A good credit score is a prerequisite for many lenders; however, bad credit is not uncommon in Canada. Getting approval for any loan, be it personal loans, commercials loans, or even mortgages, can be a daunting task if your delinquency rates are high.
If your credit score is poor, many lenders will find lending to you a considerable business risk.
Lending determinants
Canada has two credit reporting agencies; Equifax and Transunion. While these are two independent organizations, they both have similar guidelines in determining credit scores.
Some of the factors used to determine your creditworthiness are;
Loan repayment history
How consistent were you in making your loan repayments?
Did you make them on time?
Were there collection agencies assigned to recover your debt?
These are some of the things that we’ll negatively impact your credit. Lenders want to lend out money they are sure will be recovered without so much efforts.
The number of recent credit inquiries
Several credit inquiries will inarguably impact your credit scores negatively. Hard pulls on your credit report imply that you are either borrowing too much or are being rejected by many lenders.
Debt types
Lenders are likely to favor borrowers with several debts over those with one credit card or personal loan.
Multiple loans help build your credit score hence making you creditworthy.
Length of credit history
Lenders want to see your consistency in making loan repayments. A long history of a consistent open account means that you are actively servicing your loan, which’s good for your credit score.
Any score between 300-500 is considered a bad credit score in Canada, and your chances of getting loan approval are zilch, especially in commercial banks.
How a bad credit score comes about
You don’t wake up one day to bad credit scores. It is a culmination of the following factors.
Late loan repayments
Usually, lenders have a repayment date for every loan advanced to you. One or two missed days may not affect you that much, but if you are consistently late with your repayments, your credit score will be negatively impacted in the long run.
Defaulting
Defaulting means you don’t pay your loan ultimately. This leads to a written-off account and will hurt your credit badly.
Several credits pull
Several inquiries by lenders will negatively affect your credit score.
Overstretched credit cards
Overstretching your credit cards to the limit is a sign of dependency on credit. This is not good for your credit scores, either.
In Canada, most lending institutions, especially commercial banks, are risk-averse when borrowing out their money. Before a loan is approved, a borrower must meet all the above requirements. However, if your credit scores are low, you can commit to work and improve them to become eligible for lending.
It takes time to build a good credit score, but it’s a worthy investment.
