In the financial journey of life, a strong credit score is your passport to competitive interest rates, key financial products, and the peace of mind that comes with financial security.
Your credit score is a three-digit number that stems from your credit reports and serves as a snapshot of your financial reliability, influencing everything from the approval of loans to the terms of credit extended to you. It's a critical component that lenders examine when deciding to offer you credit.
Yet, the path to a robust credit score can have its setbacks, leading many to seek strategies for fixing bad credit.
In this article we will solve the puzzle of credit scores and provide actionable insights on how to fix your credit score, empowering you to navigate your credit landscape with confidence and purpose.
What Does My Credit Score Mean?
Understanding your credit score is critical, as it plays a central role in your financial opportunities. In Canada, credit scores range from 300 to 900, and each category holds specific implications for borrowing and lending.
Poor Credit (300-559): A score in this range is the financial equivalent of stormy weather, signaling to lenders that you may be a risky borrower. This could stem from a history of late payments, defaults, or bankruptcies. Access to credit will be more challenging, and interest rates—if you’re offered credit—will be higher.
Fair Credit (560-659): Those in the fair credit range are treading calmer waters but are not quite in the clear. Lenders might approve loans, but the terms are usually less favorable, with higher interest rates than those with higher scores.
Good Credit (660-724): Achieving a good credit score is like sailing with a favorable wind. You're likely to be approved for financial products and will enjoy lower interest rates, saving you money over the long haul.
Very Good (725-759): If your score is here, you're navigating with precision. Lenders view you as a low-risk borrower, which opens the door to more competitive interest rates and terms.
Excellent Credit (760-900): With a score in this coveted range, the financial world is your oyster. You're likely to receive the best interest rates and terms available, and lenders may offer you premium credit products.
Now, how does your score compare to the average Canadian's? As of the latest figures, the average credit score in Canada hovers around 650 to 700, placing the median citizen in the 'good' credit category.
If your score surpasses this average, you’re sailing ahead of the fleet; but if it falls below, you may need to navigate carefully to improve your financial standing.
How to Fix Bad Credit in Canada
Improving your credit score in Canada is like going through a financial makeover—it requires commitment, discipline, and a strategic approach.
Here are several key steps you can take to begin the credit repair journey:
1. Payment Punctuality
Your credit score is, in many ways, a reflection of your reliability and trustworthiness as a borrower, and nothing speaks louder about these qualities than your payment history.
Here's why punctual payments matter and how to ensure you never miss a due date:
Significance of Payment History: Roughly 35% of your credit score is determined by your payment history, making it the single largest factor.
Consistent, on-time payments build a history of reliability, while missed or late payments can stay on your credit report for up to seven years in Canada, serving as red flags for potential lenders.
The Impact of Late Payments: Not all late payments are created equal. Being a couple of days late might incur a fee from your lender, but it might not be reported to the credit bureaus. However, payments that are 30, 60, or 90 days late have progressively negative impacts on your credit score. The longer a bill goes unpaid, the worse the damage can be.
Strategies for Timely Payments
Automated Payments: Many institutions allow you to set up automatic payments. This ensures that the minimum amount due, or any other specified amount, is automatically withdrawn from your bank account and applied to your debt on the due date.
Calendar Reminders: In today's digital age, you can use technology to your advantage. Set up calendar alerts a few days before your payment is due. This gives you a buffer in case you need to transfer funds or make arrangements.
Addressing Missed Payments: If you realize you've missed a payment, don't panic. Pay it as soon as possible. Many lenders won't report a late payment to the credit bureaus until it's at least 30 days overdue.
2. Debt Reduction
Managing and reducing the debt you already owe is a cornerstone of improving your credit score. As your debts decrease, your credit score is likely to rise, reflecting your hard work and dedication to financial health.
Here's how you can effectively reduce your debt and why it matters:
Understanding Credit Utilization: Your credit utilization ratio is the amount of credit you're using compared to the amount you have available. It accounts for approximately 30% of your credit score, making it the second most important factor after payment history.
Credit experts recommend keeping your utilization below 30%, as high utilization can indicate that you're overextended and may have trouble managing your debt.
Tactics for Reducing Balances
Prioritize High-Interest Debt: Paying off high-interest credit cards and loans first can save you money on interest over time. This is often referred to as the "avalanche method" of debt reduction.
Snowball Method: Alternatively, you may choose the "snowball method," where you focus on paying off smaller balances first for psychological wins, which can provide motivation to continue paying down debt.
Larger Than Minimum Payments: Whenever possible, contribute more than the minimum payment on your debts. This not only reduces your principal balance faster but also decreases the amount of interest you'll pay in the long run.
Impact on Your Credit Score
Lower Debt Means Lower Utilization: As you pay down your balances, your utilization ratio will drop, which can have a positive effect on your credit score.
Reflecting Financial Responsibility: Lenders like to see that you're not constantly maxing out your credit limits. By keeping your balances low, you demonstrate that you're managing your credit responsibly.
3. Smart Credit Card Usage
Credit cards, when used wisely and with intention, can be powerful tools for rebuilding credit. By developing smart credit card habits, you're not only keeping your credit in check but also slowly building a strong case for yourself as a creditworthy individual.
Here's how to make the most of them:
Small, Manageable Purchases: To show that you can handle credit responsibly, use your cards for small purchases that you know you can pay off. This can include routine expenses like gas or groceries that you would have to pay for anyway.
Full Payment Strategy: Each month, aim to pay off your credit card balance in full to avoid interest charges. This practice demonstrates to creditors that you're using credit sensibly and are not relying on it to cover gaps in your budget.
Avoiding the Max-Out Pitfall: Maxing out your credit cards can drop your credit score, as it suggests you're in financial trouble or are not managing your finances well. This is why it's important to keep a buffer between your balance and your credit limit.
