What to know about bad credit

A bad credit history can have serious consequences for your financial future. Here’s what you need to know to improve your credit rating.

A bad credit rating is bad news for your ability to access a home loan, personal loan or any other form of credit in the future. If you’ve defaulted on loan repayments, entered into a debt agreement or even applied for a credit card, all this information goes into your credit file and can severely impact your finances for years to come.

So what is bad credit, what negative information is included in your credit file and how can you improve your credit rating?

What is bad credit?

Your credit report contains a range of information about your credit history. This information can be positive, such as a history of making on-time repayments on your car loan or credit card – but it can also be negative. It’s this negative information that can give you a bad credit rating.

Missed repayments, loan defaults, debt agreements and bankruptcy details are collected by credit reporting agencies and can all make an appearance in your credit report. The agencies then use this information to calculate your risk as a borrower, with this risk reflected as a number, known as your credit score.

How can bad credit affect me?

When you apply for any type of credit in the future, such as a loan, the lender will examine your credit file and credit score to determine the risk involved in lending you money. The lender needs to be reasonably certain that you will be able to repay the money you borrow in a timely fashion – and that there is minimal risk of suffering a loss when you default on your loan.

• So, if you’ve got a bad credit score or black marks on your credit file, this will immediately raise red flags for the lender. Borrowers with a history of missing repayments, defaulting on debts or filing for bankruptcy are seen as being high-risk customers. If you’ve struggled to keep up with repayments or defaulted on a loan in the past, what’s to stop the same thing from happening again?
• As a result, if you have bad credit there’s a much higher chance of your loan and credit applications being rejected and you may find it difficult to access the financing you need.

Things to watch out for

• Unfortunately, one of the consequences of bad credit is that you may be tempted to accept financing with higher interest rates and fees or unfavourable loan terms.
• In addition, you may be targeted by loan sharks and other unscrupulous lenders. This could prompt you to take out a loan you can’t afford and eventually lead you even deeper into the vicious cycle of debt.

What listings on my credit file are bad?

There are several listings that can have a negative impact on your credit file, including:

• Bankruptcy. Bankruptcy is when you are legally declared unable to repay your debts. Once you are declared bankrupt, you will remain classified as bankrupt for 9 to 36 months, depending on the number of times you’ve claimed bankruptcy and other factors. The listing can remain on your credit file for six to fourteen years.
• Debt agreements. A debt agreement is a binding agreement between you and your creditors. If you enter into such an agreement, your creditors agree to accept an amount of money from you paid over a set period of time to settle your debts.
• Defaults. If you fail to make a repayment on a debt within a specified time period past the due date, your credit provider can hand the matter over to debt collectors and also report the debt to Equifax or TransUnion. The default will then be listed on your credit file and will affect your credit score.
• Writs, summons and court judgements. If you’ve been invited to appear in court to settle a debt, this – along with any resulting court judgement – will be listed in your credit file.
• Late and missed payments. Your credit file records both positive and negative information about your repayment history, so if you’ve made late credit card or loan repayments – or missed them altogether it shows that you may have trouble managing your finances.
• Multiple credit enquiries. If you make several credit enquiries in a short space of time, for example, if you file multiple personal loan applications in the space of a couple of months, it indicates to lenders that you may be under financial stress. This can then affect your credit rating and your ability to get a loan.

I have bad credit can I still get a loan?

Bad credit can certainly have a detrimental effect on your ability to access credit in the future, but it doesn’t mean all options are closed to you. Even if your credit history is far from perfect, you may still be able to access:

• Personal loans. It’s still possible to qualify for a personal loan if you have bad credit; in fact, some lenders specialize in offering financing to borrowers with a less-than-perfect credit history. You can compare bad credit loans of up to $5,000 and even $10,000, or you may need to consider a short term loan if you need urgent access to cash. Just make sure to only borrow from a reputable registered credit provider and remember that because you have bad credit, the lender may charge you a higher interest rate on the money you borrow.
• Debit cards. You may not qualify for many credit cards if you have bad credit, so one option may be to use a debit card instead. Debit cards allow the same convenience as credit cards but with the key difference that you spend your own money rather than funds from a credit provider. You can also access prepaid debit cards with some short term loans.
• Home loans. A bad credit rating won’t necessarily stop you from getting a home or investment loan. There are several non-traditional lenders that offer home loans for bad credit borrowers, so shop around and compare your loan options. You can also speak to a mortgage broker for specialist home loan advice tailored to your financial situation.

