What is Bad Credit and How do I Fix it?
The great thing about credit is that it can be improved. If you currently have bad credit, you are not stuck with it forever. You can work to build better financial habits, pay off debts, and ultimately rebuild your credit.
What is a Credit Score?
The majority of the time when someone has bad credit, it means that they have a low credit score that is affecting their ability to get approved for the financial products they need. A credit score is a 3 digit number created by a credit reporting agency (in Canada we have two, Equifax and TransUnion). It represents an individual’s creditworthiness, meaning their likelihood of getting approved for a loan or new credit.
The two credit reporting agencies (for more information on credit reporting agencies, click here) calculate your credit score based on how you use and pay back credit. If you’ve never used credit or have never had a loan, then you do not have a credit score. There are 5 major factors that are used during the calculation of your credit score:
History of Payments (35%)
Have you missed any credit card payments or have you ever been late making a loan payment? If yes, your credit score was negatively affected. On the other hand, if you always make your credit and loan payments on time then your credit score is probably good, depending on your other financial habits.
Amount of Debt (30%)
We all have at least some debt, whether it’s a mortgage or a maxed out credit card. But those who carry large amounts of debt month to month are more likely to have lower credit scores. Typically, this factor is most affected by personal and consumer debt. Individuals who constantly use up more than 30% of their available credit limit are more likely to have bad credit.
Credit Length (15%)
This factor has less weight in the calculation of your credit score, but it’s also probably the easiest factor to change, in both a negative and positive way. Simply put, the longer you’ve had a credit account open and have been using it responsibly, the better your credit score will be. A large part of your creditworthiness is the responsible use of credit over time. Closing a credit account that you’ve had for years is not a good idea as you’ll essentially be removing that part of your credit history, thus making your credit history shorter. A long and healthy credit history should be your number one credit goal.
Diversity of Accounts (10%)
The average consumer typically has no idea that the types of credit accounts they use have an effect on their credit score. Having several different types of credit accounts in active use will help give your credit score a boost. So if the only type of credit you’ve ever used is a credit card, think about taking out a personal loan to add a new type of account to your credit history.
New Inquires (10%)
Every time a credit card company or lender performs a hard pull on your credit, your score will 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, is not good for your credit score. These hard pulls will also show up on your credit report. Several hard pulls all in a short period of time means that you’re either being rejected or that you’re taking on too much credit, neither is a desirable quality.
What is an inquiry? Learn here.
Click here to check out our Credit Score Breakdown infograph.
Canadian Credit Score Range
Now that we know what a credit score is, let’s take a look at the Canadian credit score ranges. In Canada, both TransUnion and Equifax provide consumers with credit scores that range from 300 to 900. Depending on your financial habits and your credit history, your personal credit score will fall somewhere in this range.
300 – 559 = Poor
560 – 659 = Fair
660 – 724 = Good
725 – 759 = Very Good
760 + = Excellent
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.
Why is my Credit Bad?
Your credit score is affected by your credit and financial habits. Therefore, everyone’s credit is either good or bad, based on a set of reasons unique to that person. That being said, there are several general reasons why the average person’s credit may be bad:
- Missed payments
- Late payments
- Maxed out credit cards
- Applying for too many credit cards within a short period of time
- Charging purchases you can’t afford to buy with cash
- Taking on loans you can’t afford
- Defaulting on loans
Is my Bad Credit Affecting my Life?
Your credit score is the backbone of your financial life, a high credit score is great for your financial life and a low credit score is bad for your financial life. But what most people do not know is that a low credit score can also affect aspects of your personal life. So yes, your bad credit is most definitely affecting your life, both personally and financially. Bad credit can prevent you from:
- Getting a new credit card
- Getting approved for a loan you need to cover the cost of something important
- Purchasing your dream home
- Renting an apartment
- Getting approved for vehicle financing
- Getting chosen for a job you want
How do I Improve my Credit Score?
Everyone wants to know how they can improve their credit scores, and we completely understand why. Good credit is so 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, this requires good credit. Let’s take a look at what you can do to improve your credit score and accomplish all your goals, both financially and personally.
For more information on how to improve your credit score quickly, read this article.
Conquer Unnecessary Debt
First and foremost, create a budget, stop using your credit cards to buy things you don’t need, and pay down any consumer debt you have. Debt causes all kinds of unnecessary financial problems, including bad credit. Paying off debt and improving your credit go hand in hand. As you pay off your debt, your credit will start to grow.
Start Making all Your Payment on Time
We’ve said is before and we’ll say it again, late or missed payments will negatively affect your credit score and therefore should be avoided no matter what.
Keep Track of Your Credit
Canadians have access to one free credit report each year from each agency. After that, you will have to pay for any additional credit reports and credit scores you wish to see throughout the year. But, if credit improvement is really an important goal of yours, you should consider requesting a copy of your credit report and credit score at least twice a year. You should also consider paying for a credit monitoring service. Either way, keeping track of your credit will help you to improve your overall financial health.
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.
Looking for alternative ways to improve your credit?
If you’re looking for even more ways to improve your credit or are interested in giving your credit score an extra boost, check out our credit rehab savings loan and this credit card that specializes in helping individuals improve their credit.