Learn Credit Score in Canada What is a Bad Credit Score?

What is a Bad Credit Score?

Understanding your credit score can be confusing, but getting it right will pay off.

While your credit score can have a huge impact on your financial life, it's important to know that you still have lending options available to you, even with bad credit.

There is a lot of confusion surrounding credit score ranges and their meaning. It can often be difficult to determine the difference between a good credit score and a bad one. So what exactly is a bad credit score, and what makes it bad?

Credit Score Ranges

A credit score is a metric used by lenders to determine a borrower's level of trustworthiness, or the likelihood that a person will repay any funds loaned to you through a line of credit. Canadians have their credit score provided by two agencies, TransUnion and Equifax. Your credit score can range from 300 to 900.

What is Considered a Bad Score?

A credit score of less than 579 is considered a bad credit score by most lenders in Canada. Here is a rough breakdown of the tiers your credit score can fall into:

● 300 – 579 (Poor) A score in this range places you firmly in the category of what is considered bad credit, meaning it is unlikely that you will be approved for most loans.
● 580 – 669 (Fair) A fair credit score means you may still be denied credit, but you will likely pay the highest interest rate on any borrowed amount if you are approved.
● 670 – 739 (Good) A score in this range means you have better odds of being approved for credit but will likely still pay higher interest rates.
● 740 – 799 (Very Good) You can expect to be approved for most credit applications and pay lower interest rates on any borrowed funds.
● 800 and Higher (Excellent) You have the best odds of approval and will usually be given the best available rates.
Graphic showing the credit score ranges in Canada

Why is Your Credit Score Bad?

Your credit score may be low for a variety of reasons related to your financial habits, for example:

• Late or missed payments
• High levels of debt
• Excessive inquiries for new credit
• Defaulting on a loan
• Filing for bankruptcy, among other reasons.

In general, spending beyond your means and neglecting financing payments will result in having bad credit.

How is a Bad Credit Score Calculated?

Credit scores are calculated using a complex algorithm that weighs different aspects of the financial behaviours of an individual. Because of this, many people are unaware of what kind of activity hurts their credit score. Here are the factors that affect your credit and the percentage of your total credit score that they make up.

Payment History (35%)

This has the largest impact on your overall credit score. When you make on-time payments, it enhances your score in this category, but these will significantly lower your score when you miss payments on loans or credit cards. You can help your score by ensuring you never make a late payment on a credit card or any outstanding debt.

Debt Proportion (30%)

This metric measures the amount of debt you have relative to your available credit. If you have maxed out credit cards, you likely have a high debt ratio that can hurt your score. It's best to keep your debt ratio below 30% to keep a good credit score. However, the lower the debt ratio you have, the better.

Length of Credit (15%)

This measures the age of your oldest credit account and the average age of all of your accounts combined. The longer your credit history, the more it helps your score. It is best to leave your oldest credit accounts open to keep your credit history length. Unfortunately, this metric can only be improved with a long history of responsible credit behaviour.

Types of Credit (10%)

Having diverse types of credit, such as credit cards, auto loans, personal loans, or home loans, will improve your score. Managing multiple types of credit shows lenders that you are responsible enough to handle different types of loans.

New Inquiries (10%)

When you apply for credit or a loan, a lender will conduct a hard pull on your credit that impacts your score by a small number of points. These inquiries will generally show up on your credit report for at least two years. Having too many hard pulls on your credit within a short period of time suggests that you are overextended financially to credit agencies. Only apply for new credit when needed.

Graphic showing how credit scores are calculated

How Can a Bad Credit Score Affect You?

Having a bad credit score can have a major impact on your life, both financially and personally. A bad score can make you ineligible for a wide range of financial products. You will likely have some difficulty getting approved for a personal or auto loan and will have to pay higher interest rates on any money you do borrow.

This is especially true if you are looking to get approved for a mortgage to buy a home. Bad credit can also cause you to pay higher premiums for different insurance types, potentially costing you a substantial sum of money over time.

You may even experience difficulty being approved for a rental or job application as many landlords and employers will look at a bad credit score as a sign that you are a greater risk to rent to or employ. Credit scores are widely viewed as an indicator of a person's level of responsibility.

On the contrary, having good credit can bring many perks to your financial and personal life. Good credit can help you get approved for loans easily, with larger approval amounts and lower interest rates to save you money on borrowing.

A good credit score will also increase the types of credit cards available to you. The best credit cards offer rewarding features like cash back or valuable bonus points that can be redeemed for travel or other merchandise. These perks can be worth hundreds or even thousands of dollars. You can view being able to take advantage of these benefits as a reward for good financial behaviour.

