Before we determine how to improve your credit score, let’s discuss what factors influence your credit score.
A mathematical formula is used by credit report agencies to figure out your credit score. Factors which are taken into account when determining your credit score are:
- Payment history – Is there a balance on credit cards from month to month? Have you ever missed a payment on any of your debts?
- Collection or bankruptcy Issues – Has a collection agency had to collect an unpaid bill from you? Have you ever been bankrupt?
- Outstanding debts – What is the limit on your credit card? Is your spending close to your credit limit?
- Account history – How long have you had credit?
- Number of recent inquiries made about your credit report – How many times has someone asked about your credit report?; and
- Type of credit you are using – Do you only have credit cards, or do you have a mix of credit cards and loans?
These factors do not all have the same influence in determining your credit score. The most important factors are your payment history, whether you have ever declared bankruptcy, and the amount of your outstanding credit balances.
Although other components such as your mortgage information and any personal inquiries you have made may also be included in your credit report, they usually do not impact your credit score.
Now that we have discussed the factors that influence your credit score, let’s look at ways we can improve/increase a person’s score:
- Having too much available credit can sometimes harm your credit score. Lenders may feel that you have the ability to spend more than you could potentially pay back. If you have a lot of credit cards, you may want to consider closing a few accounts or asking to have your credit limits reduced. However, avoid closing too many accounts – especially the oldest accounts on your credit profile – because it could harm your credit score.
- High levels of debt can signal to potential lenders that you are spending more than you can afford. It is a good idea to use your credit cards regularly but remember to keep your balances below 35 percent of your available credit limits. If you have balances above 35-50 percent, you could see your credit score start to drop.
- Using your credit accounts regularly is an important part of building healthy credit. Lenders will be able to better evaluate your creditworthiness if there is more data about your payment and spending behaviour on your credit report. Using a credit card to make a few purchases each month may help improve your credit score.
- Studies show that consumers who are in search of new credit accounts are riskier than consumers who are not searching for credit. Inquiries are the only information lenders have that shows a consumer is actively seeking credit. There are different types of inquiries that reside on your credit bureau report. The score only considers those inquiries that were posted as a result of you applying for credit.
- Your credit score measures how much you owe on the non-mortgage related accounts (revolving, non-revolving, and installment) that are listed on your credit bureau report. Research reveals that consumers owing larger amounts on their credit accounts have greater future repayment risk than those who owe less. Paying off your debts and maintaining low balances will help to improve your credit score.
- Installment loans is a good way of helping to increase your credit score. Paying down installment loans is a good sign that you are able and willing to manage and repay debt, and evidence of successful repayment weighs favorably on your credit rating.
For a free, downloadable publication about understanding your credit report and credit score, follow this link to the Financial Consumer Agency of Canada http://www.fcac-acfc.gc.ca/eng/publications/CreditReportScore/UCreditScore-eng.asp or copy and paste the link into your browser.
