Credit scores can be stressful. They’re a critical part of your financial health and definitely make a difference in the options available to you when you’re applying for a credit card, loan or mortgage. A high credit score is ideal, but you should know many Canadians encounter credit issues and can still buy a home. This article will explain how to improve your credit score. First, let’s take a brief look at how credit works in Canada.

WHAT IS A CREDIT SCORE
Canada offers two major credit bureaus: Equifax and TransUnion. Both assign your score based on your debts and history of paying them off. The credit score itself is a number between 300 and 900. The higher the number, the better your rating. Specifically, a credit score of 680-900 is good, 600-679 is fair, while under 600 is poor (these numbers may vary slightly depending on the lender).

You can check your credit score by visiting those bureaus; there’s a myth floating around that says checking your credit score lowers your credit. This isn’t entirely true. You are able to check your score without impacting your credit, however, if an organization or financial institution checks your credit, then it can impact your score in a negative way, temporarily.

BAD CREDIT = HIGHER MORTGAGE RATE
One of the biggest reasons we need to keep our credit score in check is to buy a home. Many lenders won’t approve a mortgage for someone with a credit score under 600. When a lender does, the biggest concern is the cost of the mortgage. The chart below illustrates the cost difference between obtaining a mortgage with bad credit vs good credit (based on a $500,000 home with 5% down, amortized over 25 years).

HOW TO IMPROVE YOUR CREDIT
Seeing actual numbers such as those above can be quite motivating to improve your credit. The difference between good credit and bad credit for that example is $2,231/month. The following are proven methods of increasing your credit score:

1. PAY YOUR BILLS ON TIME. Your credit score is largely based on your history of paying bills. Late payments register as negative information. The best way to improve here, is to automate your bill payments so they are paid before they are due.Sticking to a budget will also help with paying your bills on time. This can include tracking your spending and sticking to a shopping list.
2. PAY DOWN YOUR CREDIT CARDS. Having a high balance on your credit card is a bad sign for credit bureaus. The “credit utilization ratio” is a popular ratio used to measure your credit usage; it is concerned with how much of the total credit available to you is being used, for example…
   If you have two credit cards: CARD A and CARD B. Each card has a credit limit of $10,000. If CARD A has a balance of $4,000 and CARD B has a balance of $2,000, your credit utilization is calculated as:TOTAL CREDIT LIMIT is $10,000 + $10,000 = $20,000
   TOTAL DEBT is $4,000 + $2,000 = $6,000
   CREDIT UTILIZATION RATIO is $6,000/$20,000 = 30%Of course, the lower the better, but the goal with the credit utilization ratio is to keep your ratio below 30%. Keeping old credit cards alive is recommended as well. Cancelling unused credit cards lowers your total credit limit which worsens your credit utilization ratio.
3. CONSOLIDATE YOUR DEBT. When you’re having a hard time paying off debt, it may be useful to transfer as many as your debts as possible to a low-interest credit card. There are some available in Canada that only charge .99%. If you can qualify for a low interest loan, that’s another strategy people use for paying off their debts.