Since Alberta, including the town of Red Deer, can be a relatively expensive place to live, it’s important to create a proper budget and reduce your non-essential expenses whenever possible. And, if you’re a regular credit user, it’s also best if you can secure the best interest rates and save yourself money in the process.
Then again, having what most lenders classify as bad credit can lead to more expensive rates and unhealthy finances all around. If that’s the case for you, improving your credit is definitely the way to go.
To see how bad credit can affect your daily life, check out this infographic.
Your Credit Report and Credit Score
If you’re new to credit usage, it can be difficult to wrap your head around the idea of building and, if necessary, improving both your credit report and credit score. However, it’s good to learn about these major components so that you can monitor them regularly and be aware if anything ever goes wrong.
Once you use your first credit product, the provider will dispatch said activity to the two main credit bureaus in Canada; Equifax and TransUnion. Each bureau will then compile a credit report.
Your report is a detailed profile containing some of your personal information (name, date of birth, SIN #, etc.), as well as a history of your credit activity over the past several years. Any credit card payment you make (or miss), any loan you apply for, and any debt you incur will be listed on your report until it is no longer reported after a predetermined amount of time.
Not sure which credit bureau your lender checks? Find out here.
If you’d like to monitor your report, you’re entitled to one free copy annually from either bureau. While additional copies would cost a fee, it’s smart to check your report regularly for signs of errors, fraud, or identity theft. It’s also suggested to look at both versions so you can make sure every bit of information lines up.
The next component to study is your credit score, which you can also view for a small fee from either bureau. Ranging from 300 – 900, this score acts as a representation of your health as a credit user and fluctuates according to your payment activity. For instance, if you pay a credit card bill on time, your score rises. However, if you make that payment late, short or you miss it altogether, the opposite will occur.
The higher your score is, the more opportunity you’ll have to secure larger amounts of new credit and lower interest rates to go with them. Below, you’ll find a brief explanation of the various credit score ranges so you’ll know where your own credit health stands.
Good Credit (660 – 900): Having a score in this range typically means you’ve had little to no problems managing your active credit products. Since you present a relatively small risk of defaulting on future payments, new lenders are likely to approve you for more credit and lower rates without the hassle.
Read this to see some surprising perks of having a good credit score.
Fair Credit (560 – 659): The more payments you default on in some way and the more debt you undertake, the further you’ll fall into this range. By now, approval will become slightly harder to obtain due to increased risk for the lender. Any product you are approved for will become more expensive and have a stricter repayment schedule.
Bad Credit (300 – 559): This is where things get complicated and expensive, because many lenders, especially prime sources like banks, will not trust you with their products. Generally, this is due to the fact that you’ve defaulted on many payments, accumulated a lot of unpaid debt, and/or experienced some kind of delinquency, such as a debt settlement, consumer proposal, or bankruptcy.
The Overall Effect of Bad Credit
The worse your credit is, the more problematic it is when potential lenders inspect your report and score to determine how creditworthy you are. If you have bad credit, you may only be able to find limited, higher-cost credit products through alternative lending institutions or, more specifically, bad credit lenders.
Any new product you’re approved for may then be unaffordable and cause further debt problems for you. Not to mention, every time a lender pulls your credit, a hard inquiry gets listed on your report for around a year and decreases your score by a few points.
Nevertheless, the silver lining is that, as we mentioned, every payment you complete will elevate your credit score. So, if you spend time paying your bills responsibly and monitor your report on a regular basis, the situation will gradually resolve itself.
Factors That Affect Your Credit Score
Although many people are able to get by without credit products, having good credit is essential if you’re ever planning to use a credit card, loan, line of credit, and even some debt management products. This is particularly true if you want to access a more imposing product some day, such as a car loan or mortgage.
If that’s your goal, it’s best to improve your credit as soon as possible. A good first step is to learn about the 5 factors that credit bureaus use to calculate your credit score.
Payment History (35%)
The factor that contributes the most to the calculate of your credit score is your payment history. It’s also one of the factors that lenders will inspect first. Since this plays such a major role, the best thing you can do for your score is to pay all your credit-related bills on time and in the fullest amounts you can manage.
Outstanding Debt (30%)
The second biggest factor is the money you owe currently. Simply put, the less unpaid debt listed on your credit report, the better it is for your credit score. Although this applies to fixed amounts of credit (like loans) as well, the effect is especially visible with products that have revolving credit limits (like credit cards). In that case, try to pay off as much of your monthly statement balances as possible.
Length of Credit (15%)
Since the third largest percentage of your score relates to the age of the accounts in your credit history, it’s better to avoid activating and canceling credit products on a regular basis. Instead, try to use the same cards, loans, and lines of credit responsibly for longer periods of time.
For more information about your credit history, click here.
New Credit Inquiries (10%)
When a non-credit entity, such as you or your landlord checks your credit, it will be listed on your report as a soft inquiry, which will not affect your score. However, remember that whenever you apply for new credit, any hard inquiries your lenders perform will have a negative impact. If you have lower credit and need to apply multiple times, consider waiting a few months between each application.
Credit Diversity (10%)
While it isn’t smart to take on more products than you can manage comfortably, adding diversity to the credit types on your report is a good way of both building and improving your score. That said, do not forget that a positive effect will only occur if you handle all those accounts responsibly.
For even more information about credit scores, check this infographic out.
Methods of Credit Improvement
Now that you’ve learned about the way your credit fluctuates, let’s discuss some things you can do and habits you can change to improve your credit if it’s been damaged in some way.
It’s essential to realize that everyone’s financial situation is different and, depending on what your credit looks like currently, certain solutions may not be right for you. Before you attempt any of the habits, products, or programs listed below, be sure to reevaluate your finances, talk to an advisor, and do lots of advanced research, as some methods are potentially more costly and time-consuming than others.
Habits to Pick Up
- Create a monthly budget and reduce unnecessary expenses
- Stop paying bills late, short, or missing them entirely
- For revolving products, make at least your minimum payments
- Activate and use a variety of products responsibly
- Consolidate your highest-interest debts first, then work your way down
- Increase your gross income however you can
- Check your credit report regularly for errors, fraud, or identity theft
Products to Try
- Low-interest credit cards, loans, and lines of credit
- Secured credit cards (if you don’t qualify for regular cards)
- Guarantor loans
- Debt consolidation loans
Programs to Enter
- Credit counselling
- Debt consolidation program
- Credit rehab savings program
Click here for some information about debt and credit counselling.
Looking for Credit Improvement in Your Hometown?
Whether you want to build, diversify, or improve your credit in Red Deer, you can rest easy knowing that Loans Canada has your back. Contact us today to learn about our credit improvement methods, then apply below when you’re ready to get started!