Examples of Bad Credit

If you have a credit score of 550, for example, your credit is considered very poor. As a result, it is unlikely that you will be approved for most credit cards or personal loans without additional restrictions, such as being required to put down some form of collateral payment. You may also be turned down for rental applications or job applications within certain industries, especially finance.

Fortunately, a bad credit score doesn't have to be permanent, no matter how low. There are plenty of ways through which you can start to get your credit back on track and improve your score.

How to Improve a Bad Credit Score

The best ways to fix bad credit depend on developing a more disciplined and organized approach to your finances. This means not spending more than you can afford, not accumulating additional debt, and prioritizing paying off the debt you already have. Let's take a look at some of the quickest ways how to build up bad credit.

1. Pay Down High-Interest Debt

Many people with poor credit have significant levels of debt. Paying those debts off will raise your score. Focus on paying down debts with high-interest rates first; then, you can move on to debts with lower interest rates. If you owe money on a credit card with a high-interest Annual Percentage Rate (APR) of 15%, it's a good idea to pay that off before moving on to debts with lower interests. However, don't forget to meet your least minimum payments on any outstanding debt.

2. Avoid Late Payments

Paying your bills on time is a huge portion of your total credit score and will go a long way towards building a positive credit history. Many lenders will provide you with the option to set up auto-pay so that your bills are taken directly out of your account each month without you having to worry about remembering to pay them. Consider taking advantage of this feature to help you build a record of on-time payments.

3. Limit New Inquiries

Only applying for credit when you need it will help raise your score by limiting the impact of excessive hard pulls of your credit report. It will also keep your average age of accounts higher if you rarely add new credit accounts or take out new loans. If you are applying for a car loan and comparing interest rates across lenders, try to cluster your credit inquiries into a short timeframe. Multiple inquiries within a timeframe of two weeks or less will often be counted as a single inquiry.

4. Monitor Your Credit

Keeping tabs on your credit report can be an important part of improving your credit score. Monitoring your credit can help you understand how specific actions cause your score to fluctuate. Keeping a close eye on your credit report can also help protect you from fraud.

If you see suspicious activity, you can take action quickly to protect your credit. All Canadians are guaranteed a free annual credit report, and many companies offer additional monitoring services. You can reach out to credit bureaus to correct any inaccurate information on your credit report.

5. Get a Secured Credit Card

There are other ways to build up bad credit, such as getting a secured credit card. This credit card type requires you to put a deposit payment upfront, usually equal to the amount of the total available balance of the card. This allows lenders to provide you with a line of credit without the risk. As you make on-time payments and establish positive credit history, lenders will often increase your credit line after a predetermined time.

6. Become an Authorized User

You can also be added as an authorized user to someone else's credit account. If you are added to a person's account who keeps their balance low and pays their bills on time, your score can benefit from the increased available balance on your credit profile.

This strategy is often called "piggybacking" because it involves assistance from another person. Parents can usually add their children as authorized users to help them establish good credit from a young age.~

7. Keep Your Oldest Accounts Open

People with poor credit will often make the mistake of closing an account once they have successfully paid off the entire balance. You'll want to avoid closing credit accounts that you have had for a long time because doing so will erase your credit history. Instead, it is best to completely pay off those accounts and let them age to increase your average age of accounts, which will raise your overall credit score.

Additionally, closing an account can also negatively affect your score by lowering your available credit limit. Lowering your available credit will increase your debt to credit ratio, causing your score to drop.

By following these outlined steps, you'll be well on your way to repairing your bad credit score and establishing long-term habits of financial responsibility.

How Quickly Can I Raise My Credit Score?

Ultimately, the quickest way to raise your credit score is to pay off outstanding debts as soon as possible. Paying down those debts can even have a positive impact on your score within a couple of months. However, if you have a very poor credit score, you should expect that it will take much longer to see a dramatic score increase.

It is important to understand that improving your credit is not usually something that happens overnight and is often a long-term process that can take months, sometimes years. Rebuilding your credit score takes patience, dedication, and discipline.

Can I Still Get Access to Credit with a Low Score?

Yes! There are still great lending options available to Canadians with poor credit in need of short-term financing or a personal loan. You can get credit with bad credit, thanks to cash advance lenders like iCASH, who offer quick cash payment options to people with low credit scores.

Instead of demanding collateral or requiring a high credit score, iCASH approves your loan requests based on your income and a few other simple factors.

If you have an urgent or unexpected expense, a cash advance can be an excellent option to get you out of a tight spot. You can potentially borrow up to $1,500 through a loan with us.

While you develop a plan to get your credit on track for the long-term, iCASH can help you meet your financial needs in the short-term.

Get access to the funds you need today with iCASH.