Getting by without credit products is a skill that not many can accomplish nowadays. Given how expensive it can be to live in Surrey, most residents need access to at least one credit card if they want to avoid using up all their savings.
Then again, even a basic credit card can be out of reach if you have bad credit. If you’re looking for better approval chances and more favorable interest rates, it’s a good idea to start credit improvement as soon as you can.
Using a credit card? Be sure to avoid these 8 mistakes.
Learning About Your Credit
Once you’re approved for your first credit product, where it’s a card, loan, or line of credit, your lender should report your payment activity to Canada’s two credit bureaus; Equifax and TransUnion. From that point on, you’ll be a certified credit user and every payment you make or miss will affect your credit report and credit score in different ways.
Click here to learn the difference between a credit card and a line of credit.
Your Credit Report
As soon as they receive said information, both bureaus will build you a credit report. This profile contains a number of personal details, such as your name, address, and Social Insurance Number. It will also show records of all the credit accounts you’ve activated and used within the past decade or so.
For example, most credit card payments, whether good or bad, will remain on your report for around 6 years, depending on which bureau you’re looking at. Keep in mind that there are also two different versions of your credit profile, so make sure to check both before you apply for any new credit product.
Your Credit Score
Both bureaus will also assign you a credit score ranging from 300 to 900 which, unlike your credit report, is a more basic representation of your health as a credit user. The closer your score is to 900, the better your credit health is and vice versa. Once again, the way you use your credit products will cause your score to fluctuate.
For instance, if you make a full credit card payment by its designated due date, your score will rise. However, if you default on that payment, your score will drop.
For more information about credit scores, check out this infographic.
The Overall Effect
While there are other factors that affect the fluctuation of your score and the way your credit report looks (which we’ll discuss below), your payment activity has one of the biggest impacts. It’s also one of the main factors that a lot of lenders use during their approval process when you apply for a new credit product.
The stronger your credit is, the easier it will be to get approved for a larger amount of credit. Since better credit often means less risk is imposed on the lender, they should also be willing to offer you a lower, more affordable interest rate.
If you have a decent income, a solid source of employment, and you continually make responsible payments, no credit product should be out of reach in the future. This is particularly important if you want to be approved for a more expensive product, such as a large personal loan, mortgage, or car loan.
Looking for the best personal loans in 2019? Your search ends here.
Identifying Bad Credit
There are many different lending institutions in both Surrey and the rest of Canada, some that offer a variety of items and others that specialize in one or two key products. This notion can be a bit confusing, especially when you consider that every lender also has different standards for the clients they approve.
For instance, borrowing restrictions will typically be more tight with a bank or other ‘prime’ lender, but more loose with a private, alternative, or bad credit lender (otherwise known as a ‘subprime’ lender). The underlying truth, however, is that the worse your credit is, the more risk you pose to them.
That being said, the majority of lenders will approve you for at least a small amount of credit and a reasonable rate if you score is in (or ideally above) the 600 – 650 range.
Unfortunately, when your score dips below the 600 mark, you’ll be entering the realm of ‘bad credit’, where your options will be far more limited. If you get approved at all, it will be for less credit at a higher interest rate and may include a non-negotiable payment plan.
Common Causes of Bad Credit
The real problem is that bad credit cannot necessarily be attributed to one cause. Although your payment activity has much to do with it, your credit score can also drop due to a number of other avoidable and unavoidable events, such as:
- One or more errors on your credit report
- Moving to a new address without informing your lender or credit bureau
- Fraud or identity theft
- Reduced hours/wage at work or total unemployment
- A car accident, house flood, or another unexpected setback
- A medical emergency that prevents you from working or uses up your savings
Breaking Down Your Credit Score
Another way of identifying bad credit before it happens is by learning about the 5 factors that are used during the calculation of your credit score.
Payment History (35%)
Once again, it’s essential to make all your payments on time. This is especially true for installment loans and other ‘fixed’ amounts of credit, where you’ll have a set payment schedule that you shouldn’t deviate from.
For credit cards and other products with revolving credit limits, making minimum payments should temporarily prevent your score from dropping. However, it’s not a good habit to keep up because of the second factor that affects your credit score; debt owed.
Debt Owed (30%)
Having a lot of unpaid debt is problematic in more ways than one. Firstly, lenders will be more skeptical of your ability to afford the product you’re applying for. Secondly, the more debt you owe and the longer you owe it for, the lower your credit score will drop.
This is a particular problem for revolving products because it’s so easy to carry lots of debt for months on end without penalty. However, you’ll also have to pay interest on the unpaid amounts, causing your debt level to grow even more. For the best results, use a maximum of 30-35% of your available credit.
Length of Credit History (15%)
The age of your credit accounts is also important for the health of your credit score. Simply put, the older an account is, the better, as long as you’re making all payments on time. It’s not a great idea to constantly be opening and closing new accounts, especially when you consider the next credit score element.
New Credit (10%)
Applying for numerous cards or loans all within the same block of time is also not great for your credit score, particularly when you already have bad credit. That’s because every time a lender checks your credit, which may be standard during their application process, a hard inquiry will be listed on your credit report.
Hard inquiries cause your credit score to drop by a few points and can stay in your credit history for upwards of 12 months. If a lender sees that you’ve been denied a bunch of times and made your score worse, they may deem you less creditworthy.
Credit Diversity (10%)
It can also be good and bad to have a variety of credit types listed in your report. When you can properly manage several products, your score will rise. At the same time, if you have a bunch of unpaid debt, interest, and penalty fees spread across those accounts, your score will certainly fall.
Did you know that bad credit can affect your daily life? Learn more here.
Building and Improving Your Credit
As you’re now aware, strong credit is essential. It’s, therefore, best to discover some ways of building your credit score if you’re inexperienced or improving it after it’s been damaged in some way. If that’s your goal, there are several tactics, programs, and products you can use to accomplish it, as well as some that will help you pay down your outstanding debts.
- Create a budget and reduce your unnecessary spending
- Ask for more hours or a pay raise at work
- Pay off your largest and/or high-interest debts first
- Dispute any errors or signs of fraud/identity theft on your credit report
Programs and Products:
- Credit counselling
- Secured credit card
- Debt consolidation loan
- Debt consolidation program
- Credit rehab savings program
Credit Improvement When You Need It
If you’re about to apply for a credit product in Surrey, having good credit is a great asset and Loans Canada can help you get there. If you’d like more information about credit improvement or are curious about one of our solutions, contact us today or apply below!