What is a Bad Credit Score in Canada and How to Improve It

A bad credit score in Canada not only costs you money, but it can also cost you opportunities and your quality of life. If you have a bad credit score, the negative information dragging it down stays on your credit report for 6 years. A bad credit score is determined by a variety of things. However, there are steps you can take to improve your credit score. Your credit score is calculated by the two reporting agencies for Canadians, TransUnion and Equifax.

Each have their own scale and scoring algorithms used to determine what your credit score is. Companies such as ClearScore, Borrowell or your bank also usually provide this information for free. A low number represents bad credit and puts you in the category of “a risky borrower.”

What is a Bad Credit Score in Canada? 

Credit scores range from as low as 300 and go as high as 900. According to Equifax, if your credit score is below 560, you’re considered to have bad credit. A credit score of 560 or less puts you at a disadvantage because banks, lenders, and landlords consider you to be a financial liability. This means you’re less likely to get loans and if you do, they’ll be at much higher interest rates.

How a bad credit score affects your finances

When you have a bad credit score in Canada, it limits your ability to access the financial products and services you need. You’ll have a much harder time getting approved for a mortgage, personal loan, credit card, and other types of financing.

Interest rates

If you do manage to get a loan, you’re going to face much higher interest rates, which makes borrowing more expensive and makes the payments bigger too. That has an immediate negative impact on your budget and affects your ability to save money or pay off your loan faster.

Loan approvals

The main credit reporting agencies in Canada are TransUnion and Equifax. Each one uses a different algorithm to assess how risky it is to lend money to you. Lenders access and use this information to predict how likely you are to pay back things like loans and credit cards. It is through these reporting agencies that they can decide whether or not you are qualified for their lending and credit products. If you’re considered high-risk, you have very few options. 

Unsecured loans

Unsecured loans do not require any collateral or upfront deposits. For that reason, unsecured personal loans, credit cards, lines of credit, etc typically require good credit scores because there is nothing for the lender to fall back on if you default.

If you have a bad credit score in Canada, it’s a lot less likely that you’ll be able to get approved for unsecured credit and the low interest rates you’re looking for. If you want to start a business, own a home, or invest in something that could improve your financial well-being in the future, you may not be able to get the credit or other types of financing you need to achieve your goals.

Getting a credit card 

If you have bad credit, you likely won’t get approved for most credit cards on the market. You’ll miss out on rewards, cash back, and cards with low interest rates. The good news is, you can start to rebuild your credit with certain credit cards available to Canadians with bad credit. 

Buying a home

If you have bad credit, you likely won’t qualify for a mortgage from traditional lenders. If you need to buy a home, you may need to apply through a private subprime mortgage lender. If you are lucky enough to qualify for a home loan, it’s likely going to involve a very high interest rate and strict terms. Before looking to get a mortgage, you should try to improve your credit score first, aiming for at least 680. It will save you a lot of money when buying a home. 

Getting a loan from a bank

If you have a bad credit score, it’s going to be hard to get approved for a loan through a major bank. There are alternative lenders, but there are risks to consider. With bad credit, you may be able to get a personal loan but it comes with much higher interest rates. 

Little-known risks of bad credit in Canada 

A bad credit score can have other downsides beyond just loans and credit cards. It can impact your quality of life and even prevent you from meeting your basic needs.

Housing security

Your bad credit score can prevent you from renting a home or an apartment, which puts you at risk of homelessness. During the rental application process, many landlords and rental companies run a background check. Landlords in competitive markets may reject people with a credit score of less than 650.

Employment opportunities

More and more employers are checking credit scores during the hiring process, especially for positions that handle finances and sensitive personal information. But other industries are starting to run credit checks on applicants as an indication of character and the ability to handle responsibility.

Insurance premiums

In some provinces, it is legal for insurance companies to use credit scores to assess your level of risk and calculate the cost of premiums accordingly. A bad score could result in more expensive premiums, making it harder for you to afford the amount of coverage you need.

How to improve a bad credit score in Canada

If you happen to have bad credit and you’re worried that you can’t enjoy the benefits of getting the loans and credit cards you want, there are solutions. A good credit score opens up your world to generous rewards. There is a lot of competition with credit products once you have what is considered good credit. 

