As a mortgage professional, we often work with clients who are eager to improve their credit scores. A higher credit score not only increases your chances of getting approved for a mortgage but also helps secure a more favourable interest rate. Here are five effective strategies to enhance your credit score:
1. Pay Your Bills on Time
One of the most significant factors affecting your credit score is your payment history. Paying all your bills on time, every time is critical. This includes not just your credit card bills or any loans you may have but also your rent, utilities, and even your cellphone bill. Late payments can have a detrimental impact on your credit score. Setting up automatic payments or reminders can ensure you get all the due dates.
2. Reduce Your Credit Utilization Ratio
Your credit utilization ratio is the amount of credit you’re using compared to your total available credit. For instance, if you have a credit card with a $10,000 limit and owe $2,000 on that, your credit utilization ratio is 20%. To help improve your credit score, it’s advisable to keep this ratio under 30%. You can do this by paying down existing debt and avoiding large balances on your credit cards.
3. Regularly Check Your Credit Report for Errors
Sometimes, errors on your credit report can drag down your score. You are entitled to a free copy of your credit report every year from each of the major credit reporting agencies in Canada: Equifax and TransUnion. Review your report for any inaccuracies or fraudulent activities and dispute them promptly. This can include incorrect personal information, duplicated accounts, or incorrect reporting of payment statuses.
4. Limit Your Inquiries for New Credit
Each time you apply for credit, a “hard inquiry” is placed on your credit report, which can temporarily lower your score. While one or two inquiries aren’t usually a concern, several in a short period can be problematic. Try to limit applications for new credit cards or loans unless absolutely necessary. If you need to shop around for a loan, try to do it within a short timeframe to minimize the impact on your score.
5. Maintain a Mix of Credit Types
Credit scoring models often consider the variety of credit accounts you have. Having a wide mix of credit types, such as a credit card, car loan, a mortgage, or a line of credit, can most definitely positively impact your score. However, this doesn’t mean you should take on debt you don’t need, it’s all about showing that you are able to take on various types of credit and make payments responsibly.
Improving your credit score is an exercise that takes time and patience, but by following these strategies, you’ll be on your way to a healthier financial future. A good or excellent credit score can save you many thousands of dollars of interest over the life of your mortgage. If you are still trying to figure out where to start or need more personalized advice, please feel free to contact me.