Learning how to improve credit score is one of the most powerful steps you can take for your financial health in Canada. A strong credit score is an essential financial tool in Canada. It can unlock better loan terms, lower interest rates on credit cards, and even influence rental applications. Your credit score is a 3-digit number calculated by Canada's credit bureaus based on your credit history, which records your debt repayments.
This guide provides 10 practical steps, incorporating every key aspect of credit management, to help you build a stronger financial future.
First, Understand Your Canadian Credit Score
Before you can improve your score, you need to understand the fundamentals of the Canadian credit system.
- The Score Range and Its Meaning: In Canada, credit scores range from 300 to 900. This number represents how likely a credit bureau thinks you are to pay your bills on time. Lenders use this score to assess your creditworthiness and capacity for new loans or credit.
- The Credit Bureaus: Canada has two major credit bureaus: Equifax Canada and TransUnion Canada. They compile your credit report and calculate your score.
- What's a Good Score? A good credit score is generally considered to be between 660 to 724. The full ranges are:
- 800 - 900: Excellent
- 725 - 799: Very Good
- 660 - 724: Good
- 560 - 659: Fair
- 300 - 559: Poor
A higher score indicates better credit, making it crucial to understand the factors that influence it. Understanding your credit report and score is the key to effective credit improvement.
The 10 Practical Steps to a Better Credit Score
Step 1: Obtain and Review Your Credit Reports
You are legally entitled to free copies of your credit report from both Equifax and TransUnion. Obtaining these reports is the essential first step to identifying errors or inaccuracies that may be negatively impacting your credit score. While a U.S. study found 25% of people had errors, inaccuracies are common everywhere.
Action: Request your free credit reports directly from Equifax Canada and TransUnion Canada. You can get them online instantly or request a copy by mail. Review them regularly to monitor your payment history, credit utilization, and to check for mistakes. You can check your own credit score and report as often as you like without affecting your score.
Step 2: Dispute All Credit Report Errors
Finding and disputing errors is one of the quickest ways to improve your credit score. Look carefully for:
- Incorrect payment history (e.g., a paid account still listed as unpaid).
- Unfamiliar accounts that do not belong to you.
- Negative information that is too old to be listed (typically 6-7 years in Canada).
Action: If you spot an error, start a dispute. Gather your supporting documents (like payment confirmations) and submit your dispute directly to the credit bureau online or by mail. They are required to investigate your claim, typically within 30 days. If the error is verified, the updated information will be corrected, which can significantly improve your score.
Step 3: Make On-Time Payments Your Top Priority
Your payment history is the most important factor in your credit score. Consistently paying your bills on time—for credit cards, loans, and lines of credit—is the best thing you can do to improve your credit. Each month an account is marked as delinquent hurts your score, and late payments can stay on your credit report for up to seven years.
Action: Set up automatic payments for at least the minimum amount due on all your bills. This simple strategy helps ensure you never miss a payment.
Step 4: Manage Your Credit Utilization Ratio
Credit utilization is the second-biggest factor in your score. It compares your credit card balance to your credit limit. A high ratio signals risk to lenders, even if you pay on time.
Action: Keep your credit utilization ratio below 30% on all credit products. For example, if your credit card has a $10,000 limit, try to keep the balance you carry below $3,000. You can lower your utilization by spending less or paying down your balance more frequently.
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Step 5: Be Strategic with Credit Limits
Increasing your credit limit can be a useful tool because it instantly lowers your credit utilization ratio (if your balance stays the same). However, it requires careful management to avoid overspending.
Action: If your income has improved, consider asking your credit card issuer for a higher credit limit. Be aware that this may result in a "hard inquiry" on your credit report, which can cause a temporary dip in your score. Avoid applying for too many credit cards in a short period for the same reason.
Step 6: Protect the Length of Your Credit History
A key factor in your score is the age of your credit accounts. Closing old accounts, especially your oldest one, can shorten your credit history length and negatively impact your score.
Action: Avoid closing old, no-fee credit cards. Keeping older accounts open and using them occasionally for a small purchase helps maintain a strong credit history.
Step 7: Optimize Your Credit Mix
Lenders like to see that you can responsibly manage a variety of credit types. This is known as your credit mix. Having a combination of revolving credit (like credit cards) and installment loans (like a car loan or personal loan) can improve your score.
Action: If you only have one type of credit, consider adding another when it makes financial sense. Opening a new credit card or taking out a small credit-builder loan can help diversify your credit profile. Be strategic and only take on new credit you can manage responsibly.
Step 8: Use Canadian Credit-Building Tools
If you are building your credit from scratch, it can feel like a catch-22. Many people turn to high-interest credit cards or payday loans, which can lead to a cycle of debt that harms your credit more than it helps. A key part of how to improve your credit score is finding the right tools that build your history without financial risk.
- Secured Credit Cards: These cards require a cash deposit that acts as your credit limit. They are an excellent option for building or rebuilding credit as your payments are reported to the credit bureaus.
- Rent Reporting: Services like the Landlord Credit Bureau and Borrowell allow your on-time rent payments to be added to your credit report.
- Become an Authorized User: You can be added to the credit card of a trusted person with a strong credit history. Their positive payment habits can help your score, though you are not responsible for the bill. Confirm with the card issuer that they report authorized user activity to the credit bureaus.
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Step 9: Manage Collection Accounts Proactively
If you have an account in collections, it's a significant negative mark on your credit report.
Action: Address any collection accounts. Paying off a collections account so it is marked as "paid" can improve your standing. You may also be able to negotiate with the collection agency to have the account removed from your report after payment. A collection can also be disputed and removed if it is inaccurate or too old to be listed.
Step 10: Maintain a Healthy Long-Term Credit Profile
Lasting credit improvement requires ongoing responsible behavior. This final step in how to improve credit score is about consistency.
- Automate: Use automatic payments and electronic alerts to stay on top of your bills.
- Use Cards Responsibly: Always pay more than the minimum payment, keep balances low, and stay within your credit limits. When selecting a new card, evaluate offers for features like low interest rates or balance transfer options.
- Limit Hard Inquiries: Understand the difference between "hard hits" (which affect your score, from loan applications) and "soft hits" (which don't, like checking your own score). Limit your applications for new credit to avoid too many hard inquiries.
Building a strong credit history takes time and consistent effort, but it is the key to achieving long-term financial confidence and security.
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