For some Canadians, credit scores are a largely mysterious number that can alter your financial life, but it doesn’t have to be that scary.
While credit scores are important for accessing loans or mortgages, the good news is rebuilding credit after a few missed payments is not as frightening as it may seem.
“We've seen scores recover within three, six, 12 months, it really depends on the behaviour,” Matt Fabian, director of financial services research and consulting at TransUnion, said in a phone interview with Yahoo Finance Canada.
“With good behaviour and following the rules and monitoring your credit, it's actually faster than most people think... It's not years and years and years, as long as you're consistently exhibiting positive credit behaviour.”
Making the minimum payment
For the most part, experts agree the easiest way to improve a credit score is to stay on top of your bills.
“(What) is always important to reinforce is to ensure that you're getting into the habit of paying your bills on time, and ideally, in full,” Natasha Macmillan, director of everyday banking at Ratehub.ca, said in a phone interview.
“If you're not able to pay them in full, at least pay the required minimum amount shown on the monthly statement, and sometimes what can help you is even doing a little bit more than that.”
Keeping the size of your credit bills in check is also crucial to build up that score, Macmillan adds.
“Ideally, your balance should be under 30 per cent of your available credit limit at any time,” she said.
“Anytime you go above 30 (per cent), you will see that hit to your credit score, so try and ensure it's under 30 (per cent).”
The problem with exceeding the 30 per cent threshold is it signals to credit agencies that a bill may be difficult to repay. However, it's not a huge deal if the added expenses are paid off.
What should my credit score be?
More recently, banks and financial institutions have started offering free credit checks, and Fabian suggests taking advantage of this.
"Being able to understand where your credit score is moving, if it's going up or down, and then you can get some detail around why that might be really important," he said.
“The more things you measure, the more you're apt to drive those positive behaviours.”
Ratehub.ca recommends checking your credit score at least annually through TransUnion or Equifax, with more frequent check-ups before a big purchase.
Fabian adds that regular credit checks can help detect irregularities in a score, such as fraud.
“Something could pop up and all of a sudden, you've got a new credit card that you didn't know you had,” he said. “So it's just being more prudent.”
What should my credit score be?
Have more than one credit card
Macmillan says maintaining multiple credit cards and paying them off is a great way to rebuild credit, but applying for several credit cards at once can be a red flag to credit reporting agencies.
Hard credit inquiries refer to when your credit is reviewed after applying for a new card from a bank or financial institution, compared to a softer inquiry, which means you’ve allowed the bank to check for maintenance or to see if you qualify for upgraded services.
“Hard inquiries tend to have an impact on your credit score,” Macmillan said. “If you do multiple of them at one time, for example, it might signal distress to a financial provider and to the credit score bureau and that will therefore have a negative impact on your credit score as well.”
According to Canadian fintech company Koho Financial, there are roughly 76.2 million Visa and Mastercard credit cards in circulation in Canada, amounting to about two per person in the country.
What credit agencies are looking for
In some cases, rebuilding credit can take a few months, while more severe credit issues can take a year or more to rebuild.
What can make it easier is understanding what credit agencies are looking for in a credit score.
“It can take some time, typically weeks or about six months, to rebuild your credit, but what they're really looking for is a sustained period,” Macmillan said.
“If, for example, you wipe out all your debt, you're doing really well, you're making a monthly payment, but then all of a sudden, it comes back, that doesn't really work in your favour. So they're looking for that sustained ability – responsibility – on your credit."
Ben Cousins is a freelance journalist based in Toronto. Follow him on Twitter @cousins_ben.