How to Max Out Your Canadian Credit Score and Save Thousands of Dollars
In Canada, having not just a good credit score, but the highest credit score possible, requires some strategy. But if done right, having your credit at its best can save you thousands of dollars:
- Lower Your Mortgage Rate: In today’s mortgage market a good credit score will get you a good mortgage rate, and an excellent credit score will get you the BEST mortgage rate. A lower mortgage rate of 0.10% can easily save the average Canadian mortgage holder $1,500 every 5 years. Now multiply this by 3 or more mortgage terms. Keeping your score at the highest levels will help you with these kinds of mortgage savings.
- Lower your credit card interest: Carrying credit card debt over long periods is expensive and limits your choices going forward. A high credit score will help you lower your interest costs, and pay down the debt faster – perhaps through an unsecured line of credit. With the highest credit scores, you could get a line of credit at 6% or even lower. Paying off your debt faster could save many people thousands of dollars, and beats ANY guaranteed investment you could make.
- Lower your Auto insurance rates: As part of the policy review – Canadian Auto insurers can use your credit report to help price your coverage. So having a higher score help gets you your best possible insurance rate. Even $10 per month in insurance savings, spread over 10 years, with interest can lead to thousands in savings. The exception here is in Ontario and Newfoundland although this could change anytime, and there are ways these provinces can get around actually pulling a credit score (for example by looking at home ownership).
- Employment Seeking: Some employers may request that you provide a credit report. This is especially true in areas such as police work, essential services and any type of financial employment. An excellent credit score may help you stand out from the crowd.
- Lower rents if renting: Successful landlords always request credit reports in a rental application. A stellar credit score lowers your landlords’ risk and can help you negotiate a lower lease rate. Or if your desired location is under multiple applications, help you secure that location in preference order.
- Starting a business: There are some Canadian banks that will loan you $10,000 on the spot at competitive rates, without any income verification, to those with the highest credit scores. This can be a great starting point for anyone interested in starting a part-time or full-time small business.
The list of benefits is meaningful and very real. So finding that perfect balance on how to best use your credit, without slipping down the slippy credit slope, is what this article will focus on.
Importantly, if you are recovering from a bankruptcy or other credit blip, I would suggest starting with this short article HERE before proceeding with this one. Otherwise I have no doubt, as I have seen proven working with hundreds of people over the past 8 years in consumer credit management and as a Kitchener Waterloo Cambridge mortgage broker, that if you follow the 5 Credit Laws laid out here – you will find it easy and enjoyable as you max out your credit score and reap the rewards.
Know the System, before you Hack the System
A quick overview of the credit system will help provide a framework as you move along perfecting your credit score. We’ll take a look at a few of the most commonly asked questions about credit.
What is a Credit Report?
In Canada, all Banks, lenders and many other financial companies are required to report your credit use activity to Equifax or TransUnion credit reporting agencies. Other information contained on your credit report includes your Birthday, SIN, address history, employment history and a host of other information. The credit agencies consolidate all this information and use math formulas to help determine your credit risk profile. In other words, your behavior with credit use over time will determine what kind of a borrowing risk you are. This credit risk is reflected as a Credit Score.
What is a Credit Score?
For Equifax, the main credit reporting agency used by mortgage brokers and lenders, the score ranges from a low of 300 to the highest level of 900 points. The score changes on a monthly basis as new information is constantly reported to by the lenders to the credit agency. A credit score over 700 is considered excellent and over 800 is outstanding. A credit score over 650 will usually entitle a person to some of low mortgage rate or ‘A’ lending. A credit score around 600 or lower will usually involve Alternative mortgage lending, second mortgages and are less likely to qualify for other bank loans and credit.
Who can use my credit report and score?
With some exceptions, any person or company that requests to review your credit report must have your permission. Usually, this will involve a signature, or recorded phone conversation. The types of agencies who typically request reports are lenders, collection agencies, employment or rental applications, and in most provinces auto insurers. It is important to keep you your credit and personal information very safe to avoid identity theft. Click here for a credit Monitoring Service that can help you with this.
The 5 Laws of Credit Improvement and Maxing Out Your Credit Score
With the above in mind, the following tips will help you max out your score.
- Make Payments On Time.
This is the most important factor in boosting your credit, and even one payment over 30 days late can affect your score for 6 years. If several missed payments add up – this can noticeably cost you. If you cannot make the full payment, then ensure you are able to make the minimum payment or arrange with the lender ahead of time when the payment will be made.
- Keep your Credit Balances Low
The second most important way to ensure your best credit score is to ensure your use of available credit is less than 35% of the maximum. For example, if you have a $1,000 limit on your credit card, do not carry more than $350 on balance at any given time. The same goes for lines of credit. Use of more than 50% of a credit limit can noticeably impact your score. Keeping your balances low another good motivation to save on interest.
It is important to reiterate as well, that you must use your credit card in order to build credit. Ideally, the entire balance would be paid each month. A good strategy is to only put Groceries and Gas on the card, leaving all other expenses to debit or cash. Those with ‘points cards’ that are struggling to pay down their debt are losing much more out of the deal in the long run than they may realize. Credit companies are sneaky and manipulative and are earning billions by giving fewer rewards and taking more interest. No one would knowingly agree to an arrangement like this. And nobody – ever – got rich with credit card points.
- Use Time to Your Advantage.
The longer you have had a credit account open and operating in good standing, the higher your credit score will creep up. Given this, keeping an older account open as opposed to closing one credit account and opening another will help improve your credit score.
- Keep the Number of Inquiries or ‘Credit Checks’ to a Minimum.
Limiting the number of credit checks you do within a short period of time will help keep your score at its healthiest. Two or three credit checks within a couple weeks when shopping for something big like a mortgage will not lower your score – contrary to the Bankers Myth that ‘two credit checks will bomb your score (so don’t shop around)’. But several checks can lower the score. Moreover, repeated, regular credit applications over time (several per year, every year) will deem a consumer as a ‘credit seeker’ and can have a very noticeable affect in lowering the score.
Using a mortgage brokers services when shopping for mortgage can work to your advantage, as a mortgage broker is often able to shop among dozens of lenders by pulling just one credit report
- Have a mixture of credit types – but be careful!
This category has the least impact on your credit score, and I have worked with many clients who carry one or two credit cards, that have stellar 800+ scores. This said, according to the Equifax credit agency, it can help to have a mix of credit products. For example 2 credit lines, weather they are lines of credit, credit cards, store-based credit cards ect… is advised over one type of card. Having a small loan, such as a card loan can also help.
It’s important to note for this category, though, that if you have any kind of issue with credit that may negatively impact your score – having more cards or loans can exaggerate the negative impact. Only peruse this strategy if you have an excellent history of paying your cards to $0. For the few extra credit points that can be gained here, it is not worth the risk of paying high interest and limiting your future in this way.
So there you have it. It’s not Rocket Science is it? But following these steps can certainly help make life easier and less stressful as you move forward. Feel free to post any questions below which I will happily answer or leave a comment. Is there anything you have noticed that improves your credit score?