How to Improve Your Credit Score for More Financial Freedom

You are not your credit score.

It’s not a representation of who you are, only a reflection of your current spending habits.

A good credit score isn’t reserved for the wealthy (in fact, many rich people may have poor credit scores). It’s now how much money you make, but how you manage it.

That said, it pays to improve your credit score.

A good credit score opens access to

• new loans at lower rates

• better credit cards with higher rewards

• and even lower car and home insurance rates

A higher credit score unlocks the freedom of choice with your finances.

At some point, as it is for all Canadians, your credit score will affect your life—from new immigrants who need a credit card, to students looking for a new loan, to homeowners who want home equity loans for renovations.

So, below we take you step by step on how to improve your credit score and what to do to keep it high for the rest of your life.

How to improve your credit score in 13 ways

Below are 13 ways to improve your credit score. You can click each link to go to that section. Don’t skip checking and knowing what affects your score unless you know how to do them.

1. Check your credit score

2. Know what affects your credit score

3. Pay off debt

4. Pay your bills on time

5. Get the right credit card

6. Only take out credit you need

7. Maintain low credit card balances (credit utilization)

8. Monitor credit reports for errors and protection from fraud

9. Manage your payment history and improve it over time

10. Set up automatic payments

11. Communicate with creditors

12. Stay organized with systems and regular check-ins

13. Build your savings, sinking and emergency funds

1. Check your credit score

In Canada, there are two main credit bureaus—Equifax and TransUnion. These two companies provide credit ratings that get sent to financial institutions whenever you apply for a loan or line of credit, like a credit card.

Odd fact: Both Equifax and TransUnion buy most of their credit information from FICO, a US-based company. These two bureaus then use your FICO score to determine your Canadian credit rating. However, Canadians can’t directly access their FICO scores (weird, we know).

Both Equifax and TransUnion offer one-time annual credit scores online for free, but they’ll try to rope you into a monthly monitoring service for a fee.

• Get your free credit score from Equifax

• Get your free credit score from TransUnion

Scotiabank, RBC, BMO, TD and CIBC can do a “soft” credit check (meaning it won’t hurt your credit score) if you bank with them.

There are also sites like Borrowell, Intuit Credit Karma and ClearScore that offer free credit scores, but they’ll try to sell you products for which you’re likely to be approved (since it matches your credit rating), but it may not be the best product, especially as you improve your score.

If you sign up for KOHO’s credit building program, you’ll see your monthly credit score and change in your credit history all in the KOHO app for $10 per month, no credit card required.

Any request from any of these companies will probably reveal different credit scores. This is due to slight differences in how each company calculates your credit score.

All this means is that when you check your rating, remember that the score you receive is more of an approximation than the cold, hard, truth. Use your score as a guide to help you get to where you want to be and don’t dwell on it for too long.

According to Refresh Financial, the average Canadian credit score is 650 but unlocking high-reward credit cards and lower rates for loans, aim for 700+ (many require better).

2. Know what affects your credit score

Credit scores are calculated using some complex equations, so it’s impossible to know precisely how much a certain action will affect your score.

With that in mind, according to the Financial Consumer Agency of Canada, there are a handful of key factors that affect your score:

• The length of time that you’ve had credit (pro tip: don’t cut up no-annual-fee credit cards until you have a history with a new credit card).

• Whether or not you carry a balance on your credit card(s)

• How often you have missed payments

• The amount of debt you currently have

• How much you spend on your credit (a.k.a. credit utilization ratio)

• If you’ve ever filed for bankruptcy

• Whether you’ve ever had debt sent to collections

These factors show your level of financial responsibility. When combined into a credit score, they give lenders an idea of whether or not you’ll pay them back.

3. Pay off your debt to improve your credit and mental health

Carrying around large amounts of debt doesn’t excite lenders into giving you more money. There’s no shame in having debt, but working to pay off that debt, even if it feels impossible, is essential.

There are two methods for attacking debt:

1. Avalanche method. You make the minimum payment on each debt, then use money left over to pay the debt with the highest interest rate.

2. Snowball method. You pay down the smallest debt first.

The snowball method is better for your mental health because you see many debts disappear quickly, but the avalanche method is financially a better way.

