Consider a credit report as a resume of your consumption and borrowing habits. Unlike a professional CV, this report does not provide you with the same “creative freedom” in which you present your past in its finest light. An old job that turned sour can be easily omitted from your record. But late payments and old, unpaid debts are another matter! You should know that your credit report has a long memory (7 years) and compiles your information rigidly.
Your credit score is the result of a formula that doesn’t give a damn about good intentions and bad luck. It’s the tale that tells everyone about your financial life, and there’s no literary flair or beautiful design that can make it more attractive to lenders. Having a good credit rating and maintaining a high score are purely mathematical goals that have practical solutions. I know this because I have scrutinized thousands of files as an analyst…and I have also made every “youthful mistake” imaginable, in addition to suffering my dose of bad luck with the credit bureaus.
Here are 10 things that have been proven to improve your credit report. They apply to everyone, including mortgage shoppers and investors, to those neck-deep in debt and those with no credit history.
1. Request your credit report
Before implementing an appropriate treatment, you need the diagnosis. You therefore begin the process of improving your rating by requesting your file from Equifax or TransUnion. And no, contrary to what you’ll sometimes hear, requesting a copy of your own file has no negative impact (see tip #6 for more detail). As for knowing which credit bureau to choose, I’ve always had a preference for Equifax. But it’s a bit like choosing between Apple and Samsung, to each their own! In Canada, you can obtain your credit file free of charge once a year. Organizations like Borrowell and Credit Karma also provide free access to certain credit bureau information.
2. Identify harmful elements
There are three things to look for on your credit report first: errors, fraud and outstanding balances.
Both credit bureaus and the organizations that submit your information to them have a frustrating habit of making mistakes. Considering the millions of pieces of information transmitted monthly, not to mention those famous IT security issues, you would have to be naïve to expect anything else!
I experienced this myself several years ago when I realized that I had three different files in my name, two of which had no history. After being refused for a $500 card at The Bay (which was rather embarrassing), I had to make countless calls and send a series of letters to unravel the case.
All this to say that the credit bureau frequently makes administrative errors. The data collection process has improved greatly since my story, but the technology still has its flaws.
Whether it’s the result of information theft worthy of a spy novel or a careless reply to a fraudulent email, we’re probably all going to experience it one day or another.
According to the Canadian Anti-Fraud Centre, 45,000 citizens were victims in 2019, for losses exceeding $96 million. A CPA Canada survey published in 2020 reported that 34% of respondents had been defrauded in the past, including 18% through credit cards and 5% online.
And yes, it happened to me once before too. Suddenly I had five new mobile phone accounts in my name in a month. (I’m rather unlucky, I guess.)
If you discover an account on your file that does not belong to you, be patient and start the steps to remedy it as quickly as possible to eliminate any negative impacts on your credit score.
Old unpaid balances
You may have forgotten to pay off an old account by mistake. It can also happen that you are so dissatisfied with a supplier that you swear never to foot the bill.
Friendly tip: No matter how legitimate your frustration is, sometimes it’s better to pay in order to move on, especially if the amount is relatively low.
A few dozen dollars is not worth the hassle of being denied approval for a mortgage.
If one of these three things applies to your situation, you may need to get a current copy of your two credit files in order to validate that they are both up to date and accurate.
3. Make your minimum payments fully, and on time
It might sound silly, but you’d be surprised at how many people overlook this basic rule, even though they can afford to pay. I’m not talking about paying off the full balance here, just ensuring that you make the minimum payment. Even if you expect to pay off your entire credit card balance in two months, the minimum payments required by then must be made to avoid a bad rating. The same goes for loan payments. If your auto loan payment is $200, making a $150 payment will still be considered late. Are you guilty of allowing a few little oversights? Make your life easier by tracking your budget on a mobile application and signing up for pre-authorized payments.
4. Decrease your debt ratio
This ratio represents the amount of your unpaid balance(s) compared to your total credit limit(s). The higher the ratio, the worse your credit report is. Ideally, it should be less than 30%. There are two ways to reduce this ratio; either increase your credit limit(s) or decrease your balance(s). The second option is obviously the preferred one.
Consider two fictitious examples:
Funding amount: $1000
Total balance: $1000
Cumulative limit: $2000
High debt ratio: 50%
If possible, it would be beneficial for Elon to accelerate repayment of his financing in order to reduce his balance and his debt ratio.
