As you get closer to maxing out your credit cards and continue to be late paying your bills, you are getting closer to discovering just how much this can affect everything from your credit score to much more.
You might think the debt you carry is no big deal and you can always get around to paying off, but having a poor credit history or a low credit score will have a bigger impact than you might expect.
Having a bad credit score can make life extremely difficult, from higher interest rates on loans or or restrictive terms or not being approved at all to higher insurance premiums. It can also make it harder for you to get a job, an apartment, credit cards, cell phone contract, buying a car, require you to put a deposit on utilities and even make the dream of owning a home next to impossible.
What Causes Bad Credit?
There are several factors that go into determining your credit score, here are a few of the more common ones that influence that rating more heavily.
Paying your bills on time is considered possibly the most important ingredient when it comes to credit scoring, and even a single missed payment can have a negative effect. It’s a simple lesson, pay your bills on time, every time.
Your credit utilization rate (also called your credit utilization ratio) is based on how much you currently owe divided by your credit limit. It suggests how reliant you are on non-cash funds. Keeping this well below 30% of your available credit is advised.
Credit History Length
In general, the longer your credit history is, the higher your credit rating can be. While it’s often consider that 7 years is a good length of time to establish a good credit history, time alone doesn’t guarantee anything and factors like credit utilization and payment history also play an important part of how your credit rating impact your overall score.
Having diversity in your credit such as car loan, credit cards, mortgage and other credit products can also be an indication of how well you might manage your money with a wide range of credit products and debt simultaneously, and demonstrate your ability to pay back any debt to lenders. Known as your credit mix this can also help your score.
When you are aware of the factors involved and why you might have a bad credit rating, it can help you with planning and preparing to improve things, which can help when the time comes that you can use a personal loan and will shop around to see how you prequalify for a loan.
What is a Bad Credit Score?
According to major credit reporting bureaus likeTransUnion and Equifax, a poor credit score would be 560 or less . According to Transunion and Equifax, the average Canadian credit score is about 650.
Some sources suggest a bad credit score might be 650, and even 670. One thing to keep in mind is that you don’t want to just improve your credit score, it’s also important that you maintain it.
This is a reference towards what they call trustworthiness, which suggests to lenders how likely you are to repay if you were to borrow. The better your score, the better your rates, as it’s considered less risk by the lender.
With lower credit ratings, especially bad credit scores, the odds of defaulting is higher. Lenders use higher interest rates to offset the ones that do to reduce their losses overall.
What Can Hurt My Credit Score?
Missing payments is a big one, and you should do everything you can to ensure this never happens. As previously mentioned, your payment history is a big part of your credit score.
Over using available credit will impact your credit utilization, which can also be a red flag for many lenders, and keeping your credit utilization ratio under 30 percent is advised. It’s even more in your favour if you can manage to keep under 10 percent.
Too many credit requests in a short span is another issue to avoid. For each time that you apply for something that would involve a request for your credit report for a lending decision, it creates what is referred to as a “hard inquiry” which is recorded in your credit file. Too many inquiries like this not only reduces your credit score, it can also be a signal to lenders that suggests you might be in a dire financial situation and therefore too much risk for borrowing purposes.
Any kind of defaults like settled accounts, repossession, bankruptcy or similar will have a negative affect your credit score and can even hurt your rating for up to a decade.
What Kind of Accounts Impact Credit Scores?
Possibly the most common type would be installment loans or credit, which is where you borrow a fixed amount and make monthly scheduled payment until the loan is paid off. Typical examples of these can include personal loans, car loans, home loans and student loans. If you make your payment on time, they can help influence your score. But if you are late, or worse yet, if you default, then your credit ratings will suffer.
Another is revolving credit, which is usually associated with credit cards. This can fluctuate and doesn’t have a fixed term. With revolving credit you would have a limit and need to make the minimum monthly payments to avoid running into trouble.
What If I Don’t Have a Credit Score
Then it’s about time that you got one! There’s no better time to get started thinking about your future. If you are wondering why that might be, there could be a few reasons. You haven’t used traditional credit accounts or products in the past, you have not used credit in over 24 months.
There are a number of ways to establish a credit score, and if you follow just a few simple rules you can build it up in no time.
A good way to start would be applying for a secured credit card. Unlike a regular credit card, this requires a security deposit that is usually the same as your credit limit. This is like protection from the idea that if you default it is of little consequence to the lender. Using this type of card consistently, and doing the same for payments while making sure they are on time can help establish and build your credit
You can also try requesting from friends or family to become an authorized user to their credit card. It isn’t a huge advantage, but a small way of helping yourself. Another option that might be more meaningful would be to get a cosigner for a loan.
Diversifying your credit mix is also advised, such as a car loan and/or a personal loan to demonstrate your ability to handle credit responsibly over time. Other options include applying for a retail store credit card. Carefully managing your utilization rate and making payments on time for several months will improve your credit rating and allow you better options after 6 month or so.
If you’re carrying non-mortgage debt like loans or credit cards, one option that many make use of is debt consolidation, when it makes sense for them. Knowing your debt situation and your options, you can find more affordable ways to pay down debt at times.