Having a bad credit score in Canada can be an inconvenience. This can lead to difficulty in obtaining a loan when needed. People need to understand what a credit rating is and how the score is determined. They also need to know the effects of having a bad credit history. Understanding how credit scores work will help people avoid negative ratings and improve poor credit records to get loans more easily.
A person’s credit score depends on the result of a technical formula that calculates his or her overall financial standing. The result will depend on the person’s previous transactions with banks and other lending bodies. This formula produces a score between 400 and 900, and higher numbers indicate better credit ratings. A score of 700 and up is commonly regarded as a good credit rating while a score of 500 and below is usually considered poor.
Effects of a Credit Score
This score will be evaluated and used in determining loan approval. A bad credit score in Canada implies that the person is not in a good position to pay back a loan. This rating usually results in a lower probability of obtaining a loan. Some lenders do not give out loans to those with bad credit. There are lenders who still approve loans for these borrowers, but they may come with extra fees. These loans usually have higher interest rates and increased amounts due for every scheduled payment. These lenders also require high down payments and allow shorter repayment terms. They may also require borrowers to put up a large amount of collateral to secure the loan. This is because lenders want to protect themselves and their finances as there is a greater risk in providing loans for those with bad credit ratings.
On the other hand, a good credit score will make it easy for a person to get a loan. This increases his or her ability to get approval easily. The interest rates are usually lower, and the repayments schemes are good. This is because lenders have on security based on the borrower’s past transactions.
However, the person’s ability to get a loan will still depend on the lender and how the score is evaluated. Interest rates and repayment schemes may differ depending on the credit score and the lender’s preferences. The amount that can be borrowed will also be affected if the borrower does not have a good credit rating.
Causes of a Bad Credit in Canada
Current and Past Debts
Debt can have a major effect on a person’s credit rating. This can be from car or housing loans, credit card debt, payday loans or any other money owed. The person’s ability to pay these loans on time will greatly affect his or her credit score. Defaulting or not being able to complete the payments on time will decrease the borrower’s score and lead to negative records.
Financial debts to any lending body will appear during credit score calculation. If the borrower has current loans that seem impossible to cover with his or her monthly earnings, he or she will find it hard to get an approval. The borrower may obtain a loan, but it will likely come with undesirable rates and payment schemes.
Credit bureaus record people’s credit standing. They retain information on loans obtained and any delinquency. These bureaus record any nonpayment or late payment for any debt. Not being able to pay the debt on time will result in poor credit standing. This will permanently change the person’s score and ability to get more loans.
How to Avoid a Bad Credit Score in Canada
People should maintain a good credit score in order to increase their ability to obtain loans in the future. However, this requires quite a bit of effort. A few tips can help a person avoid ruining his or her credit standing.
– Paying Bills on Time
The best way to keep up a good credit rating is to pay bills on time. This includes utility bills, credit card bills and other monthly expenses. Phone bills should also be paid on time. Failure to do so will affect the person’s credit standing as these companies usually report late payments to credit bureaus.
– Pay the Amount Due
Paying the amount due or more will also improve the person’s credit rating. This will be recorded in the credit agency database. The information will then be available for lenders when a person applies for a loan.
– Stay Inside the Credit Limit
People should not go over the limit on their credit cards in order to avoid unwanted monthly fees. Going over the credit limit will result in higher payments and difficulty keeping up with the debt.
– Minimize Debts
The most important thing that people should keep in mind in order to avoid bad credit scores is to minimize debts. This is probably the best way to maintain desirable monthly payments and avoid high interest rates. People should only acquire loans when needed and avoid unnecessary debts. This includes additional credit cards and loans that are not practical.
– Keep a Personal Credit Score
People should keep track of their debts and monthly payments. They should have a record of every financial transaction in order to avoid late payments and delinquencies. The personal record will also help people determine their credit standing and take necessary steps to improve it if there are inconsistencies.
Restoring a Bad Credit Score in Canada
People with bad credit scores should not give up. There are several things that a person can dp to improve their credit score.
– Pay Current Debts on Time
Borrowers should pay their debts on time in order to improve their credit scores. This will reflect on their records with the credit bureau. Borrowers will have better scores when they continue to keep up with their payments.
– Avoid New Debt
Those who have current debts should avoid obtaining more. They should complete paying their current loans before deciding to get new ones. This will also help people from having a buildup of monthly payments that will result in the inability to pay all of it. Any impractical debts like those from credit card purchases should be avoided. These will just add to the problem and can potentially worsen the person’s credit score.
– Change Borrowing and Paying Habits
People with bad credit standings usually have a negative attitude towards borrowing and paying the amount due. They should start to change habits and attitude towards the issue. The overhaul will include lifestyle changes and eliminating impractical borrowing habits.