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Improving your credit score

By Carla Hindman, Director of Financial Education, Visa Canada

Many people suffered blows to their credit scores during the unstable economy of the last few years, whether because they missed payments, exceeded credit limits or, more seriously, experienced bankruptcy. Is this a big deal? Absolutely.

If your credit score drops significantly, you'll likely be charged higher loan and credit card interest rates and offered lower credit limits – or perhaps be disqualified altogether. And, lower scores can also lead to higher insurance rates and harm your ability to rent an apartment or even get a job.

Fortunately, there are a few steps you can take that will begin improving your credit score almost immediately:

First, review your credit reports from the major credit bureaus (Equifax and Transunion) to see which negative actions your creditors have reported and look for errors or possible fraudulent activity. You can order your report for free and have it mailed, or pay a fee and have it delivered electronically.

A single late mortgage payment could knock down your score, so set up automatic payments for recurring bills (mortgage, utilities, etc.) Also consider setting up automatic minimum credit card payments if you're prone to forgetting or travel a lot.

Never exceed individual credit limits. In fact, the lower your credit utilization ratio (the percentage of available credit you're using), the better. Try to keep your overall utilization ratio – and ratios on individual cards and lines of credit – below 30 percent.

Even if you pay off your balance each month, showing a high utilization ratio at any time during the month could conceivably hurt your score. A few suggestions:

  • Spread purchases among multiple cards to keep individual balances lower.
  • Make extra payments midway through billing cycles so your outstanding balance appear lower.
  • Ask lenders to reinstate higher limits if your payment history has been solid.

Transferring balances to a new credit card to get a lower rate dings your credit score by a few points – although it won't take long to recover. But, say you move a $2,000 balance from a card with a $10,000 limit to one with a $4,000 limit; you've immediately gone from a 20 percent utilization ratio to 50 percent on the new card.

A few other credit score-improvement tips:

  • Make sure that credit card limits reported to credit bureaus are accurate.
  • Don't automatically close older, unused accounts; 15 percent of your score is based on credit history. In fact, occasionally make small charges on existing accounts to make sure lenders don't close them out.
  • Each time you open a new account there's a slight impact on your score, so avoid doing so in the months before a major purchase like a home or car.
  • Pay off parking, traffic or library fines. Once old, unpaid bills go into collections, they can cause major damage to your credit.

There are many good resources for learning more about what you can do to repair and protect your credit scores. The Financial Consumer Agency of Canada (FCAC) is a great place to start, with a downloadable guide called "Understanding Your Credit Report and Credit Score".

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.

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