A credit score is designed to present information about your creditworthiness to a prospective lender or an organization that may need to take a financial risk on you, such as a utility that will provide you services and bill you at the end of the cycle. Based on the score, they could adjust the terms in order to protect their interest. The eventual distillate of the information is presented in the form of a credit score.
It is prepared by an agency which is know as a credit bureau in Canada and is essentially a history of relevant events in your financial, particularly credit, journey. The presence of credit bureaus obviates the need for individual lenders to collect and maintain this information on their own. They need to only subscribe to the information made available by the bureau.
From a borrower’s perspective, the objective is to have a credit score that opens the door to the most beneficial terms on which credit can be availed. Hence, the higher the score, the better.
Steps for improving your credit score
Though ‘financial prudence’ is what you may be advised when you seek advice on improving your score, there are some specific actions that will help:
Keep a clean payment track record
The most important factor in your credit score is the payment history; when given credit, what has been your record in paying it back? You need to ensure that payments, when they become due, are made in time. In case of credit card payments, while the minimum payment is an absolute must, the more you pay the better it is. Even if you dispute the amount that has been charged, raise the issue, but make payment if the due date has arrived. In the event of inability to clear dues, it would be advisable to reach out to the creditor, before the due date, to check if some rescheduling may be possible.
Pro tip: Bill payments have a regular cycle. You can set up alerts for payment of bills on a device you use most frequently so that you do not forget. You can also consider creating an automated payment mechanism so that the due amount automatically gets debited to your bank account.
Stay well within limits
While exceeding your credit limit should be a no-go territory, even within the available credit limit, if not needed, don’t draw against it. Maintaining a 25% utilization of your credit card limit is better than maintaining a 50% utilization. The message it gives is that you are not borrowing even though you can.
Pro tip: If you get an offer for your credit limit to be raised, take it, even if you don’t need it. This way, assuming your utilization stays at extant level, your percentage utilization will come down.
Give it time
Credit score improvement is a slow process. The greater the duration of a well-managed and serviced credit history, the better the score, and vice versa. Though there may be tempting offers for fresh credit, try to keep your older credit accounts alive, if possible, so that the duration can increase.
Keep a check on your loan applications
Each time you apply for a credit, resulting in the prospective lender raising a query to the credit bureau, it is counted as an inquiry or credit check. The larger the number, the more keen you appear, to take on more credit.
There are some types of inquiries that do not count against you. You asking for your own report is one of them. The other one is existing lenders asking for updated information to keep their database updated. These are known as ‘soft hits.’
Pro tip: If you are shopping for credit, it is better to do it all together, within a few days. This way, all enquiries sent by prospective lenders will be treated as a single instance of a credit check.
Distributed portfolio of debt
Having different types of credit on your report presents a better picture of your creditworthiness, like having a Car Loan as well as a Credit Card as opposed to just a Credit Card. It is obviously assumed that you are in a position to service the different debts, else it will hurt you more.
Keep track of scores
Like a management guru said, “what can’t be measured can’t be managed.” Keeping track will enable you to check statements, identify errors, raise disputes and ensure goof hygiene overall.