Challenges When You Have A Bad Credit Score

Having a bad credit score shouldn’t be like a sentence, but it can often feel that way.

Many don’t realize just how much a bad credit score can impact their lives, but may realize it when they try to apply for a loan. When you have a credit score below 600, it’s important to work towards improving it. With a poor credit score you are missing out on much that can impact the quality of your life. A bad credit score isn’t just viewed negatively by banks or lenders. There are also landlords and some employers that may see you as  less financially responsible, which can affect your options for renting, career and more.

If you chose to get a loan you would only qualify for higher interest rates. You would simply be considered too much of a risk for many lenders, and the ones willing to take a chance on you charge higher rates. What is regarded as your creditworthiness will determine your options when borrowing.

This is not to say that being above 600 is good. Having a score in the low 600’s is considered fair. But if we were to pick a point at which a credit score is considered bad, below 600 would be it. There are a number of disadvantages to having a poor credit rating. Read on as we discuss other ways it can impact you, and the many benefits of good credit scores you may want to consider.

Cost of Borrowing

If you were to apply for an online loan, since the banks would probably not help, it’s more than you having to pay higher interest rates. There will be limits to the amount you can apply for, and the length of the term available to borrow is often affected as well. Since your credit score has so much to do with borrowing and whether you might qualify for personal loans, installment loans and other credit products, it’s wise to monitor. And to always work towards improving your credit score so you may qualify for better borrowing opportunities in future.

This would also mean it’s more expensive to get a mortgage (if you qualify) along with higher interest rates if looking for car loans. 

Other Rates Can Cost More

When you have a bad credit score, it affects more than your ability to get a personal loan or installment loan. It can also affect your insurance rates. In some provinces, auto insurance providers are allowed to access your credit score to determine your insurance rates. The few exceptions being Ontario, Newfoundland and Labrador where they prevent auto insurance companies from making use of credit score data. In Alberta, auto insurance companies are permitted to use credit score data, but they must have your consent to make use of it. With the rest of the provinces there are no clear rules or regulations about how this works. Home insurance is another scenario, but the insurance providers often use a soft check, which can be done without your permission. 

Missing Out on Good Rewards Cards

When you have good to excellent credit, you can be eligible for the best introductory offers, cash-back incentives and better rates with credit cards. But until you can prove that you are financially responsible and prove capable of managing your credit, you will probably miss out on such rewards. There are credit card options for those with lower scores, and even secured credit cards for those with bad credit. But the best options among credit cards are mostly reserved for those with good to excellent credit. For those dealing with credit card debt, this is of high interest and one of the things you want to get under control so you can start to manage your credit score more effectively. If you have bad credit and unable to qualify for a credit card, using secured credit cards is one way to improve your score.

Security Deposits

With a bad credit score you may find that a security deposit is required with utilities like water, electricity, gas and similar. When you are a newcomer with no previous history of utility payments a deposit is often required. If you have a history of missing or late payments, it’s likely you may also need to provide a deposit as well. So having a poor credit history should come as no surprise as another reason where it can impact you, such as when a security deposit is required. 

How Your Credit Score is Calculated

A credit score in Canada ranges from 300 to 900, with the average score of most Canadians being reported as 672. There are 2 main credit bureaus in Canada (Equifax and TransUnion) that provide this score. 

Understanding the parts that make up your score can help with determining how you might improve it. The main factors being history, debt, length of history, new credit accounts, and mix/use of credit.

Payment History (35%) – a record of debt repayments for loans, lines of credit and similar

Amounts Owed (30%) – this compared credit you have access to, and what you’ve used

Length of Credit History (15%) – how long you’ve had accounts, and how long since used

New Accounts (10%) – new credit inquiries (hard) on your credit account

Credit Mix (10%) – the diversity of credit products you maintain

Also worth noting is the your debt to income ratio might not be part of your overall credit score but it is something most lenders will look at if you are applying for a loan. 

A higher debt to income ratio would suggest you may have trouble making payments and can affect loan eligibility since it suggests you carry too much debt and that you may have trouble making payments.

The following provides the average credit score in Canada by age group:

How to Manage Your Credit Score

Some basics that can help you with how things might impact your credit score include:

– Always pay your bills on time

– Try to keep a low credit card balance (if any at all) to manage your DTI

– Avoid applying for other credit, especially around the same time

– Monitor your credit reports for errors or mistakes

Credit Utilization

Managing your credit utilization ratio is another important way of maintaining your score.

The following example is related to cards, but this applies to loans as well.

A good credit utilization ratio is typically under 30%, and can often open doors for better opportunities like better loan rates and card offers.

Credit Habits

Adapting good financial habits with credit can help to ensure that you start making moves that can positively influence your credit score. A good plan to also consider is starting a budget if you don’t already have one. Look into how to lower your bills so you have more money to pay down debt. Also look into budgeting apps to help you with managing your finances.

Finding an error on your credit report is one of the fastest ways you can improve your score, and another reason to get a copy so you can ensure the information is correct.

Developing a good credit score takes time. It won’t happen overnight and takes commitment. The following articles can also help set you on the right path.

Recommended Reading

What is a Good Credit Score

Ways to Improve Your Credit Score Fast

How Your Credit Mix Can Help Your Score

How to Get Approved for a Loan When You Have Really Bad Credit