Both a little opaque on how they’re calculated and sometimes painfully clear in what they say, credit scores are an unavoidable part of any borrowers’ life.
But with interest rates already running high, the chance of getting a lower rate thanks to a good credit history is all the more important. Warnings from short-term lenders that they may cut off millions of people with poor credit because the government is lowering the maximum interest rate they can charge adds further importance to having a strong score.
Experts say several products that have gained momentum in recent years to boost credit scores could help but, overall, the key lessons remain the same.
“My main advice these days is my main advice for 15 years, which is to really, really understand how the score is calculated, and do what it says,” said Bruce Sellery, chief executive of Credit Canada.
Credit scores are designed to gauge how reliable a borrower is, with only minor differences between how Equifax Inc. and TransUnion, Canada’s two main agencies, calculate the final number.
The fundamental inputs are the same. Payment history, including any late or missed payments, and "utilization," or how much available credit is used, each make up around a third of the total. Other factors, including credit checks, the mix of credit products, how long someone has had an account, and any public filings of defaults or bankruptcies make up the rest.
Since payment history is such a big contributor, it’s crucial to not skip a minimum payment, said Sellery.
“If you've got a credit score you're desperate to rebuild, then that minimum payment — not the balance, but the minimum payment — comes before all else.”
He suggests automating the minimum payment, so it’s not missed because of forgetting, or because people are having to make incredibly difficult decisions between things like paying bills, or buying food.
“I am deeply aware of the choices that people are making in their lives, and it's brutal.”
It’s possible to try and increase your credit limit either on an existing card or with a new one, but Sellery warned consumers to be very careful. It only works if you are well in control of spending and won’t use the extra space.
“The pro is that can lower utilization dramatically. The con is it could make your problem way, way worse,” he said.
If the temptation to use the credit is a concern, Sellery suggests some dramatic measures to make sure the extra credit is not misused.
“What you could do is apply for a store card, but you literally cut up that card as soon as it arrives, or you put that card in the hands of your mother and she, you know, puts it in a Ziploc bag full of water and puts it in her freezer.”
People often misunderstand the utilization category, said money coach Parween Mander.
Some people, overeager to boost their scores, will try to max outa credit card and pay it back, to show how reliable they are, but it backfires because credit rating agencies prefer about a third of the available credit used up.
“People think that reflects on their credit a lot better, when in hindsight, it actually doesn't because lenders don't like it when they see you are overextending and using up to your credit limit,” said Mander.
There are a growing number of ways to boost your score.
Secured credit cards, where a cash deposit is used as a backstop but otherwise work much like a regular credit card, are a long-standing option.
There are also credit-building products from companies like Koho Financial Inc. and Refresh Financial. Some of them work by having the customer make regular payments on a loan that they can access only after it's fully paid. Other programs allow you to put in money up front that you then borrow from and pay back monthly.
A number of options to count rent toward credit scores have sprang up in recent years, including FrontLobby, Borrowell’s Rent Advantage and most recentlyZonetail also signing on with Equifax in January.
With all credit-building products it’s important to remember that missed payments can work the other way and worsen a credit score. Tenant advocates have also raised concerns with rental-reporting programs, worried how they might be misused by some landlords.
There are also an increasing number of options for newcomers. Last July,Nova Credit partnered with Scotiabank on what it said was the first cross-border credit bureau to operate in Canada, giving the option of customers to share their foreign credit bureau data.
It’s also a good idea to check your credit score records to make sure there aren’t any errors or lingering problems like a forgotten bill that’s gone to collection.
Checking your credit score yourself is much easier these days, with all sorts of free options including directly through the rating agencies, banks, or options like Borrowell or Credit Karma.
Such checks are considered soft pulls that don’t affect your score, but hard pulls, like the kind carried out when applying for credit cards or an instalment loan, should be avoided if possible, said Sellery.
“Do not apply for new credit because the bureaus and the score will take it as you're in crisis,” he said.
Overall though, while it’s important to understand credit scores, it’s also good to remember that improvements take time, and having the right financial fundamentals in place is key, said Mandar.
“What I find is people are sometimes a little bit too obsessed with their credit scores,” she said.
“If you have good spending habits, if you have good debt repayment habits and you're paying off your debt, your credit score will reflect that over time.”
This report by The Canadian Press was first published Feb. 22, 2024.