How long will I have bad credit?

The time that negative information stays on your credit file varies depending on the type of listing.

• Bankruptcy. Bankruptcy is listed on your credit report for six to fourteen years, depending on the credit agency and the number of times you’ve declared bankruptcy.
• Debt agreements. Debt agreements are listed on your credit file for three to six years, or potentially longer in some cases.
• Defaults. Credit defaults are listed on your report for up to seven years.
• Late and missed payments. Late and missed payments on loans and credit cards are recorded on your credit file for up to seven years, depending on the credit bureau.
• Multiple credit enquiries. Applications for credit, including loans, credit cards and more, are listed on your credit file for two or three years. These listings are included regardless of whether or not your application was approved.

What can I do to improve my credit?

If you’ve got bad credit, there’s plenty of steps you can take to repair your credit history and improve your chances of getting financing.

• Get a copy of your credit report. You can order a free copy of your credit report from Equifax or TransUnion, however you will receive it by mail. In addition, you can receive your credit score and report instantly from a legitimate website online. Getting a copy of your report will let you get a full rundown of the bad credit listings that are hurting your borrowing power. It’s good to check your credit report regularly for both incorrect listings and areas you can improve.
• Fix any incorrect listings. While you may not be able to do anything about some of the bad credit listings in your file, it’s important to rectify any errors in your report. For example, you may have been a victim of fraud and may therefore not be responsible for one or more of the debts listed. Contact the credit reporting agency to report any errors and be willing to take the matter up with the credit provider if needed.
• Take control of your debt. From debt consolidation loans to balance transfer credit cards, look at the options available to help you get out of debt. However, remember that some methods of dealing with debt, such as entering into a debt agreement, can have a severe impact on your credit file. Work out a budget and cut back on expenses wherever possible so you can get your debt under control.

Frequently asked questions about bad credit

• How can I get a copy of my credit report?

  There are many websites online which offer a free copy of your credit report. When signing up to receive your free report, make sure the site is legitimate. Some sites will sell your information to third parties, while others may not provide you with a legitimate report.

  In addition, you can request a paper copy of your credit report from one of the credit bureaus – Equifax or TransUnion. You will need to apply online and provide proof of identification. While this is a solid way to get a free copy of your credit report, it will take longer since it’s coming by mail.

• My credit card application was refused. Will this affect my credit history?

  Yes. When you apply for any form of financing, including a credit card, a lender will do what is known as a “hard pull” on your credit file in order to find out about your financial history. Even if you’re rejected for a credit card, this hard pull will knock your credit score down by about 5 points. However, this is only temporary and your credit score will recover within a few weeks or months if you continue to make timely repayments on your accounts.

• What are the names of Canada's credit reporting agencies?

  Canada’s two main reporting agencies are Equifax and TransUnion.

• How can I track my credit score?

  Both Equifax and TransUnion offer a credit monitoring service, which gives you daily access to your credit score and report. Additional features are also offered, however this service will cost a monthly fee. Prices and features vary between the two reporting agencies, so compare your options before subscribing to a service.

• Will I have a credit file if I've never applied for a loan or credit card?

  You may still have a credit file if you’ve applied for any other type of credit or borrowed money in some other way. For example, a cell phone contract held in your name or interest-free store financing can both be reported in your credit file.

• Can I still get a home loan if I have bad credit?

  It is possible, however you won’t get the most favourable terms or the most competitive rates. Many banks and credit unions are not willing to lend to customers with bad credit, so you may need to borrow from a non-traditional lender that specializes in providing loans to bad credit borrowers.

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