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Managing and Improving Bad Credit
Having bad credit isn't a death sentence for your financial future. Most people deal with bad credit or insolvency at some point in their lives. But all bad credit history eventually goes away after getting your finances in order. There's no magic cure for bad credit, but rest assured that you can overcome it; it just takes some patience and a little financial reform.
What Lenders and Bankers are Looking For
When applying for credit, bankers and lenders are looking for certain tell-tale signs of risk:
- No credit history.
- Bankruptcies less than seven years discharged.
- Unpaid collections, unpaid judgements, consumer proposal or orderly payment of debt.
- History of late payments, foreclosure or repossession.
- Low FICO and Equifax beacon scores. (Usually under 600 points.)
Bad Credit Costs You Money
Many financial institutions divide their clients into various classes of risk based on credit worthiness. For these companies, lower risk clients cost less due to average delinquency rates, and as a result, they're able to offer lower cost services and lower lending rates. For those with low and borderline credit scores, the average delinquency rate is higher, and costs for these companies are higher, so they use credit as an excuse to charge more. As a result, people with bad credit end up paying more for the same services as people with good credit.
How to Improve Bad Credit Scores
Credit histories can be repaired in seven years or less in almost all cases. Though Trans Union may retain your financial history for longer, Equifax histories only go back seven years. Creditors realize that people can get their financial situations together, and they're more than happy to sell their products to people that are no longer credit risks.
If your credit score is 600 or less, here are some financial dos and don'ts to help you wipe out bad credit:
- Do organize your financial situation. If you already have a mortgage or line of credit, it's highly advantageous for you to consolidate your high interest debts (like credit cards) at a lower rate.
- Don't forget about secured credit cards. Secured credit cards are available to anyone with a deposit, and good credit will come from owning one.
- Do make your payments on time. A one-month late payment to a creditor can bring down your credit score 20 points. If you can't afford the full balance, at least make the minimum payment requested.
- Don't apply for unneeded new credit. Every credit inquiry requested on your credit history nicks off points.
- Do pay down any credit product you have maxed out. The best situation is to have less than 50 per cent of available credit on any product in use or owed.
- Don't close credit accounts that you've long had open in good standing. These improve your credit score. The more you can prove your reliability to a creditor, the better.
- Do get a copy of your credit history through Equifax or other credit bureau that can provide such. Make sure everything on the report is valid. If there are inaccuracies, you may dispute credit report errors through the credit bureau.
- Don't go over your credit maximums. Do not overdraw.
- Do make sure that you have a credit history. If you are new to Canada, or a first-time home buyer who has never had a Canadian credit card, get one and use it wisely. Pay down your monthly balance, in full if possible, on time.
- Don't pay a third-party company to repair your credit report for you. In Canada, it is not possible to have items removed from your credit bureau by a third-party source. You must wait the timeframe legally specified in order for those items to be cleared, or contact the creditor directly.
Debt Consolidation & Mortgages For Bad Credit
If you believe that debt consolidation would help you, contact a financial representative to assist you. Do not pay a company that boasts it can improve your credit score rating by having items removed from your credit bureau.
If time is of the essence, financing is still available for those with bad credit. Private lenders are not as interested in credit score as conventional mortgage lenders are. Just keep in mind that financing attained with a Beacon score of 580 or less will be attributed a higher interest rate than the best mortgage rate posted, even with a down payment of five per cent or greater.