You’ve heard the term “credit score” a million times before, no doubt. But millions of Canadians still don’t really understand what a credit score is, how it works, or how it affects your financial future. Read on to find out everything there is to know about credit scores and the consequences of a poor credit score.
What is a Credit Score?
A credit score is a number range that lets creditors and prospective employers know what financial condition you are in. Credit bureaus take many financial elements into account when calculating your score. Your credit score can let people know if you are reliable and able to pay your bills. Some creditors, like banks or car dealerships, require relatively high credit scores to offer you a loan, especially if it is a low-interest loan.
Your credit score tells people how likely you are to repay your debt to them and whether or not you are a risky candidate to loan money to. To determine your credit score, credit bureaus take a few things into consideration like whether or not you have any late payments on your record, your debt load, and your used credit to credit limit ratio. Paying any of your bills late can result in an immediate impact on your credit rating.
Credit Score Ranges and What They Mean
Generally speaking, the lower your score, the worse you look to a prospective creditor. The higher it is, the more likely you are to be approved for a loan and obtain a lower interest rate. Risky clients with low credit scores may be forced to pay higher interest rates for the same loan.
- 300 to 499: This credit score is known as Very Poor. You are unlikely to secure a loan from a traditional banking institution.
- 500 to 600: This credit score is Poor. It is considered very low and could have an impact on your ability to secure a loan from a bank or a car dealership. Few traditional creditors will loan you funds and if they do, the interest rate will be higher than it would be for someone else.
- 601 to 660: This credit range is known as Fair. There are some creditors who may be willing to offer you credit, but likely at a higher interest rate.
- 661 to 780: This credit rating is Good. It means you are considered to be a medium to low-risk candidate for borrowing funds and that you generally pay all of your bills on time. This credit score can be passable for some types of loans, but you may still get a slightly higher than average interest rate.
- 781 to 820: This credit score is Very Good. You are unlikely to be refused for a loan request and are deemed to be a low-risk candidate. Everyone should aim to keep their credit score at least in this range. You can take advantage of lower credit rates if you’re in this range.
- 821 to 900: Anything over and a score of 820 is considered Excellent. You are of virtually no risk in the eyes of a creditor. You can get even lower interest rates, qualify for lower down payments, and even get the option to make payments over a longer period at no additional charge. This is the Cadillac of credit score ranges and means your credit has been in good standing for a long time. It tells employers you are stable and lets landlords know you can be trusted. This credit range can open even more opportunities for you.
How Do I Fix a Low Credit Score?
You can’t go back in time and fix the mistakes you’ve made. Nor can you undo the damage caused by unforeseen events that threw you off your financial plans. What you can do is make an effort to improve your score day-by-day. Here are some things you can do to manage your credit score and improve it over time:
- Pay your bills on time
- Do not hold onto balances on your credit card each month
- Do not pay the minimum payments only
- Do not open up many accounts
- Try to use cash whenever possible to avoid credit issues
- Do not take on more bills than you can handle
Another big step you can take to help repair your credit is to call your local credit bureau and request your own credit report. Go through every element on the credit report and see if there are any discrepancies or errors. You can then call each creditor who you owe money to and see if there is any way you can settle your debt.
If there are errors on it, you can call the creditor and have them fixed. These quick updates can change your credit score enough to take you into the next credit score range. This can in turn makes things more affordable for you.
Why Does Bad Credit Matter?
Having a bad credit score can mean a few different things. It can impact your ability to take out loans you need or secure housing. Here is a closer look at the collateral damage of having a bad credit rating.
If you need a loan or a mortgage, you may be refused by traditional banking institutions if your credit score is very poor. This can prevent you from securing your dream home and force you to rent – even if that rent costs more than the mortgage payments would! This can keep you pegged down in the cycle of debt even longer.
Higher Interest Rates
If you have bad credit, you may be able to secure some loans but the interest rate will likely be higher. This means more money out of your pocket, making it even more difficult to keep y0ur head above water when it comes to your finances.
Less Job Opportunities
Some jobs require a credit check. In some cases, your credit score plays a big role. If the job has anything to do with finance, you can easily be refused if you have bad credit – despite your qualifications. People with lots of debt are at higher risk of embezzling or misallocating funds so they are considered a huge risk. You can miss out on new jobs or promotions with consistency bad credit.
Landlords will take one look at your credit score and refuse you flat out. If there is any chance you won’t pay, you can kiss luxury apartments and even decent apartments goodbye. Very low-end apartment could easily be all you are left with. This can jeopardize your safety and make it very tough for you to get to work every day and continue paying your bills.
Inability to Invest in Real Estate
Investing in real estate can be a very lucrative way to invest and earn a huge return. Unfortunately, if you have bad credit, you may not be able to swing it. You will either get stuck with a high interest rate, making your property less lucrative, be required to make a heftier down payment, or be simply refused altogether.
Higher Insurance Premiums
If you are looking to get insurance, you may find that new requests will require a credit check. If this is the case with your insurance company or broker, it could mean higher premiums for you. It may not seem like much at first but cumulatively, it can add up to a large sum of cash.
