In Ontario, as with the rest of Canada, a strong credit score is critical for securing favorable loans, mortgages, credit cards, and other financial products. Your credit score is essentially a numerical reflection of your financial reliability. Ranging from 300 to 900, the higher your score, the more attractive you are to lenders.
For those aiming to buy a home, refinance a mortgage, or access other forms of credit, improving and maintaining a good credit score can unlock better interest rates and financial opportunities. This article outlines the key strategies borrowers in Ontario can adopt to boost their credit score and maintain it at an optimal level.
1. Understand How Credit Scores Work
In Canada, your credit score is calculated by credit bureaus like Equifax and TransUnion. It takes into account several factors, including:
- Payment History (35%): Whether you make payments on time is the most critical factor.
- Credit Utilization (30%): This measures how much of your available credit you use. Using too much can negatively affect your score.
- Credit History Length (15%): A longer credit history provides more data for lenders to assess your behavior.
- New Credit Inquiries (10%): Opening many new accounts in a short time can reduce your score.
- Credit Mix (10%): Having different types of credit (e.g. credit cards, car loans, and mortgages) can improve your score.
With this knowledge, borrowers can better focus on areas of their credit profile that need improvement.
2. Review Your Credit Report Regularly
Ontario residents are entitled to one free credit report annually from both Equifax and TransUnion. Reviewing your report helps you spot any errors or inconsistencies that may be lowering your score. Errors such as:
- Incorrect personal information
- Unfamiliar accounts or fraudulent activities
- Payments marked as late when they were made on time
If you identify errors, contact the credit bureau and the lender involved to have them corrected. This simple step ensures your credit report reflects accurate data, boosting your score if any inaccuracies are resolved.
3. Pay Bills on Time, Every Time
Since payment history accounts for 35% of your credit score, the single most effective way to improve your credit is by paying bills on time. This includes not just credit cards but also phone bills, utility payments, and any other form of credit. Late or missed payments can stay on your credit report for six years, significantly impacting your score.
Tips to Stay on Top of Payments:
- Set up automatic payments to ensure timely bill payment.
- Use calendar reminders or mobile apps to track payment deadlines.
- If you are unable to make a payment, contact your lender immediately to negotiate a repayment plan.
4. Lower Your Credit Utilization Ratio
Your credit utilization ratio measures how much of your available credit you are using. Ideally, you should use no more than 30% of your total credit limit. For example, if you have a credit card with a $10,000 limit, keeping your balance under $3,000 will reflect well on your credit report.
How to Reduce Credit Utilization:
- Pay off balances as quickly as possible, preferably before the billing cycle ends.
- Ask for a credit limit increase (but avoid using the extra limit unless necessary).
- Spread your spending across multiple credit accounts rather than relying on a single card.
5. Don’t Close Old Credit Accounts
The length of your credit history contributes to 15% of your credit score. Closing older accounts reduces the average age of your credit history, which can negatively impact your score. If you have an old credit card that you no longer use, consider keeping it open with a zero balance, especially if it has no annual fee.
6. Be Selective When Applying for New Credit
Each time you apply for a new loan or credit card, the lender performs a hard inquiry, which can slightly lower your score. Multiple hard inquiries within a short period can signal financial distress, leading to a further decline in your score.
Best Practices for New Credit Applications:
- Apply for credit only when necessary.
- Research lenders who offer pre-qualification checks, which only perform a soft inquiry.
- If you are shopping for a mortgage or car loan, try to submit applications within a short window (usually 14-30 days), as this counts as a single inquiry.
7. Consider a Secured Credit Card
For borrowers with a low or no credit score, a secured credit card is an effective way to rebuild or establish credit. With a secured card, you provide a cash deposit that serves as your credit limit. Using the card responsibly and paying off balances on time helps demonstrate good financial habits to lenders.
8. Manage Your Debts Wisely
High levels of outstanding debt can lower your credit score. It’s essential to develop a strategy to manage and reduce your debt over time.
Strategies for Debt Management:
- Use the debt snowball method (paying off small balances first) or debt avalanche method (paying off high-interest debts first).
- Consolidate debts with a personal loan or balance transfer credit card at a lower interest rate.
- Seek help from a licensed credit counselor to create a repayment plan.
9. Diversify Your Credit Mix
Having a variety of credit accounts, such as installment loans (e.g. car loans, mortgages) and revolving credit (e.g. credit cards), can help improve your score. However, this should be done strategically. Do not take on new credit simply to diversify if you don’t need it.
10. Negotiate with Creditors to Remove Negative Marks
If you have a history of late payments or collections, you may be able to negotiate with your creditors to remove these marks from your report. This is often referred to as a “goodwill adjustment.” While lenders are not required to comply, some may agree, especially if you have been a reliable customer overall.
11. Monitor Your Credit Using Tools and Alerts
Many financial institutions in Ontario offer free tools to help monitor your credit score. You can also subscribe to credit monitoring services from Equifax or TransUnion, which provide alerts whenever there is significant activity on your credit report. These tools help you stay informed and catch any suspicious activity early.
12. Be Patient and Consistent
Improving a credit score takes time. Positive changes, such as paying off debt and establishing a track record of on-time payments, can take months to reflect on your credit report. The key is to stay consistent with good financial habits and avoid any actions that could hurt your score, such as missing payments or maxing out credit cards.
For borrowers, building and maintaining a strong credit score is crucial to achieving financial goals, whether it’s securing a mortgage, obtaining a car loan, or accessing better credit card offers. The journey to an improved credit score begins with understanding how the credit system works and implementing small, strategic changes such as paying bills on time, reducing credit utilization, and avoiding unnecessary credit inquiries.
Regularly monitoring your credit report and taking corrective actions, when necessary, can further accelerate your progress. With patience and consistent effort, borrowers can take control of their financial future, opening the door to better financial opportunities.
