You may be in a financially tight spot right now and want to look for ways of improving your credit score. After all, having a good credit score will allow you to get loans, better rates on insurance, and lower interest rates. Despite all the talk about how credit score ranks among the most important financial tools, few actually understand how it works and to what extent a monetary institution can use it.
Your credit score is heavily influenced by the information a financial institution has about you as you appear on its database. You need to leave a good impression on the organization in order to get approval for any loans and credit plans. Here's how to rebuild your credit in Canada smartly:
4 Tips on How to Rebuild Your Credit in Canada:
1. Check Your Credit Report:
Many Canucks don't even realize that their bad credit might be because of a clerical error and not because of their spending habits. There have been too many instances in the past where people discovered errors in credit reports that impacted their credit scores.
So get a copy of your credit report from any of the two (or both) national credit bureaus in Canada; TransUnion and Equifax.
Once you get the reports, go through them with a fine-tooth comb or consult with a credit counselor for more accurate analysis.
2. Limit Your Accounts, Loans, and Credit Cards:
If you have a lot of credit cards and lines of credit, you are likely to get denied the loan. This is because the financial institutions see such a person as a ticking bomb that can get a huge loan from these open accounts at any time.
So close all unnecessary accounts and start making timely payments on the ones you owe money to improve your credit score.
3. Reduce Your Debt-to-Income Ratio:
A high debt-to-income ratio means a high percentage of your monthly income goes towards paying the debt. You can calculate your DTI using this free calculator.
Your goal should be to keep the DTI below 36%, as this is the best-rated ratio and will increase your chances of getting approved for credit.
We know this directly doesn't answer your question on how to rebuild your credit in Canada, but the purpose of rebuilding it is to get in the good books of creditors, and a good DTI does just that!
4. Reduce Your Credit Balance:
Credit reporting agencies hate high credit balances, and that's why when you max out on your credit, it directly affects your credit score.
A ratio used to calculate this metric is called Credit Utilization Ratio. Here, the amount you owe across all of your credit cards is added and then divided by their added maximum limits. For instance:
- Card A: Limit = $5000, Debt = $800
- Card B: Limit = $5,000, Debt = $2,200
- Total Limit: $5,000 + $5,000 = $10,000
- Total Debt: $800 + $2,200 = $3,000
- Credit Utilization Ratio: ( $3,000/$10,000) x 100 = 30%
According to a general consensus, 30% or lower credit score is considered good enough.
Consider Debt Consolidation:
You can transfer your significantly high credit balance to a low-interest credit card and save a lot of money in interest payments.
However, the low-interest period for most credit cards is six months, like the Scotiabank Value Visa Card that offers six months of low-interest charges; 0.99% only.
You can also consult with a credit counselor to find better ways to consolidate your debt and also how to rebuild your credit in Canada more efficiently.