What is The Best Way to Improve Your Credit Score?
What is A Credit Score?
Let's talk about your credit score - a number between 300 and 900 that lenders use to get a sense of how reliably you've handled credit in the past. This score essentially helps them evaluate the risk of lending you money.
When you apply for a mortgage – which is likely why you're here – your credit score plays a significant role. Lenders will look at this score to decide if they'll approve your application, what interest rate they'll offer you, and what terms will be available. A better credit score often means access to more favourable mortgage options, potentially saving you a lot of money over the life of your loan.
Beyond mortgages, your credit score can also impact other important aspects of your financial life. For instance, it can influence your ability to get other types of loans (like car loans or personal loans), and it can even be a factor when you're looking to rent an apartment or get insurance.
Now, if your credit score isn't where you'd like it to be right now, don't worry. The good news is that improving your credit score is absolutely within your reach. It takes understanding what affects your score and then taking consistent steps in the right direction. We're here to help you navigate that process.
How Can You Improve Your Credit Score?
Now, let's get into some practical steps you can take to boost your credit score. Full disclosure, improving your score is simple, but not quick. Build these habits and you’ll be on a great track:
Pay every bill on time - Consistency is key
Keep card balances low - Aim for under 30% of your limit
Don't close old accounts - They help your credit history
Limit new credit applications - Only get credit or loans if they are needed
Have a mix of credit - Diversify your credit
Pay Your Bills On Time: This is the cornerstone of a good credit score. Payment history carries the most weight, so making sure you pay every bill – not just credit cards, but also utilities and loans – by its due date is crucial. To make this easier, consider setting up payment reminders on your phone or using automatic payments directly from your bank account. This way, you minimize the risk of missing a payment.
What lenders see: If you’ve taken out loans previously and have had a hard time paying consistently, a lender is likely to believe they will have a hard time getting a consistent payment from you for any future loans. Remember, your credit report will show every on-time, late, and missed payment you’ve had over several years.
Reduce Your Credit Card Balances: How much of your available credit you're using, known as credit utilization, is another significant factor. Ideally, you want to keep your balances well below your credit limits, aiming for under 30% utilization on each card and overall. Focus on paying down those balances.
What lenders see: Lenders like it when you have a lot of credit available to you but consistently only use a small amount of it because it shows that you are making smart choices with your spending by spending less than you’re qualified for.
Don't Close Old Credit Card Accounts: Even if you're not using a credit card anymore, think twice before closing it, especially if it's one of your older accounts. Closing accounts can reduce your overall available credit, potentially increasing your credit utilization ratio. Plus, the length of your credit history is a positive factor, and closing older accounts can shorten that history.
What lenders see: Lenders love seeing a long history of well managed credit. If you close down a credit account, you’re reducing the amount of credit available to you even if you weren’t using it. This reduces the amount of credit you are responsible for, and ends the history for that line.
Avoid Opening Too Many New Accounts at Once: Each time you apply for new credit, it can result in a "hard inquiry" on your credit report, which can slightly lower your score, especially if you do it frequently in a short period. Be strategic about when and why you're applying for new credit. Only apply when you truly need it.
What lenders see: If you’re opening up many new credit lines at a time, a lender can perceive that as erratic financial choices. Lenders want to choose people who execute on financial plans and can explain the credit choices they are making.
Have a Mix of Credit Lines: Having a mix of different types of credit, such as credit cards and installment loans (like car loans or student loans), can be a slight positive factor in your credit score. It demonstrates that you can manage various types of credit responsibly. However, don’t open more accounts just for the sake of it. See the point above!
What lenders see: This shows that you have had different financial experiences and (hopefully) that you have managed them all responsibly.
Misconceptions About Credit
Let's clear some things up
One misconception is that simply checking your credit score will hurt your score. Actually, this is a "soft inquiry" and has no impact at all. What can slightly lower your score are "hard inquiries," which happen when you apply for credit, like a mortgage, a car loan, or a new credit card. Lenders need to check your credit at that point. While a few hard inquiries over time are normal, applying for many different types of credit in a short period can be a red flag to lenders. It indicates that you’re testing the market, and possibly trying to get around the system. So getting your credit pulled for a credit card that you plan on using, or a mortgage to buy a house? No problem. Applying for 5 credit cards in a month? Not good.
Another myth is that you need a perfect credit score of 900 to qualify for a mortgage, especially with a prime ("A") lender. While a higher score certainly opens up the best interest rates and terms, a credit score of around 680 or above is generally considered good and often sufficient to qualify for a mortgage with an A lender. Of course, other factors like your income, down payment, and debt levels also play a significant role in mortgage approval.
One more thing we often hear is that carrying a balance on your credit card helps your score because it shows you're using credit. In reality, it's better to pay your statement balance in full each month. Carrying a balance means you're paying interest, and it can also lead to a higher credit utilization ratio, which, as we've discussed, can negatively affect your score. Responsible credit use means using credit and then paying it back on time and in full whenever possible.
You Can Take Control of Your Credit!
Let's face it, things are expensive these days, and building good credit in this environment definitely takes focus and consistent effort. It requires real discipline to stay on top of bills and manage your credit wisely. But it's important to remember that even if buying a home or making another big purchase isn't on your immediate horizon, the work you put into building a solid credit score now is an investment in your future. A good credit history opens doors and provides you with options down the road, whether it's qualifying for a mortgage, getting a car loan, or even just accessing more favorable terms on everyday services. You have the power to take control of your credit, and by implementing these simple habits, you're setting yourself up for greater financial flexibility and opportunity in the years to come. It's a journey, not a sprint, and every positive step you take makes a difference. We're here to support you along the way!
