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How to Fix Bad Credit or No Credit

How to Improve your Credit Score

Your credit score is a three-digit number that represents the information in your credit report. Your credit report is very important. It contains details on every loan you have taken out in the last six years. This includes information on how much debt you owe, how often you pay your bills on time, the credit limit on each account, and more.

Credit reports are prepared by the major credit bureaus in Canada (Equifax and TransUnion). Lenders provide these bureaus with information on your loans and the bureaus use this information to prepare a report and a credit score for each person. Every person’s credit report is unique to them.

When you apply for a loan, lenders look at your credit report and/or your credit score. They use the information they find to determine how risky it is to give you a loan. In some cases, you may even be asked to share your credit score when applying for a job or renting a home.

What is “Bad Credit?”

Credit scores range from 300 to 900, with higher being considered better. If you have a score less than 650, it could be difficult for you to get new credit and you may have to pay a higher interest rate on loans that you do get. That’s because lenders will consider it riskier to lend you money.

People end up with bad credit for many reasons, including:

  • Missing bill payments or paying bills late
  • Carrying too much debt
  • Using a large percentage of your available credit
  • Applying for frequent loans.
    • If you are making frequent credit applications, lenders may think that you are having trouble making ends meet.

What is “No Credit?”

People who are considered to have “no credit” are those who the credit bureaus don’t have enough information on to predict their behaviour. Without this information, it’s tough to determiner how likely a person is to pay their bills. This situation usually applies to people who have not borrowed money or taken out very many loans in recent years.

If you have no active credit accounts, or if you have only recently applied for credit, lenders may be less likely to give you a loan. That’s because they don’t have the information they need to determine the risk of lending to you.

Having no credit doesn’t mean you have bad credit. It means there isn’t enough information available for lenders to classify you.

Tips for Improving your Credit Score

The good news is that building your credit score or improving your credit score is definitely possible. Here are some tips:

  • Pay bills on time
    • This is, perhaps, the most important factor that goes into calculating a credit score. Missing payments can seriously hurt your credit score. Save your due dates in your calendar and make sure you don’t miss any payments.
    • If you end up in a situation where you think you might not be able to make a payment, contact the creditor before the bill is due and see if you can work something out.
  • Don’t borrow too much and pay down what you’ve borrowed
    • Borrowing reasonable amounts and making on-time payments is the key to building credit.
    • The amount of credit you’re currently using compared to how much credit you have available is called your credit utilization. For instance, if you have two credit cards and each one has a $5,000 limit, you have $10,000 of available credit. If you have a balance of $4,000 owing, then you’re using 40% of your available credit. This means your credit utilization is 40%.
    • In general, lenders like it when someone is using no more than 30% of their available credit.
    • If you’re using more than 30% of your credit, paying down your outstanding balances will reduce your credit utilization and improve your credit score.
  • Correct errors in your credit report
    • You can get a free copy of your credit report by mail by requesting this information from TransUnion and Equifax. If you want an electronic copy or if you want a copy of your credit score (not just your report), you will need to pay a fee (though some financial institutions offer these reports to their customers for free)
    • Check your credit report for errors and, if you find any, let the credit bureau know so they can correct them. It helps if you have documentation to support your claims.

Improving bad credit or building credit takes time. You don’t get a good credit score overnight. Any organization that claims to be able to fix your credit quickly for a fee isn’t being truthful. By following good credit habits, you’ll slowly build your credit over time and improve your credit score.