only decrease your credit scores but also will drag you into debt. Avoid paying only the minimum due balance, as doing so will result in paying interest on the remaining credit card balance only.

It is advisable to avoid entering into settlements with lenders. If you choose to settle by paying only the principal amount, your credit account will be closed but marked as “settled” in your credit report, harming your credit score. Hence, you will notice a decrease in your credit score.

5.5 Credit Age

Credit Age is not in your hands, but having a good credit age also helps increase your credit scores. That’s why you should apply for loans as early as possible to open your credit score as early as possible.

If you are a student or have not yet applied for any loans, your credit score may initially be 0 or -1. However, it will begin to increase after you obtain your first-ever loan.

5.6 Credit Enquiries

You have to impose limits on credit applications. Filling dozens of applications to get loans leads to decreased credit scores.

Applying for many credit applications portrays that you want to seek money in any way possible, which makes lenders hesitate to give money. These credit inquiries are categorized into two parts, which are mentioned below.

  • Soft Hit – Credit Enquiry will not be shown in credit reports, and these types of applications will not affect your credit scores. Applications regarding requesting credit reports come under this inquiry.
  • Hard Hit – Applications regarding new credit cards, mortgage loans, car loans, and rental applications come under this inquiry. These applications severely affect your credit report and result in a decrement in your credit score.

5.7 Diversifying Your Credit Types

Increase your credit score just by having a mix of different types of credit. You can diversify your credit types by using credit cards, loans, and mortgages. Diversifying doesn’t mean opening multiple credit accounts just to have a variety or a credit mix.

Opening too many accounts quickly can negatively impact your credit scores. Only apply for credits when you genuinely need them and can repay without a problem.

5.8 Get a Secured Credit Card

A Secured Credit Card is a type of credit card that requires a security deposit as Collateral. You can surrender your FD (fixed deposit), gold, and insurance plan as collateral. This practice helps rebuild your credit scores by making timely payments and keeping balances low.

The amount of the security deposit typically determines the credit limit. Let’s say If you deposit $1,000 FD as collateral, then you will get a credit limit of $1,000.

5.9 Monitor Your Credit Report

monitor cibil report
Photo by Lukas at Pexels

The journey from poor to good credit scores is a bit difficult. Last but not least, you should constantly monitor your credit report. If you already have a decent credit score, you should take credit reports responsibly.

It’s tough to build credit reports in front of credit bureaus again and show them you can pay loans on time.

Many financial gurus advise you to review your credit reports at least twice a month. Not only will this help you to track all the credit inquiries, but it will also solve inaccurate information updated by bureaus before your score gets damaged.

Final Verdict

In conclusion, improving your credit score in Canada is a worthwhile endeavor that can unlock various financial opportunities.

To increase your credit score, you should follow the steps such as paying bills on time, reducing credit card debt, and diversifying your credit mix; you can gradually enhance your creditworthiness.

Remember to monitor your progress, seek professional assistance if needed, and develop good financial habits that will benefit you in the long run.

Last Updated on by Namrata

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