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Your credit is an important tool that lenders, creditors and other entities use to evaluate your likelihood to pay bills and debts. So, if you currently have bad credit and need a loan, it can be difficult to get approved for that personal loan, credit card or even an apartment rental. However, it is not too late to build better financial habits and start using credit responsibly.

What Is Bad Credit?       

In Canada, both TransUnion and Equifax provide consumers with credit scores that range from 300 to 900. Your score will fall somewhere in this range depending on how you’ve used your credit in the past. Generally, credit scores that fall below 560 are considered bad credit.

Canadian Credit Score Range

760+Excellent
725 – 759Very Good
660 – 724 Good
560 – 659 Fair
300 – 559Bad

Keep in mind that Equifax and TransUnion are two separate companies. This means your credit score from one company may be slightly different from the other because they both have different credit scoring models.

What Causes Bad Credit? 

Your credit scores are affected by how you use your credit and the credit scoring model used to calculate your credit scores. Therefore, everyone’s credit is either good or bad, based on a set of reasons unique to that person. Just remember that it is not impossible to get a loan with bad credit.

That being said, there are several general reasons why the average person’s credit may be bad:

How Are Credit Scores Calculated? 

There are five common factors that are generally used by the credit bureaus and credit score providers in Canada. But depending on their credit scoring model, the weight each factor carries can vary, which can affect the calculation of your credit scores. 

History Of Payments (~35%)

Your payment history generally accounts for around 35% of your credit scores. As such, if you’ve missed any credit card payments or been late making a loan payment then your credit scores may have been negatively affected. On the other hand, if you always make your credit and loan payments on time then your credit scores will likely improve. 

Debt-to-Income Ratio (~30%)

Around 30% of your credit scores are dependent on your debt-to-income ratio. This refers to the amount of revolving credit you use versus the amount you have available. Revolving credit accounts include lines of credit and credit cards. 

Generally, those who carry large amounts of debt month to month may lead to bad credit. Most lenders like to see a debt-to-income ratio of 30% or lower. 

Credit History (~15%)

This factor usually carries less weight than the other factors when calculating your credit scores. The longer you’ve had a credit account open and have been using it responsibly, the more positively it may affect your credit scores. 

A large part of your creditworthiness is the responsible use of credit over time. So, closing a credit account that you’ve had for years is not a good idea as you’ll reduce your credit age which can negatively affect your credit.  

New Inquires (~10%)

Every time a credit card company or lender performs a hard pull on your credit, your scores may go down a few points. Hard pulls are when a credit company or lender checks your credit report to verify your creditworthiness when applying for a loan or new line of credit. Applying for several new credit cards or loans, all within a short period of time, can negatively affect your credit. 

Public Records (~10)

Public records like bankruptcy, liens or accounts in collections can also negatively affect your credit. These remarks in your credit report can lead to significant negative effects on your credit and finances. 

How Bad Credit Can Affect Your Life? 

What most people do not know is that low credit can affect aspects of your personal and financial life. Bad credit can prevent you from:

  • Getting approved for a new credit card
  • Getting approved for a loan 
  • Getting approved for vehicle financing
  • Purchasing your dream home
  • Getting affordable interest rates and terms on different credit products
  • Renting an apartment
  • Getting chosen for a job you want

How To Improve Bad Credit?

Good credit is important, especially if you have financial goals and life dreams that you want to accomplish. Being a homeowner is something the majority of Canadians want, however, you need good credit to get a mortgage with a bank. Let’s take a look at what you can do to improve your credit scores and accomplish all your goals, both financially and personally.

Pay Off Your Debts

As mentioned, your debt-to-credit ratio can greatly affect your credit scores, as such reducing your credit card usage and debt can help improve your credit. 

Make All Your Payment On Time

Your payment history is another important factor that can affect your credit, so building a positive payment history can help improve your credit. This can be achieved by making your payments on time. Moreover, be sure to at least pay the minimum balance to avoid any missed payments. 

Keep Track Of Your Credit

Your credit can be negatively affected by errors on your credit report, so monitoring your credit can help catch these mistakes and rectify them. In Canada, you can access your credit report for free with both credit bureaus. If you want you can also pay for a credit monitoring service for additional features like fraud alerts. Either way, keeping track of your credit can help you to improve your credit.

Use Credit Building Products

There are many products out there that are specifically designed to help Canadians build their credit such as secured credit cards. 

Secured credit cards work just like a regular credit card, except you have to provide a security deposit which also acts as your credit limit. These cards are extremely easy to get approved for and can help you build a positive payment history. 

Bad Credit FAQs

What are credit scores?

A credit score is a 3-digit number created by a credit bureaus (in Canada we have two, Equifax and TransUnion). It represents an individual’s creditworthiness, meaning their likelihood of paying a bill or debt on time. The two credit reporting agencies calculate your credit scores based on a number of factors including how you use and pay back credit. 

Why don’t I have a credit score? 

If you’ve never used credit or have very little credit history, then the credit bureaus may not have enough information on your to generate your credit scores.  

How long does it take to rebuild credit? 

Improving your credit score takes time and there’s no way around it. Patience and hard work will allow you to grow your credit, conquer your debt and finally have the great credit score you’ve always wanted.

Bottom Line

Your credit is vital when it comes to getting different credit products, so improving it is important. While it may not be easy, and may take some time, improving your bad credit to good can lead to higher approvals, lower rates and overall better credit options.

Caitlin Wood, BA avatar on Loans Canada
Caitlin Wood, BA

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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