You’ll start to get offered competitive perks and other incentives. Some of the perks include savings on travel, free travel insurance, and cashback without having to pay high annual fees. Not only that but you can qualify for low interest credit cards. Having good credit is worth the effort because in the end you can save yourself a lot of money. 

Use a secured credit card

If you want to establish your credit and improve your credit score, start with a secured credit card like the Neo Secured Card. Usually, if you have no credit or bad credit, you won’t qualify for a major credit card from your bank. You may also still be learning how to manage a credit card. If you rack up a credit card and can’t pay it off, this is going to take you back to square one. 

A secured credit card prevents this and they’re easier to get. You can qualify for a secured credit card without any credit history, but you have to submit money upfront as collateral. The amount of money you have to put down will usually be equal to the credit limit of your secured credit card.

This isn’t to say it’s a prepaid card, because the secured credit card is reported to credit bureaus when you use it. This is going to help build up your credit score like a normal credit card would. It won’t take long to improve your credit rating when you use it responsibly.

Don’t close your old credit cards

If you have a hard time curbing spending with a credit card, you may feel tempted to close it. This isn’t recommended because the age of your credit accounts impacts your credit score – the older the account the better. When you cancel a card, it changes the average age of your credit file which can have a negative impact. It also reduces the amount of available credit which changes your credit utilization ratio, the second biggest factor that impacts your score.

The credit history you’ve built up from having that card will be removed from your credit report. This shortens your credit history. It’s best to keep the credit card out of your wallet and don’t have it set up as an automatic payment online. 

Credit Utilization Ratio

The Credit Utilization Ratio (CUR) reflects the amount of debt you owe on credit cards and lines of credit relative to your total credit limits across those accounts. The higher your balance(s) owing, the higher your CRU is and the more it hurts your score. Aim to keep the balances on your credit cards and lines of credit to 30% or less if you want to improve your score. For example, if you have you have a credit card with a $1,500 credit limit, do not carry a balance over $500.

If you currently don’t have a great ratio, you can improve it very quickly by paying down your debt as aggressively as possible. If you’re able to manage high credit limits without racking up balances, TransUnion and Equifax are more like to increase your credit score as you become a less risky borrower.

Pay your bills on time

While you’re working towards building good credit, one of the main factors is your payment history. The easiest way to build a positive payment history is to always pay your bills on time. This is the most important thing that TransUnion and Equifax pay attention to when evaluating your credit score.

If you don’t have good credit, it’s likely because you haven’t made your payments on time or missed them altogether. Make it a rule of thumb to change the way you manage your bills and pay them on time. You can easily do this by setting up automatic payments from your account or using phone reminders to pay bills before their due date. 

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Don’t apply for credit unless you actually need it

Each time you apply for credit, an inquiry is made on your credit report called a “hard credit check.” A few hard credit checks a year is normal and will have a minimal and temporary impact on your score. Whereas a lot of credit checks, especially in a short period of time, can drop your score significantly because it means you could be desperate for credit, which makes you a higher-risk borrower.

Diversify your credit accounts

Having a mix of different types of credit accounts like credit cards, car loans, and a mortgage can positively impact your score. That’s because different types of credit come with different types of terms, conditions, and repayment obligations. Therefore, each type of account must be handled differently. By diversifying your credit accounts, it demonstrates you have a higher degree of financial literacy and know how to manage different types of lending products appropriately.

Regularly check your credit report

Mistakes happen. By checking your credit report on a regular basis, you can catch and correct any errors that may occur and reduce the damage caused by identity theft should it happen to you. Not to mention, you can see how your borrowing behaviour impacts your credit score from month to month and use that information to break bad habits and build new ones.

A free app like Borrowell lets you check your credit score for free, pull your full credit report anytime you want, and monitor your score from the palm of your hand.

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A bad credit score in Canada doesn’t have to sit with you forever. Even if it’s low right now, you can use credit products to improve your score quickly. If you’re starting with no credit or have bad credit, you can start to improve it with one of the best secured credit cards in Canada.

As your credit improves, you can eventually get a better credit card from a major bank. As long as you continue to use it responsibly and pay your bills on time, you’ll get better offers and lower interest rates from lenders – which will save you money in the long run and improve your quality of life with better financial security.