Rebuilding Credit in Canada
The information in your credit report is important. When you apply for a loan, the lender will look at your report and your credit score to determine the risk of giving you credit. People with better credit will be more likely to get loans and will get more favourable interest rates when they do. Those who have a bad credit score will have trouble getting loans and will pay more in interest on the money they borrow.
If you have a bad credit score, you could have difficulty buying a house, getting a car loan, receiving a line of credit, and many other issues. So how can you fix a bad credit score in Canada? To figure this out, first it’s important to understand what information goes into your credit report and how your credit score is calculated.
What Information is in a Credit Report?
Anyone who has ever borrowed money or applied for credit in Canada has a credit report. That’s more than 21 million people in this country.
Your credit report contains information on every loan you have taken out in the last six years. This means it lists:
- How much you owe on each credit account
- Your credit limit on each account
- Whether you regularly pay on time
- A list of authorized credit grantors who have accessed your file
- And more
What is a Credit Score?
Your credit score is not a part of your credit report. It is a three-digit number that is calculated using the information in your credit report. While the exact formula used to calculate credit scores is kept secret by the credit bureaus, you can improve your score by knowing what goes into its calculation.
Factors that determine your credit score include:
- Your payment history
- How often you pay your bills and whether you pay on time, pay late, or miss payments.
- Your outstanding debt
- If you are using a large percentage of the credit you have available to you, this could be considered a negative.
- Your account history
- This lists how long you have had each of your credit accounts. Having accounts that you have held successfully for a long time is considered a good sign.
- How often you apply for new credit
- If you frequently apply for new credit (lines of credit, credit cards, etc.) this could be taken as a sign that you have difficulty managing your money.
Credit scores range from 300 to 900. The higher the score the better. If you have a score higher than 800, this is generally considered excellent. Scores between 720 and 799 are considered very good while a score between 650 and 719 is good.
If you have a credit score lower than 650, you may have difficulty getting credit from some lenders and will not get the best interest rate. If you have a score lower than 599, this is considered by some to be a bad credit score.
To improve your credit score, you will need to improve your credit habits.
How to Improve a Bad Credit Score
As mentioned, having a bad credit score can make it difficult to borrow money and you’ll have to pay higher interest rates if you can get a loan. To improve your credit score, you’ll need to show lenders that you can successfully use credit responsibly for a long period.
There is no way to fix a bad credit score overnight. The only thing that can affect your credit score instantly is if you find an error in your credit report and correct it. You can get a free copy of your credit report mailed to you by contacting the major credit bureaus (TransUnion and Equifax).
To improve your credit score:
- Pay your bills on time. Even one or two missed payments can cause your credit score to drop. Even if you’re not able to pay off your balance in full, make sure you pay at least the minimum payment (and hopefully more) by the due date.
- Don’t use too much of your available credit. Lenders like to see people using about 30% of the credit available to them. This shows that you can use credit responsibly without maxing out your cards. For example, if you have a credit card with a $10,000 limit, you should aim to only use about $3,000 at any given time.
- Reduce your budget so you don’t end up applying for new credit to make ends meet
If you have a bad credit score and you want to rebuild it, but lenders won’t give you a credit card, you might think that you’ll have no way to prove that you can handle credit responsibly. In these situations, a secured credit card can help.
A secured credit card is backed by a deposit. If you put down a deposit of $500, for example, you’ll likely receive a secured card with a $500 limit. You can then use this card like any other credit card. Many people who are unable to get a traditional credit card can get a secured credit card with a deposit. Making small purchases on this card and paying them off on time will help rebuild your credit score over time.
Note that there is a difference between a secured credit card and a prepaid credit card. A prepaid card does not let you carry a balance and make monthly payments. It operates like a gift card. A prepaid credit card will not help you fix a bad credit score.