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What is a bad credit score?

Posted on 11 March 2022

Written by Meghan LeBlanc

In Canada, a credit score is a three digit number between 300 and 900. It is impacted by your spending behaviour, and your ability to make repayments on any debt you owe. There are two main credit bureaus in Canada – TransUnion and Equifax. Each credit bureau has a slightly different way of determining a credit score, based on varying metrics. Ultimately, the higher your score, the better and most people would agree that a credit score of 800 and over is excellent. It is a little more difficult to pin down what exactly a bad credit score is. A bad credit score can make it difficult to take out new credit or loans, and can mean you need to pay a higher interest rate. It is important to remember, however, that bad credit scores can be improved. So, what is a bad credit score? And how can you fix one?

What is bad credit?

Having bad credit or bad debt means that some – or all – of your accounts are reporting at the bottom end of the rating scale. Each of your accounts has a rating based on your payment history. On one end of the scale, you have R1. This means you are making your payments as agreed, and that they are being made on time. With R1, you still have an open account, you are able to use it, and you have good credit on the account. On the other end of the scale, you have R9. This is indicative of a bad credit score on at least one account. Perhaps you have been through a bankruptcy, or had your debts sent to a collection agency because of missing repayments. If you see a R9 on your credit report, reach out to a Licensed Insolvency Trustee. At Spergel, we will help you to tackle it by understanding the cause and taking some simple actions to improve your credit score. Other numbers on the scale show where payments may be behind, or if a  consumer proposal has been filed, for example. It is never too late to turn around your credit score to help you live the life you want to lead.

What is a bad credit score?

If you have been missing debt repayments, making them late, or simply racking up high amounts of credit card debt that you cannot afford, it is likely you will have a bad credit score. If you are to apply for credit or loans, lenders will often look straight to your credit score to assess your risk. If you have a bad credit score, loans like mortgages could be difficult to obtain. Even if you had a bad credit score, it is possible to rebuild your score, and here at Spergel we can help you to do so. In Canada, generally speaking, a score of below 560 is considered a bad credit score. Credit scores begin at 300, so any range between 300 and 559 can make it difficult to obtain new credit. Credit scores often reflect as following:

  • Bad credit score: between 300 – 559
  • Fair credit score: between 560 – 659
  • Good credit score: between 660 – 759
  • Excellent credit score: 760+

These scores are reflective of Equifax, but you should bear in mind that TransUnion has slightly higher ranges for credit scores.

What leads to a bad credit score?

A bad credit score does not usually happen overnight. It is a pattern of behaviours that culminate in a deteriorating credit score. Here are some of the key behaviours that lead to a bad credit score:

  • Failing to pay your bills on time. If you have various late payments or missed payments, your credit score will soon be affected. Your payment history makes up a large proportion of your overall credit score.
  • Maximizing your credit limit. If you regularly use up most – or all – of your credit limit, it suggests to lenders that you cannot live within your means and are therefore at high risk for borrowing.
  • Not having a credit score. Perhaps you are relatively new to using credit, which can mean you lack a credit score. The age of your credit history contributes positively to your overall score, but only if you are using credit responsibly.
  • Making multiple applications for credit. If you are trying to take out various forms of credit in a short period of time, it can indicate that you are a high risk borrower. This is even worse if you are being rejected for credit in a short amount of time.
  • Filing bankruptcy or a consumer proposal. If you have declared bankruptcy or filed a consumer proposal in the last seven years, it is a red flag to lenders. This is because it shows that you have had financial difficulties recently and are therefore a riskier borrower.
  • Defaulting on a loan. If you have been unable to repay a loan you have taken out, you are a risk to lenders. It may also be that your debt has been sent to collection agencies. Defaulting on a loan will remain on your credit report for six years and will subsequently affect your credit score.

It is important to note that credit bureaus do not always get it right. Sometimes, you may spot errors on your credit report which could make your credit score worse than the reality. For this reason, it is important that you request a credit report annually and review it thoroughly for errors. If you do spot any errors, you should provide evidence to the credit bureau as soon as you can to have the errors removed. Learn how to understand your credit report.

What is the impact of a bad credit score?

