I often get asked by clients about credit, how to maintain good credit and how to improve credit quickly. Some clients feel their credit is bad, but when I check their credit is quite good. Other clients think that their credit is good, but when I check there are some items reporting that make their credit score bad.
I wanted to give some guidance here to help you to achieve and maintain excellent credit. Having good credit comes down to doing some simple things consistently. I have a tip at the end that can improve your credit very quickly.
First, let’s review credit and some questions I’ve received.
Who collects and reports my credit information?
There are a couple of credit reporting agencies in Canada. Namely, Equifax and Transunion. Most lenders will use Equifax, but some will use Transunion. These agencies will receive information from your creditors about you, your payment history, your balances and payments of current and past accounts. With this information, the credit reporting agencies will create a credit score and a credit report. When you apply for a new account with someone, like a credit card, or car loan, or other product, the company you are applying with will request a credit score or credit score and report from the credit reporting agency (Transunion or Equifax).
What is a Credit Score & a Credit Report?
A credit score can range from 300 to 900 (with Equifax) and gives a prospective lender an idea of the amount of risk that they will be taking by offering you credit. A score of 300 to 559 is considered poor credit. 560 to 659 is Fair credit. 660 to 724 is good credit. 725 to 759 is very good credit. 760 and above is excellent credit.
The credit score comes with a credit report which is a summary of all your current accounts (and some past accounts). The credit report generally offers information about your credit limit and current balance, your payment history, any late payments, the date of your last activity on the account and other information.
How is the credit score calculated?
In general, the credit score is calculated based on the following weighting of different activities on your report. 35% of your score is based on your payment history; 30% of your score is based on the amount of credit currently outstanding versus your available credit (also called your utilization); 10 to 15% of your score is based on the type of credit that is used; 10-15% is based on new credit & 10-15% is based on the length of your credit history. All of these factors are combined by the credit agency to report a risk score to prospective creditors.
Is there more than one credit score reported?
There are three different scores that are reported by the credit agency. The first score is the beacon score, which is used by most lenders to determine if they wish to lend to you or at what rate they wish to lend to you. The second score is the CRP or the Consumer Risk Predictor. The third score is the ERS or Equifax Risk Score. Each of these scores can be different for different reasons. When you check your personal score, you will receive the Consumer Risk Predictor, not the score that the lenders will receive.
How do we maintain a good credit score?
Earlier, we talked about the way the score is calculated. The first most important thing is your payment history, therefore, always make your minimum payments. Make your payments on time, make the minimum payments, and don’t skip a payment even if you paid more the previous month. Always Make Your Minimum Payments!
The second most important is your credit utilization. That is, keep your balances lower than the total credit limits. Typically keeping your balance to zero is the best, but no one does that! Provided you can keep your revolving credit balances below 75% of the total limit; then you will keep a good score.
That also means, that if you are trying to pay off a credit card, you should keep the credit limit where it was. I have seen clients reduce their limits as they pay down the credit cards so that they don’t use them again. That won’t help them improve their credit score. Use your own discipline to keep your balances low, not an artificial discipline of lowering the credit limits so you can’t use the card!
These 2 actions, making payments on time and keeping a good ratio of balance to limit, represent 65% of your credit score, the last 3 are effectively equal. Therefore, the final three items, keeping a good balance of accounts with installment loans to revolving or Credit Card & Line of Credit products; maintaining new credit products in good standing and credit history all contribute to a lesser extent. Time heals all credit wounds. If you missed a payment in the last month, your credit score is more significantly affected than if you missed a payment four years ago.
How can I improve a bad credit score?
The first thing is to make your minimum payments from now on; the next is to start to progressively pay down your current credit card and line of credit balances to 75% of the total limit or less. As I have said before, time heals all credit wounds. The best time to start to improve your credit score is now! Effective immediately, make your minimum payments and start to pay down some revolving credit today. Next month your score should improve.
There could be other items reported on your credit record that are affecting your score substantially that can be fixed or removed. However, there are so many possibilities it’s tough to give a comprehensive list here. Let’s just cover 1 item that I see more than others.
What if I have collection items or public records on my credit report?
A collection item reporting on your credit record can significantly affect your credit score. Some companies don’t bother trying to collect a missed payment from you, they just report a collection item on the credit bureau and wait for you to call them! Sadly, it’s less expensive for them to do this than try to reach you to pay!
If you have a collection item on your credit report, then you should approach the company that you didn’t pay. The collection item is generally registered by a collection agency who makes money by purchasing bad debt at a discount then trying to recover as much of the money as possible from the debtor (you). The more they collect above the cost of buying the debt is their profit!
Instead of going to the collection agency to pay off your debt, you can approach the company you owe money to. Pay back the money that you owe them directly. If you have the right approach and they are also understanding, then you could ask them to have the collection item removed from your credit report. I have seen this strategy succeed more than 65% of the time when clients do try this. The company you owed money to received their money back. The company then contacts the collection agency and tells them that this item is no longer a collection item and asks the collection agency to remove the item from your credit report.
If you can get the collection item removed, then your credit score will improve dramatically!
This is a quick overview of how credit in Canada works and how to maintain and improve your credit score. If you have questions about your credit or want to know other strategies that we use to help clients improve their credit score, please call/text or connect with us through our contact form.
This presentation contains images that were used under a Creative Commons License.
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