Improve Credit Rating
There are a few simple steps that you can take to improve credit rating fast. In fact, you could dramatically improve your credit score within 3 to 6 months!
Before I give you the 6 steps to improve credit rating, lets first review the credit rating system. (Skip to the 6 Steps Now!)
- Always Make payments to your creditors
- Balance outstanding vs. credit limits
- The number of credit cards &/or loans that you have
- How long have you established credit
- Collection Items
- Credit Bureau Inquiries
Always Make Payments To Creditors
Simply put, you must always make your minimum payments to each creditor. You must make them on time (or earlier) and make, at least, the minimum payment every time it is due.
When you apply for and receive a credit card or line of credit or loan, you are making a contract with the credit company. This company expects you to obey the terms of the contract. In other words, making the payments on all balances outstanding!
If you make all the payments, then you get a good rating. For a credit card this is R1, for a loan the rating is I1. R for revolving, I for installment. If you don't make the minimum payment, or you are late, then you will get a different rating: R2 (I2) for 1 month in arrears, R3 (I3) for 2 months in arrears, etc...
Therefore, improve credit rating by always making your minimum monthly payments on time, all the time.
The number of credit cards &/or loans that you have
Most lenders now require that you have established at least 2 pieces of credit that report on the credit bureau. This could include credit cards: Major credit cards like Mastercard or VISA, AMEX, etc. This will also include store cards. As long as these cards report to the credit bureau they will count.
The credit can also be loans from your bank, trust company, credit union, vehicle finance companies, etc. Again, as long as the company you have the loan with is reporting to the credit bureau, then it will count. In other words, loans from Mom & Dad or other relatives doesn't count!
Lines of Credit from banks, trust companies, etc also count as credit if they are reported.
To maintain or improve credit rating then establish at least 2 pieces of credit that report to the credit bureau.
Balance Outstanding vs. Credit Limits
Not everyone realizes this, but your credit can be significantly affected by the balances you owe versus your credit limits!
It is really important to ensure that the total balance outstanding in any one credit card is not greater than 75% of the limit. If you have many credit cards and only use one, then you would review the total balance on all cards versus the total limit of all credit cards. Again, the balance should be no greater than 75% of the total limit.
The balances that you will have on loans will not affect this 75% calculation. The calculation is based on the revolving credit that you have only. Basically the credit cards and lines of credit are used to calculate this ratio.
Going over the credit limit is also bad. For example: You have 2 credit cards and one has no balance and the other is over the limit. Even if the balance is less than 75% of the total limit, you will be negatively affected by the 1 card that is over the limit!
To maintain or improve credit rating always keep your balance on any given credit card under the credit limit and maintain your total balances at or under 75% of the total limit.
How long have you established credit
The length of time you have had credit and used it well is an important factor in arranging financing. If you are new to credit, in other words, less than 1 year of established credit, then lenders will be more cautious.
The longer you have established credit, the more history you have. You are likely maintain the same credit as you maintained in the past.
Sometimes, things happen and your credit is affected negatively. You could have gone for an extended holiday (more than 1 month). You could have experienced a family emergency that affected your credit.
When there is history of good credit, then a time of bad credit, then good credit again. Lenders will understand that something might have happened. In fact, they will probably ask you to explain what might have happened! Your explanation will then affect the decision they make.
If a close family member fell ill and you had to take time off work to help them. Your credit fell behind but you fixed it up once you were back to work full time... This is a much better explanation than... I didn't have the money so I didn't pay.
In this example, the time helps. Good Credit follows the bad credit. The more distant the bad credit issue, the better!
To improve credit rating, give it time.
A collection item is reported by a collection agency. Basically, you had a contract with a lender. You failed to make the payments. The lender made every effort to collect the balance owing but couldn't. The lender then sold your file to a collection agency who will try to collect from you.
It is always best to negotiate with the lender first! If you can speak with the lender and make arrangements to pay the funds back then you are less likely to have a collection item report on your credit bureau.
If you have a collection agency calling you, then you can still contact the original lender and pay them. Sometimes they will have the collection item removed from your credit, but sometimes they wont. Why not ask!
Most lenders will request that you pay all outstanding collection items before they will lend funds to you. The exception to this is if you are in a dispute and can prove it with documentation.
To maintain or improve credit rating, pay off all collection items and ask to have them removed from the credit bureau.
Credit Bureau Inquiries
There are 2 credit reporting agencies in Canada: TransUnion and Equifax. Both are used by lenders and both provide essentially the same information.
A credit inquiry is an item that is reported in your credit bureau. This shows other lenders who have requested your credit. The date and lender name and lender contact number is reported.
Many people are worried that an inquiry can drastically affect their credit! This is FALSE.
Yes, an inquiry will reduce your credit score but only slightly (around 2-3 points). For most people this is nothing to worry about. If however, you have bad credit, 2-3 points can make the difference between a yes and a no.
When you make an inquiry yourself by visiting the Equifax or TransUnion website, then there is no inquiry listed and this doesn't affect your credit at all.
If you are trying to improve credit rating, then you should check your own credit regularly to see the progress. To qualify for a mortgage your beacon score has to be over 600 to qualify for good mortgage rates. If your beacon score is below 600 then you may still qualify for a mortgage but the interest rate may be much higher.
The 6 Steps to Improve Credit Rating:
- Make your minimum payments, on time, every time!
- Establish at least 2 pieces of credit
- Maintain a balance on credit cards no greater than 75% of the total credit card limit
- Don't go over your credit limit on any credit card
- Pay off, in full, all collection items reporting on your bureau
- Check your credit regularly (monthly to quarterly if you are trying to build it up, semi-annually to annually if you are not)
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