How to Improve Your Credit Score

Ben: Hello everyone, and welcome to another fabulous Consolidated Credit webinar. We have our Executive director here Jeffrey Schwartz, and he’s joined by our industry expert Ryan Watt from Climb Credit.

Today we’re going to speak about building or improving credit, and then highlight some strategies and some tools that you can start using today to help do that. We’ll kick things off with Jeff.

 

Jeff: Hi everybody. Right out of the gates, whether you’ve bruised your credit with late payments or accounts that have been sent to collectors, or you just want to get the best interest rate on a loan or mortgage, the first step you need to do is get copies of both of your credit reports.

 

Ben: Yes, you need to get both. You see that there are two credit bureaus in Canada: Equifax and TransUnion. It’s a good idea to check both reports and to know both of your scores. But we’ll cover that more in a second.

Every Canadian is entitled to one free copy of their credit report per year through the mail. You simply go to the bureau’s website, download the request form (it’s a PDF), then you’ll have to fill it out and include two photocopies of government ID. Then in about 15 to 30 days, you’ll receive a paper copy of your credit report, and that’s when the work can start.

 

Jeff: You also may want to check with your bank. Often, banks will give you your credit score or report for free. Often this will be from one of the bureaus, and not both, so be sure you get copies from both TransUnion and Equifax.

You can also get both your scores from the bureau websites. Just beware that they’re likely going to charge you a fee. And there are some other credit monitoring and loan brokerage websites you can find on the web that will also give you free scores and some information on the accounts in your credit report.

 

Ryan: Yes, and whatever way you choose to get your credit reports, it’s important that you look at both scores and both reports. Now, they may not be the exact same, and that’s OK. What you want to look for is large gaps between the scores.

Let’s say you have a score of 700 at TransUnion and a score of 600 at Equifax. You want to examine both reports and find out why there’s such a difference. It’s especially important when you’re looking for larger loans as most lenders will look at the average of both scores. The closer they are to each other, the better. In the last example, the person with a 700 score and a 600 score would actually average out to 650. This could mean you’re paying a higher interest rate than you deserve.

 

Jeff: In order to have good credit, you need to use credit in a positive way. Being debt free is a great financial goal to have, however, most of us will need to take on some type of debt in our lives, whether it’s to finance education, purchase a car, or work towards homeownership. Having debt isn’t always a bad thing. On the other hand, having no loans at all to repay means you’ll have nothing to report to the credit bureaus and therefore nothing to build or improve your credit score on.

 

Ben: That’s a good point. It’s also important to note that not all debt is bad debt. And in some cases, debt can be a great tool for convenience, and it can also help improve your financial situation. Some examples of this would be taking out a student loan. Typically you’re younger, it means you’re interested in finding a good job. And by paying off that student loan once you’ve graduated, you’ve started building that credit at a young age.

Another popular example of using credit for convenience would be using one of those cashback or reward credit cards every month. As long as you pay it off, not only does this help improve your credit, it also helps you get some free perks, like gas, or groceries, air miles, that type of stuff. There are some good reasons to use credit regularly.

 

Jeff: Great points Ben. But just because you have to have a credit card to build a credit score doesn’t mean that you need to accept every offer and credit card thrown your way. We’ll talk a little bit more on that later.

It’s important to understand how having a mix of credit types can work in your favour as well. Revolving and installment credit are two of the more common types of credit and are called “trade lines” on your credit report. Having a good mix of them can help you build your score faster.

Revolving credit examples include credit cards where there can be a revolving balance and limit. Installment, on the other hand, is pretty self-explanatory, meaning you pay in installments. Things like car loans or student loans would be considered installment loans.

 

Ryan: That’s right. A good example of a healthy credit mix would be a person with a car loan, a student loan, perhaps two credit cards. In that case, lenders can see that they can handle two different types of installment credit (the car loan and student loan), and two types of revolving loans (the credit cards). Now, don’t get me wrong. Any of these loans will hurt your credit quickly if you start paying late or if you default on them.

 

Ben: Good point. That brings us to our next slide here, which is “understanding your credit scores.” Understanding the credit score calculation can help you get the best credit score. Two of the biggest factors in that calculation are what are called “utilization” and “payment history.”

For the payment history, 35% of your credit score is made up of your history of paying accounts. That means if you’ve paid off every credit card bill, every loan payment without fail for the last seven or eight years, you’ve probably got really good credit. Excellent even. Also, if you never carry a balance month to month, or on the rare month that you do happen to carry a balance – January is a popular time for that – or if it’s very low, then you probably have great credit too.

The way you want to think about utilization rate, is it’s just a way to look at how in debt you are. Staying below 20% to 30% of your limit when carrying a balance month to month is the best way to maintain a strong credit score.

 

Jeff: Great points Ben. Let’s take a look at that example. It’s one we see quite regularly. Let’s say you had a $10,000 limit on your credit card, and due to some unforeseen emergency, you had to put a charge of $5,000 on it. Doing the math, you’re now 50% utilized, which is well over that 20% to 30% we mentioned. If that card gets paid off by the end of the month, then it’s going to be seen as positive information on your credit report. But what happens if you can’t pay that card off by end of the month?

