In Canada, if you have a bad credit score, the negative information is in your credit report for 6 years. A bad credit score is determined by a variety of things. However, you can do things 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 algorithms that will identify what your credit score is. A low number represents bad credit and puts you in the category of “a risky borrower.”
What is a Bad Credit Score in Canada?
300 – 574
Credit scores have a range of 300 and go as high as 900. If your credit score is between 300 and 574, you’re considered to have bad credit. A credit score of 574 or less puts you at a disadvantage as banks, lenders, and landlords consider you to be a liability for money lending. This means you’re less likely to get loans and if you do, they’ll be at higher interest rates. To understand further what a credit score is and what you can do to improve it, check out this essential guide to credit scores in Canada.
How a bad credit score affects your finances
When you have bad credit, it limits your accessibility to the good financial products that are available. You’ll have a much harder time obtaining a mortgage or a loan for a new car. If you do manage to get a loan, you’re going to have to pay higher interest. The main reporting agencies for credit in Canada, TransUnion and Equifax, use algorithms that predict how risky it is to loan money to you. It gives them the indication of how likely you are to pay back loans or credit cards. If you’re considered high risk, you have very few options.
Your credit score and report allow lenders to see who you are in terms of your financial credit history. It is through these reporting agencies that they can decide whether you are qualified for their products. If you have a bad credit score, it’s a lot less likely that you’ll be able to get the unsecured credit or low interest loans you’re looking for. If you want to start a business, own a home, or invest in something that could improve your finances later, you may not be able to get the loan you need.
Obtaining a credit card
If you have bad credit, you likely won’t get approved for certain credit cards. You’ll miss out on rewards points, cash back, and low interest rates. The good news is, you can start to rebuild your credit with certain credit cards available to Canadians.
Buying a home
If you have bad credit, you likely won’t qualify for a low mortgage rate. In fact, you may not qualify for any type of mortgage if you have bad credit. If you are lucky enough to qualify for a home loan, it’s likely going to involve a high interest rate. Before looking to get a mortgage, you should try to improve your credit score to gain the benefits. It will save you a lot of money when buying a home.
Getting a loan
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. With bad credit, you may be able to get a personal loan but it comes with much higher interest rates.
Renting a home
Your bad credit score can prevent you from renting the home you want. During the rental application process, they’ll likely do a background check. Landlords in competitive markets may reject those with a credit score of less than 650.
Improving your credit
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. Having good credit 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.
If you have a credit score that’s under 575 or you have no credit history at all, you’ll want to improve this score. Don’t be hard on yourself for not having great credit. It’s something that can be fixed with a bit of effort. One of the first things you can do to start building up your credit is to get a secured credit card. From there, you can start building up through spending on your card and paying it back. It doesn’t have to take a long time either.
Use a secured or guaranteed credit card
If you want to establish your credit and improve your credit score, start with a secured or guaranteed credit card like KOHO or Refresh. 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 guaranteed credit card prevents this and they’re easier to get. You can qualify for a guaranteed credit card without any credit history. You have to post money upfront as collateral. The amount of money you have to put down will usually be equal to the limit of your guaranteed credit card. This isn’t to say it’s a prepaid card because the secured or guaranteed 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 cancel your credit cards
If you have a hard time curbing spending because of your credit cards, you may feel tempted to cancel them. This isn’t recommended as your credit card accounts are tied to credit history. When you cancel a card, your credit utilization ratio goes up. This is because your available credit has gone down. You may have paid the credit card off but you don’t get the benefits if you decide to cancel the card.
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
Credit Utilization Ratio determines the amount of debt you have and how high your total credit limit is. It has a major impact on your credit score and if you can keep debt at 30% or less, this will constitute a good ratio. If you currently don’t have a great ratio, you improve it very quickly by maintaining 30% or less of money owed.
If you’re able to keep a good amount of credit, TransUnion and Equifax will label you as a low-risk borrower. Credit Utilization Ratio does place different values on types of debt. For example, if you have a government-backed loan, they have a smaller impact on your score compared to products like a credit card.
Pay bills on time
While you’re working towards gaining good credit, one of the main factors is paying your bills on time. This is something that TransUnion and Equifax pay attention to when they’re evaluating your credit score. If you don’t have good credit, it’s likely because you haven’t paid bills on time and in full. Make it a rule of thumb to change the way you manage your bills and pay them on time. You can do this by setting up automatic payments or using phone reminders to pay bills before their due date.
A bad credit score doesn’t have to sit with you for years. 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, improve it with a secured credit card. As your credit improves, you can get a 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 from credit products. If you’re looking to start a business or buy a house, having good credit will allow you to get the best interest rates. This is going to save you money in the long run.