Credit Increase Requests: If you have a good track record with your credit card company, consider asking for a credit limit increase. This can instantly lower your utilization ratio since you'll have more credit available. However, be aware that this strategy only works if you don't increase your spending along with your limit.
4. Limit Credit Applications
Whenever you apply for a new line of credit, whether it's a credit card, a car loan, or a mortgage, the lender will often perform what is known as a "hard inquiry" on your credit report. This is a check to see how creditworthy you are.
While one hard inquiry may only slightly lower your credit score, several in a short period can be more detrimental because they suggest you may be desperately seeking credit or, worse, taking on debt that you might not be able to handle.
Only apply for new credit when it is absolutely necessary or when it strategically makes sense—for instance, when shopping for a mortgage or auto loan. Do your research first to ensure you meet the lender's criteria, which can minimize the risk of rejection and a wasted inquiry.
5. Diverse Credit Types
Credit scoring models generally reward you for having a diverse mix of credit accounts, often referred to as your "credit mix."
This could include revolving credit like credit cards and retail accounts, as well as installment loans such as mortgages, auto loans, and student loans.
Having different types of credit demonstrates to lenders that you have experience managing varied financial obligations.
6. Regular Credit Report Checks
Regularly review your credit reports for errors or fraudulent activity, which can negatively affect your score. You are entitled to one free credit report per year from each of the two major credit bureaus in Canada—Equifax and TransUnion.
On top of this, familiarizing yourself with the details of your credit report can also help you understand what factors are influencing your credit score.
This knowledge can empower you to make informed decisions about managing your credit and taking the right actions to improve your score over time.
What’s Influencing Your Credit Score
When it comes to your credit score, it's not just about how much money you owe or how many credit cards you have in your wallet. A variety of elements come into play, each with its unique weight and consequence on your overall credit health.
To chart a course towards better credit, it's essential to grasp the nuances of what's influencing your credit scores.
Here’s a rundown of the key factors:
Payment History: This makes up a significant portion of your score. Lenders want to see a track record of on-time payments. Late payments, defaults, and bankruptcies have a major negative impact.
Credit Utilization Ratio: How much of your available credit are you using? Carrying a balance that is more than 30% of your credit limit on each card can hurt your score. Lower balances are better for your credit score.
Length of Credit History: The longer you’ve had credit, the better it is for your score. It shows you have experience managing credit.
Types of Credit (Credit Mix): A healthy mix of credit accounts, including revolving credit (like credit cards) and installment loans (like a mortgage or auto loan), can benefit your scores as long as you manage them responsibly.
New Credit Inquiries: Applying for several credit accounts in a short period can indicate to lenders that you are in financial trouble, resulting in a slight dip in your score. A hard inquiry typically affects your credit score for one year, though the inquiry remains on your credit report for two years.
Credit Liens and Public Records: Having a lien or a public record, such as a bankruptcy, on your credit report can severely impact your score. While the impact of these diminishes over time, they can remain on your report for seven to ten years.
What Does a Bad Credit Score Mean for Me Finacially?
Having a bad credit score is like carrying a heavy anchor that drags down your financial possibilities and opportunities. When your credit score is not up to par, the ripple effects can extend through various aspects of your financial life.
Understanding the repercussions of a bad credit score is a pivotal step in recognizing the importance of fixing bad credit.
Here are some of the biggest concerns with carrying a bad score:
Higher Interest Rates: A suboptimal credit score often leads to higher interest rates on loans and credit cards—if you can get approved for them at all.
Lenders view individuals with low credit scores as high-risk borrowers, which means they will either hedge their bets by charging you more in interest or decline your application altogether.
Limited Access: A bad credit score can limit your access to some of the better financial products on the market. Many of the top-tier rewards credit cards or loans with the most favorable terms are simply out of reach.
Impacts Beyond Lending: A poor credit score can affect situations that might not even seem directly related to credit.
For instance, landlords often check credit scores when evaluating potential tenants, so a low score could cost you the chance to rent the place you want. Similarly, some employers review credit scores during the hiring process, and a low score could cost you that opportunity.
KOHO Credit Building Assistance
In the mess of financial decisions and credit scores, KOHO stands out as a beacon of support, especially for those who may feel sidelined by traditional banking institutions.
With a genuine commitment to inclusivity, KOHO's credit-building subscription service reaches out to young adults starting their financial journey, immigrants establishing new roots, and individuals on the road to financial recovery.
Tailored Assistance for Credit Building
Recognizing that the "one-size-fits-all" approach falls short, KOHO provides tailored strategies for those who have been wondering, ‘How do I fix my credit score in Canada’.
KOHO guides users through personalized steps and achievable milestones.
Whether it's setting up automated payments to ensure punctuality or offering advice on debt management, KOHO's platform adapts to the unique needs of its users.
Others Have Felt The Power of KOHO
Through KOHO, countless users have transformed their credit scores and, by extension, their lives. One such story is of a young immigrant who, within months, went from having no credit history to securing a credit score that opened up new horizons for homeownership and entrepreneurship.
Another is the story of a single parent who overcame the financial strain of unexpected medical bills. With KOHO's guidance, they not only restored their credit score but also gained the confidence to navigate the financial aspects of life with newfound assurance.
For anyone looking to embark on the journey of fixing bad credit, KOHO's credit-building assistance is a stepping stone to a brighter financial future.
Whether you're taking your first credit steps or looking to rebuild, KOHO's subscription service is a testament to the company's dedication to being a true partner in financial wellness, proving that a better credit score—and the opportunities that come with it—are within reach for everyone.
Nick is a freelance writer and entrepreneur with a particular interest in business finance. He's been featured in publications like Popular Mechanics and Apple News