There are a number of consequences of a bad credit score. First of all, you will likely find it difficult to secure new credit, depending on the severity of your credit score. For instance, loans, lines of credit, and credit cards may be tough for you to secure. This is inclusive of financed assets including car loans and mortgages. Because of the greater risk associated with you taking out credit, it could mean you need to provide a security deposit or an asset for your credit limit if you are approved. Mortgage lenders may ask for a greater deposit than with lower risk borrowers. Other lenders may be willing to give you credit but only in exchange for a high interest rate. Some lenders like cell phone providers may even ask you to prepay your bill. Other impacts of a bad credit score include the checks you may have to undergo. This includes landlords, who may decide not to rent to you, and even employers who might require a credit check before offering you employment. All of these impacts show why it is so important to work with a Licensed Insolvency Trustee to rebuild your score and become free from the financial burdens of debt or bad credit.

How can you improve a bad credit score?

The good news is that no matter how bad your credit score may be, there are always ways to rebuild your credit score. Certain life incidents that create a bad credit score could happen to any of us, after all. Taking on some new financial habits can have a positive impact on your credit score sooner than you might think. Below, we have shared some tips for improving a bad credit score:

Paying your bills on time

This may sound simple, but given the contribution that payment history makes to your credit score, it is important to get this right. Try setting up automatic payments and using reminders on your phone to ensure you make your payments on time. If you are struggling to make your payments in full, there may be issues around debt. Speak to a Licensed Insolvency Trustee as soon as you can to see how overwhelming payments can be tackled through a form of debt relief.

Continuing with credit cards

It may feel a little unnatural when you might associate credit cards with racking up a bad credit score, but credit cards can actually be the key to building up good credit. After all, credit cards enable you to build up a credit history. If you make a habit of cancelling credit cards, your credit utilization rate will be impacted because the credit available to you will automatically decrease. You want to build up a steady credit history by using credit appropriately and making full repayments on time.

Using a secured credit card

Due to a bad credit score, you may be struggling to gain a regular credit card. In this scenario, a secured credit card could become your best friend. You do not need a credit history to get a secured card. Instead, you simply put down a deposit against the credit card that is usually equal to the credit limit. Each time you use a secured credit card, your transactions are reported to the credit bureaus so you can begin to rebuild your credit score by paying your balance on time each month.

Being conscious of your credit utilization rate

In Canada, a credit score is a three digit number between 300 and 900. It is impacted by your spending behaviour, and your ability to make repayments on any debt you owe. There are two main credit bureaus in Canada – TransUnion and Equifax. Each credit bureau has a slightly different way of determining a credit score, based on varying metrics. Ultimately, the higher your score, the better and most people would agree that a credit score of 800 and over is excellent. It is a little more difficult to pin down what exactly a bad credit score is. A bad credit score can make it difficult to take out new credit or loans, and can mean you need to pay a higher interest rate. It is important to remember, however, that bad credit scores can be improved. So, what is a bad credit score? And how can you fix one?

What is bad credit?

Having bad credit or bad debt means that some – or all – of your accounts are reporting at the bottom end of the rating scale. Each of your accounts has a rating based on your payment history. On one end of the scale, you have R1. This means you are making your payments as agreed, and that they are being made on time. With R1, you still have an open account, you are able to use it, and you have good credit on the account. On the other end of the scale, you have R9. This is indicative of a bad credit score on at least one account. Perhaps you have been through a bankruptcy, or had your debts sent to a collection agency because of missing repayments. If you see a R9 on your credit report, reach out to a Licensed Insolvency Trustee. At Spergel, we will help you to tackle it by understanding the cause and taking some simple actions to improve your credit score. Other numbers on the scale show where payments may be behind, or if a  consumer proposal has been filed, for example. It is never too late to turn around your credit score to help you live the life you want to lead.

What is a bad credit score?

If you have been missing debt repayments, making them late, or simply racking up high amounts of credit card debt that you cannot afford, it is likely you will have a bad credit score. If you are to apply for credit or loans, lenders will often look straight to your credit score to assess your risk. If you have a bad credit score, loans like mortgages could be difficult to obtain. Even if you had a bad credit score, it is possible to rebuild your score, and here at Spergel we can help you to do so. In Canada, generally speaking, a score of below 560 is considered a bad credit score. Credit scores begin at 300, so any range between 300 and 559 can make it difficult to obtain new credit. Credit scores often reflect as following:

  • Bad credit score: between 300 – 559
  • Fair credit score: between 560 – 659
  • Good credit score: between 660 – 759
  • Excellent credit score: 760+

These scores are reflective of Equifax, but you should bear in mind that TransUnion has slightly higher ranges for credit scores.

What leads to a bad credit score?

