No one is born with a credit score—that’s the good news!
Your credit score is a constantly changing number assigned by credit rating agencies throughout your lifetime. In the beginning, before you borrow anything, you have no score because you haven’t done anything the agencies can look at to determine if you’re good at managing debt.
Then, one day, you pop up on their radar when you get a credit card, or get your first mobile phone contract. After that, you continue to have a credit score that fluctuates based on how well you make loan and bill payments on time and in full.
Here’s what credit agencies consider when assigning your score:
Late payments are seen as a sign that you may be unable to pay your loan back in the future. It doesn’t matter why you were late with your payment either. If it’s due on Saturday and you pay on Saturday, it still counts as late if the bank processes the payment on Monday.
Anything you can do to avoid late payments will help you maintain a better score. For more tips on how to manage loans and payments, see Rebuilding credit is all in your head.
Credit utilization rate
Your credit utilization rate (CUR), is the percentage you owe in revolving credit (credit cards, lines of credit) vs. total available credit and is one factor in determining your credit score. If you think your CUR is high, discuss it with a potential lender and ask whether or not it is going to be an issue.
No credit history
It doesn’t seem too fair to punish people who have no credit history. However, credit scores can’t be generated when there is no information to work with.
The good news is that it doesn’t take long to establish a good credit history. Getting a loan with steady, predictable payments and making each one on time can help you build good credit.
Too many hard hits on your file
The Financial Consumer Agency of Canada differentiates between a “hard hit” credit check and a “soft” one. Hard hits are new inquiries that can include checks by banks and credit card companies. Soft hits are requests made by you or a company you already have a relationship with asking for updated information.
While a "hard hit" appears on your report and lowers your credit score by a few points – "soft hits" are visible only to you and will not lower your score. Keep hard-hit credit inquiries to a minimum by not applying for multiple cards or loans.
Knowing how your credit score could take a hit and go down is one thing. Knowing how to repair and rebuild credit is another. Here’s a plan to get you on your way!
Creating a plan to rebuild credit
Credit scores change slowly. It takes time for a pattern to develop that demonstrates you are getting better at managing debt and credit.
If you have a personal loan, a credit card(s), or a line of credit, the first step to rebuilding credit is to ensure you are not doing any of the things described above. That means:
- Avoid late payments
- Keep your credit utilization low
- Take on some form of credit if you have no history, a good example may be a secured credit card
- Try to avoid anything that will result in too many “hard hits” in a short period of time
In addition, you may want to consider taking out a small installment loan that you can easily afford and pay back quickly.
How does an installment loan help you rebuild credit?
One way to rebuild credit is to take out a personal loan. It sounds backwards because you may have heard that applying for more credit will lower your score. However, this strategy works when you make all the payments on time and pay off the loan early or on schedule.
Unlike revolving forms of credit, such as credit cards and lines of credit, an installment loan will expire the day it is paid off in full and your debt is resolved.
The reward is worth the effort it takes to restore credit because:
- A better score can lead to lower interest rates on installment loans.
- Lower interest rates may make it more affordable for you to achieve some of your big, long-term goals such as buying a home or starting a business.
If you have any questions about how an installment loan might help you rebuild your credit, the team at your local easyfinancial branch is here to help. Simply give us a call at 1-888-502-3279 or drop by one of our 400+ branches across Canada.
Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.