In order to lessen any negative impact on your score, you’ll need to make a payment of, let’s say, $2,000 on the card. But even better would be a $3,000 payment. Making a payment of $2,000 to $3,000 would bring the balance down enough to fall within the 20% to 30% utilization rate that we mentioned and not negatively affect your credit if you’re unable to pay the card off in full by the end of the month.

 

Ben: It looks like that was a popular topic. We have a question now, and I think it would be a good time to answer it. This one’s for Jeff. They’re asking, “Does keeping cards overutilized or maxed out month after month lower my credit score, even if I make the minimum payment?”

 

Jeff: Yes, definitely. With only paying the minimum, the majority of what you’re paying goes to interest and fees anyway before being applied to the balance. There are some easy ways to prevent missing a payment or paying late. Setting up reminders to pay on your phone, or even better, setting up automatic payments through your bank will help ensure that you don’t miss any payments. Just be aware that there could be penalties for missing a payment if there’s insufficient funds in the account resulting in those NSF fees.

Also, overdraft on these accounts can include some pretty hefty interest rates as well. So make note of the amount and what day the payment comes out so you don’t get dinged with any unnecessary fees. And like we said earlier, you really don’t want to over apply yourself. Making the distinction between “soft” inquiries and “hard” inquiries can save you from losing some of those valuable credit score points.

 

Ben: Good. That’s something I hear quite regularly in my workshops. So I think now would be a good time to cover that question, probably for Jeff: “Does checking my credit score affect my credit?” I hear that quite a bit.

 

Jeff: Checking your own credit report once a year through the mail does not impact your credit score, and neither do any of the online soft checks on many of the websites and also on your online banking. But if you’re unsure, make sure you ask the lender before you attempt to pull.

The bottom line is, don’t overapply yourself. Next time you go to the grocery store, someone may offer you a free box of cookies, or some steak knives for setting up their new rewards credit card. But just know the cookies or the knives aren’t free. Once you sign that agreement, you’ve given permission to do a hard pull on your credit and your score will dip slightly as a result of that.

 

Ryan: That’s right. Now, there’s an exception to this rule often found with mortgage lenders. When shopping for a large loan or mortgage, you’ll be able to have five credit checks done with different mortgage lenders. And for the purpose of your credit score calculation, the bureaus will only count it as one single mortgage inquiry.

 

Ben: That’s a good point to note. So, shop around, especially for the biggest purchase of your life. After you’ve received the copies of these credit reports, you’re going to want to start going over it with a fine tooth comb and you want to start looking for mistakes, inaccuracies.

What needs to be fixed? Personal information, collection accounts, credit information. According to a national survey put out by the Public Interest Advocacy Centre, nearly one in five Canadians found a mistake on their credit report. So, take a close look at all these things. And if there are accounts in collections, make sure they’re yours. Take some time to govern all of those inquiries and make sure you recognize all of them.

Did you open that credit card? Did you get that free box of cookies? That sort of thing. If you do see any inquiries that you don’t recognize, check it out right away. That’s a really good sign that there’s an identity thief trying to open an account in your name, maybe a cell phone or credit card. Something like that.

 

Jeff: These are all excellent points. What people need to know is that the dispute process is pretty straightforward if you have found an error. You can fill out the dispute form they send you when you receive your free credit reports. You can also call the bureau directly or even do it through their online dispute center.

If the bureaus are unable to correct the mistakes found there, your next step is to contact whoever legally owns the debt, whether it’s the original lender or the collection agency the debt has been sold to. If you’re unable to remove or update the information, you always have the option of adding a consumer statement to your credit report. It’s just a few short sentences that lenders can read that are meant to explain the blemish or mistake on your report.

 

Ryan: Right, but the bottom line is to think like a lender. Would you loan money to yourself? If you took a look at the last seven years of your credit history, what would that tell any future lenders? That’s why it’s important to honestly ask yourself, “what does my credit report say about me?” Because that’s exactly what the lenders are asking themselves when they’re looking at your credit or loan application.

 

Ben: Great. Some good points there. Now we’ll move on to, what could the problem be?

Jeff: Is debt the problem? Just as the slide said. Carrying high debt levels, missing payments, and having debts sent to collections are some of the worst things you can do to your credit. So, what is your particular situation now that you have your credit reports and understand a bit more about them?

It’s time to do a bit of a personal inventory. If your balances aren’t going down, even if you’re making the minimum payments, you’re likely headed for trouble. We’ve seen how being overutilized on your loans directly impacts your credit score, so each month that a credit card stays maxed out, your score is going to feel it. Late payments over 30 days are going to be reported to the credit bureaus, and again, your score is going to feel it.

These are all warning signs that you need help with your debt. You’ll have to ask yourself some tough questions though. Why did the debt become a problem? When did these things go off the rails? What if an unplanned expense were to crop up tomorrow? How would I handle it? Would I be able to handle it?

