If you run your own business like I do, you can divide your life roughly into two phases: BBO (Before Business Ownership) and ABO (After Business Ownership). These stages are so different that by the time your business is sailing along, BBO may only be a faint and ghostly memory!
Personally, my main recollections of that time are of being restless and unsatisfied, with a deep desire to steer my own ship and start moving toward my own financial independence. I know that other business owners share similar feelings.
But despite that dramatic – and exciting! – before-and-after boundary we can draw in our lives, some things need to transfer over: care for our own health, commitment to our families and community, and of course our financial wellness. Those always have mattered and always will.
Given what I do for a living, my focus here is on financial wellness, a category that contains dozens or even hundreds of small but essential strategies, tools, actions and lessons.
One of those strategies is understanding and mastering your credit score.
In order to Live Well, Stay Rich and Never Retire, you’ve got to know, manage and, in some cases, take action to improve your credit rating.
I can hear you already: “But Richard, I’m a successful and established business person! Why are you going back to basics here? I learned about credit scores ages ago!” I know you did. But with the complexities of running your own business, sometimes the basics get left behind. Or financial strains take a toll. Or an opportunity to expand leaves a mark. Or life gets too busy or goes through a period of tumult. Or the last time you paid close attention (BBO) is ancient history.
When it comes to the basics, we all benefit from a reminder. Or a refresher. Or a kick in the pants to fix a score that has taken a hit.
So here’s why your credit score matters and how you can improve it.
First, what is a credit score and how is it calculated?
Simply, your credit score is a number between 300 (just getting started) and 900 (the highest possible figure) based on your credit history that indicates your creditworthiness. When seeking a loan, your score is used to indicate your reliability as a customer – basically, the probability that you will repay your debt. The higher your score, the more financially trustworthy you are considered to be.
A good rating starts at 650, a very good rating at 720, and over 800 is considered excellent. Generally speaking, a score above 650 is required to secure a loan – though you won’t necessarily be denied with a lower number.
A number of factors are taken into account to determine your score. They are 1) the length of your credit history, 2) your loan payment history, 3) the amount you have owed and owe, 4) the types of credit you use, and 5) your recent credit history.
Different lenders who assess your credit score may come up with slightly different numbers depending on how they allocate points and weigh different factors. But each will come out with a figure within a close range.
Why does my credit score matter?
Your credit score matters any time you need a loan or need to indicate that you are trustworthy. Any institution that lends money – banks, credit card companies, mortgage lenders, department stores – will access your score. Utility companies, insurance companies, service providers, employers, landlords, the government and the courts may also request your score to assess whether you are reliable and responsible. For example, you may be offered a better insurance rate with a higher score.
A credit score distills a lot of history and information into one number that represents your relationship with debt. Lenders and creditors want to know what kind of risk you pose. So if you want to extend your business, buy a new home, lease a car, secure insurance, and so on, your credit score will play a large role in how your application is assessed and what interest rates you may be offered.
How do I improve my credit score?
Before you take any specific steps, be sure you know your credit score. You can order copies of your credit report from Equifax Canada and TransUnion Canada, both of which are recommended by the Canadian Government. You may get slightly different numbers, but that’s okay. You’ll have an idea of where you stand.
Now that you’re ready, here are 10 ways to improve your credit score.
1. Check your report for accuracy.
It is possible to have errors on your credit report, so you want to make sure your information is accurate. Your personal information may be wrong (like the spelling of your name or your SIN), there could be errors in your payment history, or there may even be an item listed that doesn’t belong to you. If you find errors, contact the credit bureau to correct them.
2. Pay your bills on time
In short, punctual payments are good and late payments will damage your credit score. For example, you are better off making monthly minimum payments on a credit card than paying it in full every three or four months.
3. Leave old credit accounts open.
A long credit history is good. Keep old credit cards, even if you rarely use them. Make a plan to charge something on them every now and then to generate activity. For example, maybe you pay one utility company on an older card or keep a card specifically for ordering your favourite gourmet tea online.
4. Keep a low balance.
Maxing out your credit lowers your score, so most experts advise that you keep your credit card balance to less than about 30% of your limit. So if you have one card with a $10K limit and another with $25K, set a limit for about $3,000 in spending on the first and about $8,000 on the second.
5. Increase your credit limit.
Unless you have difficulty controlling your spending, it’s generally better to have a higher credit limit. This makes it easier to keep your balance below 30% of your limit.
6. Set up automatic payments.
If you lose track of deadlines, you can set up automatic payments for fixed amounts (insurance, mortgage, car loans) and even set up a guaranteed minimum payment on credit cards. For example, if you have a credit card with a $5,000 limit and minimum payments are set at 5%, you can establish a monthly $250 fixed payment as a “just in case I forget” strategy, whatever your balance might be.
7. Use your credit more.
Credit bureaus like credit activity. Your score is based on using and repaying loans, so frequent use (and repayment, of course) shows financial responsibility.
8. Vary your credit.
Managing a variety of loans well raises your overall score. A mix of credit cards, installment loans, lines of credit and a mortgage – all paid on time – boosts your score.
9. Limit credit applications and credit checks.
The number of inquiries about your credit is recorded in your file. A lot of inquiries suggest that you are urgently seeking credit or living beyond your means. You want to limit the number of times you apply for credit and, when you do apply, cluster similar items together. For example, if you’re shopping for a car, make all your inquiries within a two-week period so the cluster is viewed as one credit check.
10. Consolidate your debt.
If you have a lot of credit card debt and have difficulty paying it down, you can consolidate all of your balances into a lower-interest line of credit or loan. You do need to have decent credit history to acquire either of these – this option is mainly to move high-interest credit card balances to lower-interest options to ensure you can keep up with payments and keep your credit score healthy. Of course, you will need to avoid running your card balances up while you pay down your debt.
That’s it.
I hope this has been a useful reminder/refresher/kick (if that’s what’s needed). Wherever you are in the arc of your ABO career, the little financial things continue to matter. Knowing and managing your credit score is one of them.
Did this article resonate with you? What did I miss? Send me a note and let’s start the conversation.
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source https://richarddri.ca/10-steps-for-improving-your-credit-score/
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