As a Canadian, you will find that your credit score plays a significant role in your daily life. When you apply for a credit card, a mortgage, or a personal loan, many lenders rely on your credit score to determine if they should trust you with your money. Having a strong credit score is like having a golden ticket to better interest rates, lower insurance premiums, and even smoother rental applications. The higher your score, the better things work out in your favour.

Although credit scores influence borrowers differently, some Canadians fail to maintain a good score. The credit scores in Canada range from 300 to 900. A score between 600 and 659 is considered fair, and anything below 600 is considered poor. According to a Statista Research Department report, “As of the third quarter of 2023, approximately 4.7 percent of mortgage holders in Canada had a fair or poor credit score.”

The statistics refer specifically to Canadians with mortgages, but many non-mortgage holders also have poor credit scores, and some individual’s scores may also prevent them from getting a mortgage. The good news is that with some effort, you can improve your credit score to boost your creditworthiness and appeal to lenders. Although FlexMoney looks past traditional credit bureau data to review loan applications, a good credit score can help you get a better interest rate. Use the following guide to learn how to improve your credit score in Canada.

Understanding the Credit Score Basics

Before we discuss how to improve credit scores, it’s crucial that you understand what a credit score is and why it matters. Your credit score is a numerical representation of your creditworthiness. In Canada, credit scores range from 300 to 900, with higher scores indicating better credit health. Lenders use this score to assess the risk of lending you money, whether for a credit card, mortgage or, in some cases, an online loan.

Factors Affecting Your Credit Score

A bunch of factors play into your credit score. Here are the key ones.

  • Payment History: Lenders want to see if you’ve paid your bills, loans, and credit card payments on time. Late payments can lower your score.
  • Credit Utilization Ratio: This refers to how much of your credit limit you’re using. If you max out your credit cards, it can signal financial stress and lower your score. So, it’s good to keep this percentage low.
  • Length of Credit History: The longer your credit accounts open, the better. It shows you have a track record of managing credit responsibly.
  • Types of Credit: This is a mix of credit you have, like credit cards, mortgages, and car loans. Having a variety can be good, but it’s important to be cautious before opening too many accounts. For instance, if you already have a credit card but need to fund a renovation project, you can opt for FlexMoney’s online renovation loans instead of applying for a new credit card to pay for the project.
  • New Credit: Opening several new accounts or taking several loans in a short time can make lenders nervous. They might think you’re in a financial bind. So, be cautious about applying for lots of new credit at once. Taking the time to ensure you’re choosing the right loan when applying for new credit is a great way to avoid seeking credit that will not work in your favour.
  • Public Records and Collections: Things like bankruptcies or accounts that went to collections can seriously ding your score. Lenders want to see that you’re not dodging your financial responsibilities.

How to Improve Credit Score in Canada

Once you understand the value of a good credit score and the factors that affect the number, there are several steps you can take to improve your credit score.

Check Your Credit Report Regularly

The first step in improving your credit score is knowing where you stand. Request a copy of your credit report from Equifax or TransUnion – Canada’s two main credit bureaus. Review it carefully for errors, like incorrect personal information, accounts that don’t belong to you, or missed payments you believe you’ve made. Discrepancies can negatively impact your score, so make sure everything is accurate.

Pay Your Bills on Time

Your payment history accounts for a substantial portion of your score. Set up reminders, use automatic payments, or create a budget that ensures you never miss a due date. Consistency in paying your bills on time shows lenders that you’re a reliable borrower.

Paying your bills on time will gradually improve your credit score and help you qualify for a personal loan with a lower interest rate. Many lenders consider the applicant’s credit score to ensure they can repay the loan on time. FlexMoney focuses less on your credit score and requires you to meet our criteria for a Canadian personal loan. This includes but isn’t limited to, earning a net income of $2,000 or more each month for at least the last three months, an open and active Canadian bank account, and a valid email address and mobile phone number.

Reduce Your Credit Utilization

Credit utilization refers to how much of your available credit you’re using. If you have a credit card with a $5,000 limit and used $4,000 of it, your credit utilization is 80%. Lenders prefer to see a lower utilization rate – ideally below 30%. To improve this aspect of your credit score, focus on paying down your balances and avoiding maxing out your credit cards.

