Your credit report plays a big role in your financial health. A good report can make it easier for you to achieve your life goals, like buying a house. It can make or break your ability to qualify for a mortgage or a loan. It also counts when you’re applying for a job or renting an apartment.
So how can you maintain a good credit score? Here’s a breakdown of how it all works and what you can do to improve your score. Plus, find out how the COVID-19 pandemic may affect your credit report.
What is a credit score?
It’s a number from 300 to 900 assigned by a credit bureau. In Canada, Equifax and TransUnion are the two credit bureaus that assign credit scores, along with a rating from 1 to 9.
The score and the rating are based on information about your accounts, such as:
- balances and debts,
- opening and closing dates,
- terms, etc.
The bureaus receive this information from your lenders and service providers.
What’s a “good” credit score?
The closer you are to 900 points, the more financially fit you are.
It’s just the opposite for your rating, however, which ranges from 1 to 9.
A score of 1 means your bills are paid on time. For every month you’re late, the rating goes up by one point to a maximum of 5, which equals 120 days late.
A rating of 7 means there’s a specific payment arrangement with a creditor on the account.
A rating of 9 is usually assigned to an account that has been sent to a collection agency, or is part of a bankruptcy.
How can you improve your credit report?
1. Limit how many credit cards, accounts and loans you have
Even if your balance is zero, simply having accounts open can give financial institutions a chill.
“People don’t understand why they don’t qualify for a loan even though they make regular payments,” says Demets. “But a lender may see those accounts as a risk since a person could suddenly make a ton of purchases and max out their credit cards.”
2. Know your credit limits
Rule of thumb—set your credit limit equal to one month of your salary. That way, you’ll stay well below your credit limit maximum.
Remember, a high debt ratio is the biggest risk factor for a poor credit score.
3. Repay your debts on a regular basis
All too often, Demets sees well-meaning people trying to repay the maximum amount every month, only to give up. But if you can’t pay off your credit card in full, at least make the minimum payment.
As an example, let’s say you have $1,000 in debt at 10% interest and $1,000 in debt at 20% interest. In such a case, it may be best to pay off the second one first since it’s costing you more money.
Important note for Quebec consumers only: credit card payment rules changed as of August 1, 2019. The minimum payment is now 2.5% of your balance and will increase by 0.5% every year until 2025. For cards issued after August 1, 2019, the minimum is 5%. So make sure your credit card payments are included in your budget.
4. Create a flexible budget that works for you
We all know that having a budget and following a plan are the cornerstones of good financial health. If you’re trying to pay off debts, it’s best to pay a set amount every month. You can use what’s left over to treat yourself or save it up for something important to you (e.g. retirement, buying a home, starting a family, etc.).
- Use our budget calculator to see where your money is going.
- 6 steps to creating a realistic budget during quarantine
5. Don’t take out too many loans at the same time
Applying for too many loans in a short period of time is a red flag for lenders and could drop your credit score.
6. Check your credit report regularly
“The best reason to do this is that mistakes happen,” Alexandre says. To avoid the embarrassment of being turned down for a loan, keep an eye on your credit report. Sometimes your information doesn’t get updated properly.
It’s also important to check your report as a preventive measure too. Mistakes can happen. And you might discover you’ve been the victim of identity theft.
7. Don’t co-sign for family and friends on a whim
Co-signing a loan is a serious undertaking. If the person you’re co-signing for declares bankruptcy, you’ll become the owner of their debt(s).
It might be a noble gesture, but you need to be absolutely sure that the person you are co-signing for is completely reliable.
How has COVID-19 affected my credit score?
If you made arrangements to defer your mortgage payments under the COVID-19 relief measures, it’s very important to check your credit report. According to Equifax, you’re credit score won’t be affected by deferring your payments, as long as you’ve arranged it with your lender.
Do you have a good credit score? Start building an emergency fund.
If you’ve managed to pay off your debts, then it’s time to start building an “emergency fund.”
Demets suggests using a tax-free savings account (TFSA) to set aside enough money to cover three months of living expenses, in case you lose your job. He admits that for most people, however, saving $1,000 to $1,500 is a more realistic goal. And, a couple with children can try to aim for $3,000 to $5,000.
Sometimes aiming for a large, lump-sum savings goal can be discouraging. Instead, try building your savings in small steps. Take a realistic look at your income and your spending. Then figure out how much you can actually afford to set aside right now. Maybe you can only put away $20 or even $10 a week right now. That’s a good start.
Get professional help with your finances
If you don’t have a great credit score, remember that you can always improve it. Late payments can stay on your report for up to seven years. But with discipline and a solid budget, it’s possible to raise your score. If you demonstrate good payment habits and repay all your credit card balances every month, your score can improve.
Need more advice or help? Consider talking to an advisor. An advisor can help you:
- create a strategy and budget to manage your debts,
- build a savings plan that meets your short- and long-term goals,
- find ways to save and grow your money.
They can also answer or address any financial questions or concerns you may have.
- Most advisors now offer to meet Clients virtually by video chat. Find an advisor today.
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.