You May Need a Co-Signer
Some financial institutions will offer you a bad credit loan and others may require a co-signer instead. This is a tricky thing. You first have to ask someone you know to vouch for you and assume responsibility. If you fall behind on your payments, your co-signer will be responsible. This can cause strain on your personal relationship with your co-signer. However, if you can afford the payments, getting a co-signer may be your best option.
How to Survive with Bad Credit
If you have bad credit and it is preventing you from moving forward, there are a few things you can do to try and work around it. These tips may not work in every case, but they can help you live your life with bad credit in some instances.
Get a Reference Letter
If you have hit a rough patch and that is what caused your low credit rating, you have an alternative. You can get your boss or someone with some sort of clout (financial advisor, doctor, etc.) to vouch for your responsibility. Some creditors will accept a reference letter that can prove you are not a risky candidate for a loan. Many landlords will accept a reference letter that can attest to your character if it is written by a professional.
Pay Up Front Costs in Cash
If you are securing an apartment and you have bad credit, you can offer your landlord any required fees in cash. They may not trust a cheque so offering cash ensures they will be paid. In some provinces, security deposits are necessary. If this is the case for your apartment, pay it up front and in cash to help prove to the landlord that you are a reliable candidate.
Try to Keep a Steady Job
Everyone hits hard times sometimes. But if you are able to keep a job for a long period of time, this a sign of stability. You may have some debt but debt alone isn’t always a deal-breaker. Debt and job bouncing combines however, don’t make for the best case. Keeping a stable job for a long period of time could sway some creditors to trust you.
Pay Your Debts First
Having bad credit can really hold you back. If you really want to work around it, build up that credit score – fast! Before you take some money to spend on a treat here and there, buckle down and be sure to pay that debt down first. The sooner you pay off your debt, the sooner your credit score can improve.
What Damages Your Credit Score Most?
Credit scores can be thrown off by a number of things. Let’s take a look at the most common culprits of bad credit and what you can do to avoid these situations.
Unexpected Health Crisis
An unexpected health crisis in your family can dramatically affect your finances. If this happens to you, you may quickly fall behind on bills and find yourself missing payments. This can be damaging to your credit score. To prevent this from happening, ensure you have whatever health insurance you can afford and always keep a contingency fund ready just in case. Health crises can happen at any time. If you are living on credit already, you will not be able weather the financial storm of a major health crisis.
Sudden Job Loss
If you lose your job very suddenly, you may experience financial difficulty. The bills keep piling up and if you don’t find a new job quickly enough, you may find yourself drowning in debt, missing payments, and suffering from bad credit. To prevent this, maintain a contingency fund. You should also try to limit your expenses immediately. You may find a job the next day but you may not. Don’t wait for the bills to pile up. Cut what you can and work towards preventing a debt crisis.
Miscalculating Personal Finances
Sometimes, debt and damage to your credit score can happen when you simply mismanage or miscalculate your funds. To prevent this type of financial crisis, you should have a spreadsheet to log all of your expenses and incoming funds. This will keep you on track and prevent you from accidentally overspending.
A divorce can be costly for both parties. It is in your best interest to try and resolve your issues and financial separation amicably. If you need to hire lawyers, it can be very costly and many people find themselves filing for bankruptcy soon after. To prevent this type of crisis, try to resolve your issues together first. If you are planning a divorce, be sure to separate your accounts before you serve your spouse with the papers. They can run up bills on joint accounts out of spite, which can cost you in the long-run.
Co-Signing for Others
If you are preparing to co-sign for someone, take the time to think it through first. Is this person trustworthy? Do they have the ability to make the payments they are planning to take on? If they don’t, you can get stuck with the effects of their defaulted payments. You may have to pay for them and if you can’t, then your credit score will pay the price. Co-signing shouldn’t be done as a friendly gesture. You should only do it when you are 100% sure you can trust the person to make their payments on time.
What Do I Do if I Am Suffering from Bad Credit?
If you are living with very bad credit and it is affecting your daily life and plans for the future, you should consider meeting with a financial advisor. They can help you better understand how your credit score is impacting you and what you can do to help repair it. Living with a bad credit score can mean suffering some setbacks to your financial future, but it’s not forever. You should also be sure to create a spreadsheet to track your finances. This can help you track your expenses, stay on track to repaying your debt, and help you rebuild your credit score sooner.
How Do I Keep My Credit Score in Good Shape for Good?
Recovering from bad credit may take some time but it can happen. The best thing you can do once you repair your credit is keep it clean with a few financial tips. Here are a few things to keep in mind:
- Keep track of your expenses so you do not overspend
- Get financial counseling on an annual basis
- Build a contingency fund for financial emergencies
- Put reminders in your agenda or smartphone so you do not miss bill payment deadlines
- Get your credit report from the credit bureau at least once per year and verify that all information is correct
Keeping your credit score within a reasonable range can help you keep your credit core from suffering. As long as you can keep your credit score in a decent range, you can apply for loans, mortgages, and even new jobs. Maintaining a good credit score is very important for your financial future. If you are hit with some bad luck and your credit suffers, meet with a financial specialist right away to see what your options are. The sooner you can clear your debt, the better.
Do you have a bad credit score that is keeping you from moving forward with your life? Follow the tips above to get out of debt, improve your credit score, and get on the right track to financial freedom starting right now.