Initial amount: $5000
Line of credit
Total balance: $5000
Cumulative limit: $30,000
Debt ratio: 17%
Jeff has nearly five times as much debt as Elon, but his credit utilization ratio remains less damaging to his score. It may be unfair, but according to Equifax and TransUnion, it shows that Jeff doesn’t abuse the “privilege of indebtedness” to which he has access.
5. Keep some old accounts active
By keeping old paid accounts active, your borrowing limit remains high in relation to your balances, thus helping to reduce your debt ratio. Jeff’s example above demonstrates why it is desirable to keep accounts open even if they are no longer in use. Let’s look at what happens when Jeff asks his bank to close his $15,000 line of credit that has a balance of $0.
Initial amount: $5000
Total balance: $5000
Cumulative limit: $15,000
Debt ratio: 33%
Look at that! Although he had good intentions, Jeff’s debt ratio suddenly exceeds the recommended threshold of 30%. However, we must admit that keeping credit open requires a good dose of financial discipline. If you’re trigger-happy with your credit (don’t lie!), it’s not always a good idea to have access to too much “unearned” funds. Friendly tip: Unless you have a lifestyle that requires and allows it, your access to credit shouldn’t be greater than your income for the next three months. That’s still quite a lot! I thought I was super cool with my Visa Gold’s $20,000 limit when I finished college. After making a few trips in “pay later” mode, I learned my lesson…and was forced to eat quite a bit of Kraft Dinner for a while!
6. Limit and concentrate your financing requests
Lenders go out of their way to “give” us money, including offering reduced rates, points programs, a dozen free cupcakes upon signing, etc. Anything goes to get you to borrow and spend more. It is in their best “interest” after all…no bad pun intended!
Having multiple hard credit checks of your credit report in order to obtain financing, even if you don’t end up accepting it, only lowers your score. In other words, Equifax and TransUnion perceive this as a troublesome signal about your consumption habits. Note, however, that credit bureaus count requests submitted during a limited period as one request. You can therefore shop for a mortgage with several financial institutions without worrying that it will do too much damage.
7. Pay off high interest debt first
A common mistake is to prioritize repayment of debts according to the size of their balance. However, all things considered, a small credit card balance at 19% costs you more in interest than a “maxed out” line of credit at 7%.
Paying off one debt or another doesn’t necessarily have a direct impact on your score. Saving interest charges on high-rate financing, however, could help you eliminate the rest of your debt faster, which will ultimately improve your record.
8. Obtain credit
This tip more specifically applies to those who have never obtained financing and must therefore build a history. It’s also the starting point for those who seek to rebuild it after a period of instability or a stay of several years outside Canada. The credit report is to lenders what the resume is to employers…they want to know if you have the required experience. Before getting access to big loans, you must demonstrate your ability to handle smaller debts according to their terms. A low-limit credit card or in-store financing are great ways to start. If you are in “rebuilding” mode, a secured card (one that requires a deposit) is a good way to get back into the hearts of financial institutions.
9. Diversify your types of financing
Having access to several forms of credit is an advantage. I concede that in principle this may seem counterintuitive given that it favours those who have used credit more often, but such is life! In fact, it is the logical continuation of the previous point. In addition to your years of experience, they are trying to assess your budgetary versatility. If your history for the last few years includes a few cards, a line of credit and a car loan for example, that’s good enough. This is not, however, a reason for increasing the number of superfluous requests (see tip #6), since the diversification of financing only accounts for 10% of the score.
10. Obtain a consolidation loan
When you start having too many accounts payable and interest charges become a puzzle with too many pieces, a consolidation loan can stop the bleeding. This method is not without consequences, but it is appropriate when you think you are losing control of your debts, especially at high interest rates. The financial institution that grants you a loan at attractive rates to settle all your accounts will generally require them to be closed. It wants to prevent you from using your limits to start a second credit-spending spree again. This can consequently harm your credit utilization ratio since your new credit limit will be almost entirely taken up by your consumer loan. It is therefore less of a method to improve your score and your rating, but more of a way to avoid having it drop if your financial situation deteriorates.
In short, it’s not rocket science. The quality of your credit report is a partial reflection of your financial health. Pay your commitments on time, use financing when needed, keep your balances as close to zero as possible, and avoid viewing credit as an easy source of funds. These are the basics!