Add in debt repayment as part of your budget (see point 12), and work to minimize what you owe so you can maximize your credit score.

4. Pay bills on time every time (ideally, in full)

Late payments not only cost you extra in interest charges, but negatively affect your credit history.

In 2021, MNP found half of Canadians are within $200 of not being able to cover their bills and debt payments suggesting many Canadians struggle to pay their bills on time.

A history of missed payments can seriously affect your credit score. If you’ve never missed a bill payment before, good. For people who have missed bills, you can turn things around by staying on top of bill payments and ideally paying them off in full by their due date.

Paying the minimum amount doesn’t hurt your credit score, but it can affect it from a credit utilization standpoint (see point 7)

Consider apps like KOHO to manage your spending and use those insights to stay on track (you’ll also get free financial coaching to find out where else you can save).

With your KOHO account, you can set up automatic withdrawals to pay your recurring bills on time each month. That way, it’s impossible to pay a bill late and your credit score will slowly improve.

How to use credit the right way to improve your credit score

What is credit? Credit allows you to get products or services without paying for them upfront. It’s given to you by a lender based on the trust that you’ll pay them back.

To improve your credit score, use credit the right way. We’ll break down this section and focus specifically on the “credit” side of improving your score.

5. Get the right credit card to build your credit history with good habits

In a world filled with reward credit cards and other flashy loan offerings, it’s easy for Canadians to take out much more credit than they need.

While being denied a credit card doesn’t hurt your credit score, the hard credit check from submitting your application can cause a temporary decrease.

Also, frequent credit applications make lenders nervous because they indicate you might be living beyond your means.

If this is your first credit card, apply for one with no annual fee and a lower interest rate. Tangerine has a few cashback cards with a $0 annual fee and a 19.95% annual percentage rate (APR).

You can also check out KOHO’s Mastercard which offers cashback on your purchases, and because it’s a prepaid card, there are no interest charges (however, to build credit with this card, you’ll need to add a $10/month credit building tool).

6. Only take out the credit you need

Limit your credit applications to what you can reasonably pay back.

Excessive credit applications (new credit cards, a new car loan, etc.) can negatively affect your credit score and payment history. Do your research and choose wisely.

Multiple applications within a short period may raise a lender’s concerns.

Also, closing all those excess credit accounts can hurt your credit score in different ways depending on the type of account and your credit history.

• It affects the average age of your accounts,

• It increases your credit utilization ratio (see number 7)

• It reduces your credit mix

So, only apply for the credit you need. If you have the money to pay for something, it’s better to pay out of pocket, or save up, than to take out unnecessary credit.

You could end up paying annual fees for cards you don’t use, have to deal with a fraudulent charge on that card, or worse, identity theft. Taking on extra credit can be extra costly.

7. Maintain low credit card balances (credit utilization ratio)

The rule of thumb for a good credit utilization ratio is at or below 30%.

Credit utilization is how much of your available credit you’re using.

So, let’s say you have a credit card with a $1,000 credit limit, that means your average monthly spending on that card should be about $300.

If you also have a $4,000 bank loan, your total credit limit is $5,000, so your monthly spending should be around $1,500 ($1,500/$5,000=30%).

If you use more of your available credit, a lender will consider you a greater risk.

8. Monitor credit reports for errors and protection from fraud

Take your credit reports from Equifax or TransUnion (look at step 1 for how to get these reports)

Check for errors and discrepancies and report them immediately to the respective credit bureau. Errors on credit reports can affect your ability to get credit cards, loans, mortgages and even jobs.

Here’s what to look for on your credit report:

• personal information errors

• mistakes in your account history

• negative information that is outdated or inaccurate

• possible accounts you never opened

Canada’s Financial Consumer Agency advises consumers to check their credit reports at least once a year for errors and fraud. However, since you can get a free report from each credit bureau, schedule one at the start of the year and the other at the 6 month mark, every year to stay on top of it.

9. Manage your payment history and improve it over time

Your payment history accounts for 35% of your credit score and displays how you’ve paid debts, loans and other accounts over the length of your credit.

To manage your payment history, do these steps:

• pay bills on time

• monitor credit reports

• set up automatic payments

• maintain low credit card balances

• communicate with creditors

• limit credit applications

• stay organized

It starts with your payment history. Your payment history displays how you’ve paid debts, loans and other accounts over the length of your credit. Your payment history accounts for up to 35% of your credit score—a significant percentage of your total credit score.

