8 tips to improve your credit score

November 12, 2020

All too often, Canadians are turned away for having low credit scores, which sets them back from getting the house they want, the loan they need and the future they expected. Even if you’ve never experienced this kind of rejection, it’s only natural to want to boost your credit score, and thankfully, there are ways to do it. 

We’ve rounded up eight simple steps to help you improve your credit score and check off the financial goals you’ve been after.

8 tips to improve your credit score

1. Create a budget

Before taking any swift action, you’ll want to understand the factors that affect your credit score. Once you get a good handle on what can cause your rating to swing positive or negative, you can create an honest budget. Your budget helps you get realistic about your spending habits so you can set achievable goals, especially when it comes to getting out of debt. 

There are a ton of popular budgeting tools and templates out there, and it’s important to pick a plan that is easy for you to stick to. Make sure you consider annual expenses, like taxes and insurance fees, as well as long-term and emergency savings for any of those unexpected expenses that crop up.  

2. Pay down existing debt

Paying off your debt may feel overwhelming, but with your budget in hand, you’re better prepared to tackle debt head-on. Focus on catching up on any late credit card or bill payments. When possible, pay off your full balance and not just the minimum amount owed. Even if it’s just an extra $15-20 more, the more you put toward your debt each month, the closer you will be to paying them off in full. 

3. Pay bills on time

Credit history makes up a good chunk of your credit score - in fact, it accounts for 35% of your score, and factors in how many bill payments you’ve missed and what you owe that’s outstanding. Paying down your balances and keeping your numbers as low as possible is one of the best things you can do to help your credit score go up over time. 

Even if you have a history of late payments, it’s not too late to start building a better history by making payments on time going forward. The Neo Card makes it easy to remember to pay your bills with timely notifications and automatic bill pay options. 

4. Focus on credit utilization

Credit utilization is how much you spend on your credit. It measures the debt you owe against the total credit available to you and is the second most important factor when it comes to determining your credit score. 

Ideally, you should aim to pay off your card’s balance in full each month, but the reality is that isn’t always possible. If you do carry a balance on your card, you should aim to keep it below 35% of your available credit. This means that if you have a credit limit of $5,000, you should only aim to use $1,500 or less to maintain a 30% utilization rate, and keep your credit score in check. 

5. Apply for new credit sparingly 

Every time you apply for new credit whether it’s a credit card, loan, or mortgage, a hard inquiry gets filed on your credit report. Hard inquiries have a limited impact on your credit score, however, if your score is already low and you are having trouble securing credit, applying for more credit can work against you. 

Multiple applications made over the course of a few months might decrease your chances of getting approved for new forms of credit because it makes lenders nervous that you might be living beyond your means. So if you are shopping for a new credit card, be selective about which card you choose to limit the number of inquiries logged, or consider a credit option that will help you build credit, like a secured credit card.

On the bright side, applying for new cards alone won’t hurt your score too much. Hard inquiries only affect your score for a maximum of 12 months, and usually, they only cost you about 5 points. The key takeaway though is to only take out the credit you need.  

6. Get a secured credit card 

Secured credit cards are backed by cash deposits. The deposit you make acts as collateral if you can’t make a payment, making it less risky for lenders to approve borrowers with poor or thin credit histories. The amount that you deposit will usually become your credit limit and most deposits start at $200, but can go as high as $2,000. 

Secured credit cards are a great way to build up your credit history if you have a thin credit file or no credit history, like if you’re new to Canada or you haven’t had a credit card before. They are also a good option if your credit score has been negatively affected by previous debts or bankruptcy declarations.

7. Transfer balances with caution

Balance transfers can be tempting if you’re looking for ways to improve your credit. Although they can help you save some money in the long-run (especially if you carry a balance on a card with a high APR), there are some extra considerations to stew over if your goal is to improve your credit score.

With a transfer balance, the idea is to move your existing balance over to a card with a lower or 0% APR. Depending on the balance transfer card and the amount of debt you’re transferring, this can reduce the amount of interest you’ll pay over time.

A balance transfer likely won’t be a great option if you already have a low credit score, since you need to get approved for a new, low APR credit card. There are also fees associated with the transfer. Most banks charge 3% of the total being transferred. This can be costly if the balance you want to transfer is high. 

8. Keep old accounts open

After you pay off your credit card or line of credit, you may be tempted to close your old accounts and move on. But credit accounts all count as part of your credit history, and the age of your credit accounts affects how credit-worthy you appear to lenders. 

Closing a credit account you no longer use can also impact your utilization rate if you carry a balance on another card. It’s best to leave the account open, even if you don’t use the card to keep your utilization rate down.

In summary 

Building your credit takes time and effort, but with the right tools, a budget in hand, and a plan to pay down debts, you can start taking steps towards a better financial future today.