A bad credit score does not usually happen overnight. It is a pattern of behaviours that culminate in a deteriorating credit score. Here are some of the key behaviours that lead to a bad credit score:

  • Failing to pay your bills on time. If you have various late payments or missed payments, your credit score will soon be affected. Your payment history makes up a large proportion of your overall credit score.
  • Maximizing your credit limit. If you regularly use up most – or all – of your credit limit, it suggests to lenders that you cannot live within your means and are therefore at high risk for borrowing.
  • Not having a credit score. Perhaps you are relatively new to using credit, which can mean you lack a credit score. The age of your credit history contributes positively to your overall score, but only if you are using credit responsibly.
  • Making multiple applications for credit. If you are trying to take out various forms of credit in a short period of time, it can indicate that you are a high risk borrower. This is even worse if you are being rejected for credit in a short amount of time.
  • Filing bankruptcy or a consumer proposal. If you have declared bankruptcy or filed a consumer proposal in the last seven years, it is a red flag to lenders. This is because it shows that you have had financial difficulties recently and are therefore a riskier borrower.
  • Defaulting on a loan. If you have been unable to repay a loan you have taken out, you are a risk to lenders. It may also be that your debt has been sent to collection agencies. Defaulting on a loan will remain on your credit report for six years and will subsequently affect your credit score.

It is important to note that credit bureaus do not always get it right. Sometimes, you may spot errors on your credit report which could make your credit score worse than the reality. For this reason, it is important that you request a credit report annually and review it thoroughly for errors. If you do spot any errors, you should provide evidence to the credit bureau as soon as you can to have the errors removed. Learn how to understand your credit report.

What is the impact of a bad credit score?

There are a number of consequences of a bad credit score. First of all, you will likely find it difficult to secure new credit, depending on the severity of your credit score. For instance, loans, lines of credit, and credit cards may be tough for you to secure. This is inclusive of financed assets including car loans and mortgages. Because of the greater risk associated with you taking out credit, it could mean you need to provide a security deposit or an asset for your credit limit if you are approved. Mortgage lenders may ask for a greater deposit than with lower risk borrowers. Other lenders may be willing to give you credit but only in exchange for a high interest rate. Some lenders like cell phone providers may even ask you to prepay your bill. Other impacts of a bad credit score include the checks you may have to undergo. This includes landlords, who may decide not to rent to you, and even employers who might require a credit check before offering you employment. All of these impacts show why it is so important to work with a Licensed Insolvency Trustee to rebuild your score and become free from the financial burdens of debt or bad credit.

How can you improve a bad credit score?

The good news is that no matter how bad your credit score may be, there are always ways to rebuild your credit score. Certain life incidents that create a bad credit score could happen to any of us, after all. Taking on some new financial habits can have a positive impact on your credit score sooner than you might think. Below, we have shared some tips for improving a bad credit score:

Paying your bills on time

This may sound simple, but given the contribution that payment history makes to your credit score, it is important to get this right. Try setting up automatic payments and using reminders on your phone to ensure you make your payments on time. If you are struggling to make your payments in full, there may be issues around debt. Speak to a Licensed Insolvency Trustee as soon as you can to see how overwhelming payments can be tackled through a form of debt relief.

Continuing with credit cards

It may feel a little unnatural when you might associate credit cards with racking up a bad credit score, but credit cards can actually be the key to building up good credit. After all, credit cards enable you to build up a credit history. If you make a habit of cancelling credit cards, your credit utilization rate will be impacted because the credit available to you will automatically decrease. You want to build up a steady credit history by using credit appropriately and making full repayments on time.

Using a secured credit card

Due to a bad credit score, you may be struggling to gain a regular credit card. In this scenario, a secured credit card could become your best friend. You do not need a credit history to get a secured card. Instead, you simply put down a deposit against the credit card that is usually equal to the credit limit. Each time you use a secured credit card, your transactions are reported to the credit bureaus so you can begin to rebuild your credit score by paying your balance on time each month.

Being conscious of your credit utilization rate

Your credit utilization rate is the amount of debt you have in comparison to your total credit limit. In an ideal world, you will have minimal debt but a maximal credit limit. You want to keep a good balance between the two however you can. This way, credit bureaus will consider you lower risk. Do note that debts including government loans will have less of an impact on your credit score than credit products like credit cards.

Still wondering ‘what is a bad credit score’? For more information on bad credit scores and how to rebuild your credit, book a free consultation with a reputable Licensed Insolvency Trustee at Spergel. We will review your financial circumstances and can explore debt relief solutions if you are struggling to make your repayments on time. We have been helping Canadians become debt free for over thirty years, and we can help you too.

Meghan LeBlanc

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