Five ways you can rebuild your credit score

Banks and credit card companies evaluate your credit score to determine whether you’re worthy of a new loan, mortgage, or credit extension. Your credit score reflects your ability to meet certain financial requirements such as qualifying for or paying back a loan or getting good interest rates.

Credit scores in Canada are impacted by a combination of factors including the timely payment of your balance, the amount of credit card limit used, the amount of debt you have, your credit history, and more. These factors have either a positive or adverse effect on your credit score and knowing this, positions you for financial accountability.

If your past financial behaviour has harmed your credit score, there’s no need to worry. You have the time and opportunity to salvage it by adopting new practices that can improve your credit score. Here are some steps you can take:

Review your credit report

A good way to begin the journey of rebuilding your credit score is by getting a copy of your credit report from the two main credit reporting agencies in the country – Equifax and TransUnion. Your credit score may slightly differ in each of the reports due to the unique methods the bureaus use in calculating. Reviewing your credit report also gives you a glimpse into your behaviour around payments, debt utilization, etc. You will also be able to identify inaccuracies or signs of fraud, and immediately report them for correction.

Pay your debts

Now that you know where you stand, it’s important to put this information to good use. Your payment history is the most significant factor that impacts your credit score so you should focus on improving it by making all outstanding payments and setting up an automatic system to pay subsequent bills on time. If you’re unable to make your payments, you can bring your accounts up to date by setting up payment agreements with your creditors.

Limit your credit applications

You may be tempted to apply for new credit cards and loans, but these will be recorded in your credit report as inquiries, which are also known as credit checks. Consistent credit checks will hurt your score and suggest to lenders that you can’t live within your means. Another disadvantage of opening new lines of credit is that it reduces the age of your account and the length of your credit history. Control this by limiting the number of credit cards you apply for and apply only when you truly need it.

Use multiple credit product type

A mix of different types of credit such as a credit card, a line of credit, a mortgage, and a car loan will improve your credit score. Your ability to manage a variety of credit products sends a message to creditors about your credit health and your understanding of essential credit information.

Build better financial habits

The most important aspect of improving your credit score is building spending and saving habits that impact your financial lifestyle in the long run. Start by creating a budget that clearly states your income, expenses, and savings for a period, usually a month. Your budget helps you to prioritize important expenses, track your bill payments, and monitor where your money goes. Adopt a saving culture by setting aside a fraction of your income for emergencies and investments. These habits add up to improve your credit score over time.

Give yourself time

Improving and rebuilding your credit score requires patience and discipline. If you take the suggested steps and commit to transforming your financial life, you will begin to see results in a year or less. The journey will not be seamless, but you can make considerable progress with the help of a debt professional.