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 can affect your ability to get approved for a mortgage, personal loan, credit card or any other form of credit. If you’ve defaulted on loan payments, entered into a debt agreement or 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? Find out in our guide below.
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 payments 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.
Your credit score is a 3 digit number between 300-900. A bad credit score – referred to as a “poor” credit rating – sits anywhere from 300 to 599, although some may also consider a “fair” credit rating (a score between 599 and 649) to be a “bad” credit score as well.
What are the credit score tiers and ranges?
While not set in stone, the general credit tiers are:
- Excellent credit score: 800-900
- Very good credit score: 720-799
- Good credit score: 650-719
- Fair credit score: 600-649
- Poor credit score: 300-599
When you apply for any type of credit – such as a loan or a credit card – 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 won’t default on your loan and that you’ll be able to repay the money you borrow in a timely fashion.
Having bad credit can affect you in the following ways:
- You’re seen as high risk. If you’ve got a bad credit score or black marks on your credit file, this will immediately raise red flags for a lender. Borrowers with a history of missing payments, defaulting on debts or filing for bankruptcy are seen as high risk borrowers. If you’ve struggled to keep up with payments or you’ve defaulted on a loan in the past, what’s to stop the same thing from happening again?
- You might struggle to get approved. Having bad credit means there’s a much higher chance of your credit applications being rejected by a lender. This means you may find it difficult to access the financing you need.
When you have bad credit, there are a couple of important things you should watch out for:
- Accepting poor rates or terms. You may be tempted to accept financing with higher interest rates and fees or unfavourable terms. Having bad credit does not mean you can’t find a lender willing to offer decent rates and terms.
- Shady lenders. You may be targeted by loan sharks and other unscrupulous lenders when you have bad credit. 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.
There are several listings that can have a negative impact on your credit file, including:
- Bankruptcy. Bankruptcy is when you’re legally declared unable to repay your debts. Once you’re declared bankruptcy, you will remain classified as bankrupt for 9 to 36 months (depending on the number of times you’ve claimed bankruptcy, as well as other factors). The listing can remain on your credit file for six to fourteen years – depending on whether it’s your first or second bankruptcy.
- 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 a specified amount of money from you paid over a set period of time to settle your debts. Debt agreements might be reported to both credit bureaus and appear on your report, damaging your credit rating.
- Defaults. If you fail to make a payment 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 and/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 payment 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 inquiries. If you apply for several credit products within a short space of time, there will be many inquiries listed on your credit report. Seeking access to a lot of credit within a short time indicates to lenders that you may be under financial stress. This can then affect your credit rating and your ability to 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 there are no options available 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. If you have bad credit, you can usually apply for a loan amount of up to $5,000 or sometimes $10,000. Before applying, be sure to only borrow from a reputable lender and remember that because you have bad credit, the lender may charge you a higher interest rate on the money you borrow.
- Payday loans. You may consider a payday loan if you need urgent access to cash – although you’ll be limited to a maximum of $1,500 and these loans are notoriously expensive and not recommended. Again, make sure you apply with a reputable lender who abides by government regulations – payday lenders cannot charge more than the provincial regulations allow.
- Mortgages. A bad credit rating won’t necessarily stop you from getting a mortgage. There are several non-traditional online lenders that offer mortgages for bad credit borrowers, so shop around and compare your options. You can also speak to a mortgage broker for mortgage advice tailored to your unique financial situation.
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. A first bankruptcy usually stays on your report for six to seven years (six with Equifax, seven with TransUnion), and a second bankruptcy stays on your credit file for up to 14 years.
- 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, depending on the credit bureau.
- Late and missed payments. Late and missed payments on loans and credit cards are recorded on your credit file for up to seven years, again depending on the credit bureau.
- Multiple credit inquiries. Applications for credit, including loans, credit cards and more, are listed on your credit file for two to three years. These listings are included regardless of whether or not your application was approved.
Listings on your credit report
You don’t need to contact Equifax or TransUnion in order to have any listings removed from your file after the specified time period. They will be automatically removed by the credit agency after the specified time period.
If you’ve got bad credit, there’s plenty of steps you can take to repair your credit score and improve your chances of getting financing in the future.
- Get a copy of your credit report. You can order a free copy of your credit report from a reputable online lender or from Equifax or TransUnion. Getting a copy of your credit 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. But 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.
- Stay on top of payments. Your credit file contains both positive and negative information about your credit history. A track record of making timely repayments towards your debt can help improve your credit score and demonstrate your financial discipline.
- Avoid making multiple credit applications. Don’t make multiple credit applications in a short period of time, as this will lower your credit score and indicates to lenders that you are under financial stress.
- Get expert advice. Contact a financial expert or find free financial counselling in your area. Financial counsellors offer independent expert advice on how you can manage your money and eliminate debt.