We’ve already covered most of this, so we’ll get into some more actionable work to improve your payment history and your credit score.

10. Set up automatic payments and never miss a bill payment again

We wrote about automating your finances and you should because it makes managing your bills more manageable and reduces your stress.

Work with your bank or credit card provider to set up automatic payments for your bills. They automatically deduct the amount you owe from your account ensuring you never miss a payment.

The easiest way to do this is to set up a sinking fund just for bills. Add up all your bills, break the total down to monthly amounts and automatically transfer the amount from your paycheque to a new account your creditors can withdraw from.

If you want the step-by-step breakdown, read how to automate finances!

11. Communicate with creditors and explain your situation

If you’re struggling to pay your bills, reach out to your creditors—banks, credit cards, loans—and tell them your story.

They may provide payment options like deferral of payments, reduction in interest rates, loan extensions, fee waivers (e.g. overdraft, ATM withdrawals, etc.), and more. Being proactive sends a good signal to your creditors that you’re working to pay your bills on time and you’re not hiding from them.

Communicate as soon as possible because failure to do so could damage your credit rating.

While this can help you manage your cash flow and avoid defaulting on your debt, it’s not a long-term solution and it could also have some downsides such as increasing your total cost because of higher interest and even negatively affecting your credit score.

So, be clear with your providers about the possibilities and any repercussions.

12. Stay organized with budgets, systems and regular check-ins

Use a budgeting app to reduce your spending and see exactly where your money is going.

Get your credit report from Equifax to start the year and TransUnion halfway through the year and make that your “check in on your finances” time. The more often you do it, the less time it’ll take.

Your budget doesn’t directly affect your credit score, but it affects your financial stability. This indirectly affects the many actions you take that can cause your rating to go up or down.

You can use our ultimate budget template to understand how much you need to set aside for essential expenses, debt repayment, and other discretionary spending.

Your KOHO account also helps you get a real-time look at what you’re spending your money on. With your Insights, you can see how much you’re spending and cut back so you can focus on debt repayment and building your savings.

13. Build your savings, sinking and emergency funds

Savings and emergency funds help you weather the storms of financial crises.

If you have to borrow to pay for a new laptop or a leak in your roof, that’s another credit you’ll have to pay off. If you’re already drowning in debt, that’s more interest charges which affect your credit score.

With a financial safety net behind you, you’re less likely to take out credit you don’t need or miss a payment—two things that will hurt your credit score.

If you’re new to saving, start by setting aside part of your paycheque.

If you don’t have any extra wiggle room in your budget, take advantage of the cashback and RoundUps you earn with every dollar you spend on your KOHO card and put that aside in your savings account. You can earn 0.5% to 4% on your entire balance, depending on the plan you choose.

An extra few dollars here and there add up over time putting more money in your pocket, charging less money to your credit accounts, and earning your way to a better credit score.

FAQ

What’s a credit limit (and why does it matter)?

A credit limit is like a spending cap set by your bank or credit card provider. It's the maximum amount of money you can borrow or use on your credit card. Let's say your credit limit is $500. That means you can spend up to $500 using your card, but not more than that (and for reasons we’ll get into later, you should only spend $150 on it).

4 reasons your credit limit is important:

1. It helps you practice responsible spending. A credit limit sets a boundary on how much you can borrow, thus preventing you from overspending or getting into debt beyond your means.

2. It helps establish your creditworthiness. Lenders look at your credit limit and how much of it you’re using to determine your creditworthiness. If you’re financially responsible, it will positively affect your credit score.

3. It helps protect against fraud. If someone gets a hold of your credit card details, your credit limit ensures they limit their spending which minimizes the potential damage.

4. It helps you budget. Know your limit and stay within it. If you know you have a $1,000 limit and you’re currently at $800 and your friend asks you to go to a concert or sporting event where you’ll pay for the ticket, the commute, the dinner beforehand and the drinks at the venue, it’s much easier to say no (at least until next month).

What’s a credit usage rate (or your credit utilization ratio)?

