What is a bad credit and how can you improve it?

The good thing about credit is that it can be improved. You can work on better financial habits, pay off debt, and ultimately rebuild your credit. What is a credit score? Usually when someone has

The good thing about credit is that it can be improved. You can work on better financial habits, pay off debt, and ultimately rebuild your credit.

What is a credit score?

Usually when someone has bad credit it means that person also has bad credit which affects their ability to get the financial products that they need. A credit score is a 3-digit number created by a credit bureau (in Canada we have 2: Equifax and TransUnion). This rating represents an individual’s creditworthiness, that is, their likelihood of being approved for a loan or new credit. Both credit bureaus calculate your credit score based on how you pay off credit. If you’ve never used credit or never had a loan, then you don’t have a credit score. There are 5 main factors that are used when calculating your credit score:

Payment history (35%)

Have you missed credit card payments or been late to make a loan payment? If so, your credit rating has been negatively affected. On the other hand, if you consistently make your credit and loan payments on time, your credit rating is probably good, based on your other financial habits.

Amount of debt (30%)

We all have at least some debt, whether it’s a mortgage or a filled credit card. However, those who carry large debt month after month are more likely to have bad credit. Usually, this factor is most affected by personal and consumer debt. People who consistently use more than 30% of their available credit limit are more likely to have bad credit.

Credit term (15%)

This factor has less weight in calculating your credit rating, but it is also probably the easiest factor to change, both in a negative and a positive way. Simply put, the longer you have a long-standing credit account that has been used responsibly, the better your credit rating will be. A big part of your creditworthiness is the responsible use of credit over time. Closing a credit account that you have had for years is not a good idea, as you will essentially be eliminating that part of your credit history, making your credit history shorter. A long, healthy credit history should be your number one credit goal.

Diversity of accounts (10%)

The average consumer usually has no idea that the types of credit accounts they use have an effect on their credit rating. Having multiple types of active credit accounts will help boost your credit rating. If the credit card is the only type of account you’ve ever had, consider taking out a personal loan to add a new type of account to your credit history.

New investigations (10%)

Every time a credit card company or lender investigates your credit, your score will drop a few points. Severe investigations are when a credit company or lender checks your credit report to assess your creditworthiness for a loan or new line of credit. Applications for new credit cards or a new loan in a space-time yard will also affect your credit rating. These inquiries will appear on your credit report. Multiple inquiries at the same time mean that you are often rejected or borrowed a lot of credit. This is not a good quality.