How to Improve Your Credit Rating (Credit Score) in Canada While Staying Out of Debt
Q: I’ve had trouble finding steady work these last few years and my credit rating went down because of all my late and missed payments. Things are better now so I’d like to build a good credit rating again but don’t know where to start. How many credit cards and how much debt do I need to build a good credit rating?
A: Building a good rating takes time. Your activities need to show that you make responsible choices with your income. This means that you consistently make your payments on time, you don’t borrow more than you can afford to repay and that you use your available credit wisely.
When you apply for credit, lenders look at the whole picture to see if you’ve got balance. You need some money saved, not too much debt and enough stable income to meet all of your obligations. Lenders and the credit reporting system know that someone only has a set amount of money available each month to make debt payments.
Too much debt will be a concern when you apply for credit and it will work against building a good credit rating. Here are some things you can do that will help you build a good credit rating while staying out of debt (Note: your credit rating is actually your credit score which appears at the end of your credit report. Click here to find out how to get a copy of your credit report and your credit score):
How to Improve and Build Your Credit Score in Canada
- Only apply for credit that you need. The number of inquiries on your credit file reflects how often you seek additional credit. There are only so many payments someone can afford to make.
- The type of credit you have in Canada impacts your credit score. Repeated consolidation loans and deferred payment plans can indicate that you have trouble meeting all of your obligations.
- Keep your credit limits reasonable and keep all balances owing well below the limit at all times.
- Use your bank account properly and conduct routine banking transactions each month. Overdrafts and bounced payments can signal financial difficulty.
- Pay parking tickets and driving fines promptly.
- If you have a cell phone on contract, be sure to pay the full balance owing each month.
How to Manage Your Credit Cards and Not Accumulate Debt
Most importantly, have a realistic budget that lets you live within your means. One, maybe two credit cards with very reasonable limits based on your income, are all you should need. Pay them off in full every month. Excluding your mortgage or rent payment, try not to use more than 20% of your take home pay for monthly debt payments. This will allow you to manage unforeseen financial challenges effectively and take advantage of unexpected opportunities.
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