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A good credit score is the key to buying a house, taking out a loan, applying for a credit card as well as many other important economic transactions. Banks use your credit score to determine your credit risk—the higher the score, the lower the risk and the more appealing you look on paper, which can give you better interest rates on loans.
Boosting your credit score from merely good to great will give you access to the best offers and best rates on nearly everything. Here are the best ways to do it.
1. First - Know where you stand
To improve your credit score, it's important to know where you stand now. You can get free credit reports once a year at sites like www.canadacreditfix.com or www.equifax.ca, but you typically have to pay to see detailed scores.
If you find negative information on your credit report that’s inaccurate, notify the appropriate institutions immediately. Credit report companies are required to launch an investigation on anything you report as false.
2. Get a credit card if you don't have one
Don't fall for the myth that you have to carry a balance to have good scores. You don't, and you shouldn't. But having and using a credit card or two can really build your scores.
If you can't qualify for a regular credit card, consider a secured credit card, where the issuing bank gives you a credit line equal to the deposit you make. Look for a card that reports to all three credit bureaus.
3. Add an installment loan to the mix
You'll get the fastest improvement in your scores if you show you're responsible with both major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans).
If you don't already have an installment loan on your credit reports, consider adding a small personal loan that you can pay back over time. Again, you'll want the loan to be reported to the credit bureaus.
4. Don't be a credit card collector
Never apply for more than two credit cards at any one time. If a credit bureau sees that you have applied for three or more cards in a short period of time, the company will probably assume you’re in desperate need of cash—and desperate people do not make good credit risks. An even worse scenario: The credit bureaus think your identity has been stolen, which would also send your credit rating down the tubes.
5. Pay down your credit cards
Paying off your installment loans (mortgage, auto, student, etc.) can help your scores but typically not as dramatically as paying down —or paying off —revolving accounts such as credit cards.
Lenders like to see a big gap between the amount of credit you're using and your available credit limits. Getting your balances below 30% of the credit limit on each card can really help; getting balances below 10% is even better.
Though most debt gurus recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.
6. Use your cards lightly
Racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month. What's typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.
You often can increase your scores by limiting your charges to 10-30% of a card's limit. If you regularly use more than half your limit on a card, consider using other cards to ease the load or try making a payment before the statement closing date to reduce the balance that's reported to the bureaus. Just be sure to make a second payment between the closing date and the due date, so you don't get reported as late.
7. Pay your bills promptly
Don't wait to pay off your bill all at once. You don't have to wait until the first of the month, or whenever your credit card is due, to make payments. You can make little payments throughout the month that can help lower your debt quicker. Small payments help your credit score because they lower your debt utilization ratio, which accounts for 30% of your credit score.
8. Keep your cards active
Simply having a credit card is not enough to maintain a good credit score. It's important to use the card, even if you just buy lunch. That way, it will get reported. You want to show that you can use credit responsibly. So don't close credit card accounts when you're not using them; that will bring your score down. Keep them active, so that you have as much credit history established as possible. The longer you have an account, the better.
9. Monitor your credit and make a plan to rectify poor spending decisions and become more diligent about paying bills on time.
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