Your credit usage rate is the percentage of revolving credit you’re using divided by your total available credit. Lenders will look at your credit utilization ratio to see how well you’re managing your debt.

TransUnion ****says your credit usage rate should be at or below 30%. What does that mean?

Let’s do some math:

• Let’s say you have two credit cards each with credit limits of $5,000. Your total credit limit is $10,000.

• Your credit usage rate should be around $3,000 (30% of $10,000), meaning that’s what you should be about what you’re spending every month.

• Now, if you close one of those credit cards, without opening a new one, you reduce your total available credit limit. Doing so will increase your credit utilization ratio.

• For example, let’s say you have a $3,000 balance on one card, your credit utilization ratio is 30% ($3,000/$10,000). But if you close one card, your credit utilization ratio jumps to 60% ($3,000/$5,000), which can hurt your credit score.

Therefore, keep a close eye on your credit mix.

What is the importance of a mix of credit (credit cards, loans, and more)?

FICO considers your mix of credit as 10% of your total credit score. Your credit mix is all the types of accounts you’ll find in your credit report that affect your credit score.

The types of credit in your credit mix

• Revolving debt. Accounts that allow you to borrow money up to a certain limit and pay it back over time or in full each month like credit cards or a line of credit. NOTE: The average Canadian has 2.4 credit cards.

• Installment loans. Loans you pay back in fixed monthly payments over a period of time like auto or student loans.

• Mortgage accounts. Loans you use to buy property and pay back in fixed monthly payments over a long period of time like a mortgage or home equity loans.

• Open accounts. Accounts that require you to pay the full balance each month like a charge card.

A good credit mix improves your credit score, but don’t start applying for the various credit just yet.

Why should you limit your number of credit applications or credit checks?

For one, for every credit application, the creditors run a “hard check” check on your credit score. A “hard” check or inquiry lowers your score a bit and sticks around on your credit report for two years. FICO, however, only pays attention to inquiries made in the 12 months before they calculate your score.

Second, if any creditors, lenders, or providers see you opening a bunch of new accounts in a short time, they’ll likely think you're struggling with money (even if you're not) and likely deny your application.

So, if you want to add something new to your credit mix, think about the risk versus the reward.

How to increase your credit score fast

If you just went to apply for a new shiny credit card with a massive welcome bonus that expires soon, you may bump your credit score quickly following these steps.

1. Pay off all your bills with a consolidated loan
   
   If you have high-interest credit card debt, there are two ways to pay it off temporarily.
   
   You can take out a personal loan that may be 10%, but it’s still lower than your credit card’s 20.99%. You can also apply for a balance transfer credit card which merges your debt and puts you on a 0% payment plan for 3-6 months.

2. The credit utilization hack
   
   A quick, high-impact way to improve your score is to ask your lenders for higher credit limits. You can also add to your credit mix by opening a personal or secured loan. A higher credit limit will reduce your credit usage and make you look less risky to lenders.

3. Ask a friend for a piggyback
   
   If you suspect a friend or family member has a credit card with a high limit, and low utilization ratio, ask to be an authorized user on their account. As an authorized user, you get the benefit of a good payment history. You don’t need to use the card, you’re just borrowing the credentials.

4. Work with your creditors
   
   This takes more work, but a phone call can go a long way with your lenders. You can dispute charges, they may offer a deferral or payment plan, reduction in rates, or waive the interest. If your debt is with collections, they’ll often develop a plan for you. A little kindness goes a long way.Pay rent and utilities with a credit card.

5. Pay rent and utilities with a credit card
   
   Third-party services like Plastiq or RentMoola give Canadians the opportunity to pay for things that are typically only paid with a cheque or automatic debit, with a credit card. It’s a great way to build your credit history.

Anyone with a low credit score will see quick, tangible results of close to 100 points. Someone with a good credit score may have a more difficult time increasing it, especially if all their credit is already in good standing.

In conclusion, improving your credit score takes time

If you want to improve your credit score, you have the right mindset. Just thinking about your financial well-being is the first step toward being financially responsible. As you use your KOHO account to pay off your debt, stay on top of your bills, and build your savings, you’ll help improve your credit score along the way.

Remember that your credit score takes time to build, so don’t expect changes overnight. But, with diligence and effort, you can get the credit score you need to take charge of your financial life.