 

Ben: Those are all some good questions. And if the answers to these questions scare you – or some people who stick their heads in the sand, they don’t want to know the answer – that tells me it’s time to speak to a professional. So, speaking to a credit counsellor, or a trusted financial advisor will help you understand where your money is going and how much debt you’re carrying. Based on that budget snapshot and the debt assessment, they’ll have the tools necessary to start putting a plan together for you.

 

Jeff: And there are several options for getting you out of debt. And if debt is the problem, then fixing that problem should be the first step towards improving your credit. The most severe of these options would be bankruptcy. If your situation is dire enough, then you need to speak to a Licensed Insolvency Trustee about the bankruptcy process.

Debtors not wanting to file bankruptcy also have the option of speaking to a trustee about a consumer proposal. A proposal is an agreement made by the consumer to repay a portion of their debt within five years. Both of these options have a severe impact on your credit. So, you’re going to want to make sure you fully understand them before you go ahead with either of these insolvency options.

 

Ben: Right. Those are not simple decisions to make because there are a number of reasons why a person can’t or may not want to go bankrupt, depending on their situation. They might lose their home, they could lose savings. If they’ve built assets, they could lose those as well. Others might lose their jobs depending on what industry they work in.

So bankruptcy is not an option for everyone. A restructured payment plan – something like a debt management program (DMP) – is another option for people carrying high levels of unsecured debt. Unsecured debt would be anything that’s not backed by some sort of collateral or asset. What the DMP does is it consolidates all of your debts at a reduced interest rate, often at about 0%. Debtors will then make one monthly payment which is applied to all the accounts at that reduced interest rate until the debt is repaid.

The debt management program does have a negative impact on your credit, but it is much less severe than the ratings associated with a bankruptcy or consumer proposal. The bottom line is, find some sort of help if you need it.

If improving your credit is a concern of yours, then it’s worth it to take a look at some of the tools out there that can help you. Climb offers a credit building program to rebuild your credit while you save money. Ryan can explain a little more about what it is and how it’s been successful for some of their clients.

 

Ryan: That’s great. The credit building program is fantastic for people who currently have low credit scores and are looking to build positive trade lines and have that positive credit history. It could be that you don’t have that history from the past, so you’re looking to build up your file. It could be – as you mentioned in the last slide – that you’re considering a consumer proposal or debt management plan and you’re looking to rebuild your credit from there.

The credit builder program allows you to save money while you’re rebuilding your credit score. With an improved credit score, you’ll be one step closer to achieving the financial future that you’re looking for, being approved for loans, better interest rates. Not to mention at the end, you’ll have money that will be returned to you that can go towards whatever you were saving for, be it a car, a vacation, even your child’s education.

The way the program works is that you would be paying a loan on a monthly basis. We would be holding the payments in a savings account for you and we’d be recording all your payments to the credit bureau, building up your positive credit history. At the end of the program, we return your savings to you so that you have that money to be able to spend on whatever you’d like.

Ben: Great. Sounds like an interesting program and certainly worth taking a look at if improving your credit is a concern of yours.

Now I think we have some time for some questions. It looks like the first one is, “How long will it take before I see an improvement of my credit score?” Well, that depends a lot on your personal situation and what your credit looked like before you started taking action to repair it. But people who manage to reduce their debt loads, or stop paying late, or maybe take care of a debt that’s in collections can start seeing a big improvement in about 6 to 8 months.

Next question that we have there, it looks like it could be directed towards Jeff: “How can I build credit as a young person with no credit history?” Good question.

 

Jeff: Firstly, and I experienced this with one of my children, I would start with a credit card. As long as you can trust yourself with paying it off in full every month, and if you’re over 18, you can talk to your bank about applying for a low-limit, preferably low-interest credit card. It’s a little easier to get approved for a student card if you’re attending a full-time post-secondary program. So that’s something you might want to think about.

Now, if you can’t get approved for either one of those, then look at applying for what’s called a “secured” credit card. With a secured credit card, you’re required to pay a deposit up front. And that deposit is going to act as your credit limit. So you put down, say, a $500 deposit, and then they give you a credit card with a $500 limit. Once you get that credit card, leave it at home.

Figure out what you can comfortably afford each month. It could be your Netflix subscription or your Hydro bill. Whatever it is, make sure you pay it off each month. Borrow, pay, and repeat. That’s the best way to build your credit history. Remember that in order to get the most impact of using a card, pay it off prior to the end of the period of that statement, and not just before the due date.

 

Ben: Good point as well. Ryan, are there any questions you seem to get about your program that you want to cover now? Anything else you wanted to mention?

 

Ryan: Yes, it comes down to exactly what Jeff said in his previous comments, is that a secured credit card or credit card of some type is a great way to build your credit. But as we said earlier in the webinar, having installment loans and revolving loans is a one-two punch in order to improve your credit even quicker. So, that’s where a lot of our customers will look at getting into our credit builder program, also getting that secured card to be able to improve their credit scores even faster.

 

Ben: Great. Thanks for taking that. It looks like that’s all the questions we’ve got so far. If you’d like to contact us or Ryan at Climb to learn more about their program, please let me know. You can reach us by phone or email. Feel free to check out the website. There’s a ton of information and educational resources there.

That concludes the webinar for today. Thank you all, and have a great day!