Having a bad credit score comes with all sorts of challenges, but the main ones are related to your ability to borrow money, or to get loan offers with good rates.
Your credit score is between 300 to 900 in Canada, with the average Canadian having around a credit score of 660 to 670. With credit bureaus like Equifax and TransUnion, they collect info from banks, utility companies and just about everywhere to monitor payments (or lack of payments) and other things to determine your credit score.
Since your credit score suggests your creditworthiness, which is what lenders look at when trying to evaluate how much risk you might be as a potential borrower, you should do everything you can to try and improve it for the future when you might need it. Our credit score guide is your first step towards improving your score.
When you have a bad credit score, such as 580 or less, it can be difficult to borrow, and for the lenders that might take a chance on you, they’ll usually have high interest rates with their loan terms.
How Your Score is Determined
There are a few factors used to create your score. It’s wise to become familiar with what each of them are and how they are included in determining your score so that you can stay on top of how you can improve your credit profile.
Payment history – how often debt is late or paid on time
Credit utilization ratio – total credit available and how much used
Total debt – how much is owed (credit cards, loans, collections and other credit debt)
Mix – types of credit used
Age – how old credit accounts are
Credit inquiries – hard inquiries on your account
Public records – negative remarks (bankruptcies, judgements, consumer proposals, liens)
Dealing with Derogatory Marks
If you have negative remarks on your credit report, ensure they are accurate. Get a copy of your credit report and review for any errors. If you spot errors in your report, you should contact the bureaus to begin the process of getting them fixed.
You can read more about fixing errors on your credit report to get a head start.
There are also things you can do to help improve your credit score even with negative remarks.
Keep Up with Your Payments – since your payment history scores as the largest contributor to your overall score, making your payments (and on time) is crucial.
Keep Your Debt-to-Credit Utilization Low – this is the amount of credit used versus what is available, keep this as low as possible. Under 30% is important and under 10% is very good.
Avoid applying for too many credit products since hard inquiries will impact your score. It can be tempting, but if you want to get away from having a bad credit score, you need to limit the amount of hard inquiries. Also, having too many credit products can lead to temptation.
Another way to improve things is to consider getting a secured credit card. These are generally available to those with a low or no credit score. If looking at this option to help improve your credit score, make sure the card provider does report your positive payments to the credit bureaus.
Within Canada the rating for a credit score usually breaks down as follows:
Excellent – 800-900
Very Good – 740-799
Good – 670-639
Fair – 580-669
Poor – 300-580
When you have a poor or bad credit score, your only option to borrow might be payday lenders with high APR and interest rates. This type of lender doesn’t usually look at your credit score and will often rely on reviewing the information provided when you opt-in for IBV, or instant bank verification. Many lenders use IBV as part of their process, not only for identity verification, but it also allows them to see other details about your bank account like debt owed, late payments, NSF charges, all of which help with making a decision about your application.
When you improve a bad credit score to fair, you will find better options and terms available when you need to borrow, such as installment loans. Unlike payday loans, which are due on your next payday and are to be paid in full and can create financial troubles, an installment loan has a series of bi-weekly or monthly payments and much more manageable with your finances.
By improving your credit rating from bad to fair or good, you would benefit by being eligible for better interest rates being offered by lenders, reducing your cost to borrow. Being prepared with some basics on what to know about loans is a good way to help yourself in addition to improving your credit rating.
Improving your credit score won’t happen overnight, but it’s something you should work on so that you can get the best borrowing options available when you need it.
If you work on improving a bad credit score to good, it can seem more possible than going from bad to good. How you focus your efforts does matter,