If you have a low credit limit on your card and it is difficult to reduce your credit utilization, looking into alternative options may also be helpful. You can opt for lines of credit as they are a financial agreement that allows you to borrow money up to a certain credit limit. The limit of borrowing for a line of credit is typically higher than a credit card, and this method may help you reduce your credit utilization and improve your credit score.

Diversify Your Credit Mix

Having a mix of different credit accounts can positively influence your credit score. These might include credit cards, loans, and even a mortgage. You can also take small loans to build your credit and pay them off on time. But it’s important that you ensure you can pay off these loans before taking them. Taking loans to improve your credit score but failing to pay on time will have the opposite effect and lower your credit score. It’s also essential to manage your credit responsibly before seeking new avenues of credit.

Keep Older Accounts Open

The age of your credit accounts also influences your credit score. Lenders like to see a longer credit history, so think twice before closing an old credit card account, even if you don’t use it regularly. The longer an account is open and in good standing, the better it reflects on your creditworthiness. Keeping older accounts open can improve credit score and help you qualify for loans. For instance, if you’re looking for low-income loans but don’t have a high credit score, you have a higher chance of looking like a responsible borrower if you have a longer credit history.

Minimize New Credit Applications

Whenever you apply for new credit, many lenders do a hard inquiry on your credit report. While a single inquiry might not have a significant impact, multiple inquiries in a short period can signal to lenders that you’re seeking a lot of new credit, which could look like a red flag.

Alternatively, you can get a secured loan that doesn’t focus heavily on your creditworthiness. Secured loans typically require collateral, so some lenders may overlook your credit score when you apply for this type of loan. Meanwhile, you can learn how to improve your credit score and eventually qualify for an unsecured loan.

Deal with Outstanding Debts

If you have outstanding debts that have gone to collections, it’s time to address them. Contact your creditors to work out a repayment plan, negotiate settlements if necessary, and get those accounts back into good standing. While this might take time, it’s a crucial step you need to take to improve your credit score and overall financial health.

FAQ About Improving Credit Score

If you’re figuring out how to improve your credit score, you may have encountered the following questions.

How Long Does It Take to Improve Credit Score in Canada?

One of the key questions revolving around credit scores is, how long does it take to improve credit score? Improving your credit score in Canada is a gradual process that typically takes several months to see noticeable changes. By consistently following the steps mentioned in the guide, you can start seeing positive impacts on your credit score within three to six months. However, if you have to improve your credit score significantly, the process might take longer, often a year or more, as your responsible financial habits build a solid credit history over time.

When Is it Acceptable to Look for New Credit?

Looking for new credit can be acceptable in a few situations, but it’s important to be mindful of how it can impact your credit score. When planning a major purchase, like a home or a car, it’s okay to shop around for the best loan terms and interest rates within a short period. During this window, multiple inquiries for the same type of credit are usually treated as a single inquiry, minimizing the potential impact on your score. It’s important to note that multiple credit inquiries can affect your score in some cases.

If you need financing for medical procedures, it is also acceptable to look for new credit. FlexMoney offers medical loans to help you during challenging times.

Seeking new credit can be reasonable when you want to improve your credit score. If you currently have a limited credit history or a lower credit score, responsibly adding a new credit account and managing it well can help you build a more positive credit history over time. Once you receive the credit, you can use it to finance your move or other important events and pay the debt on time to see a positive impact on your score.

How Soon Will My Credit Score Improve After Bankruptcy in Canada?

After bankruptcy in Canada, your credit score will likely take a significant hit. Bankruptcy remains on your credit report for several years (usually around 6 to 7 years for a first-time bankruptcy). However, you can rebuild your credit soon after bankruptcy by establishing responsible financial habits. You might see slight improvements within a year as you make consistent on-time payments and manage your finances responsibly.

Over time, as the bankruptcy gets older and positive information accumulates on your credit report, your score can gradually recover. It’s a gradual process, so patience and consistent positive financial behaviour are essential.