What Is Bad Credit And How Can You Fix It?
Your credit score plays an important role whenever you seek financial help, especially for a mortgage. Conventional mortgage lenders rely heavily on credit scores while analyzing applications. Your credit score shows your credibility as a borrower and reflects your history of credit payments.
However, certain circumstances are out of our control, and things can go downhill when it comes to your credit score. Regular missed payments and defaults are the most common causes of bad credit, impacting your ability to secure a mortgage for your home.
In Canada, credit scores typically range between 300 and 900. Here is how they are categorized:
- 760 – 900: Excellent
- 725 – 759: Good
- 660 – 724: Fair
- Below 660: Poor
If your credit score is below 660, you should start working on how to fix bad credit.
Before going further, let us quickly understand bad credit.
What Is Bad Credit?
Bad credit is a financial situation where your credit score is poor. It is caused by missed payments, loan defaults, multiple delayed payments, high credit card balances, and other risky borrowing behaviors.
Such a situation reduces or eliminates your chances of getting a loan or mortgage from conventional lenders (banks and credit agencies). However, it does not mean the end of the world.
You can always approach alternative lenders in your city to get a mortgage despite bad credit. For example, if you have bad credit in Ontario, find trusted alternative mortgage lenders in Ontario for help. Such lenders give less importance to your credit score and more importance to the property’s marketability.
Having said that, you should never ignore bad credit. Over time, it limits your opportunities and spoils your deals.
How Can You Fix Your Bad Credit?
If you are wondering how to improve bad credit, here are the most effective steps you can follow:
Review Your Credit Report
Before anything else, go through the source of your credit score. Analyze your credit report and see if there are any errors. It is possible for a report to reflect old debts that are now paid.
Focus on incorrect payment statuses, faulty balances, and accounts that are not yours. If you find any of these errors, inform the credit bureau. Correcting your credit report will automatically improve your credit score.
Pay Your Bills On Time
This is the simplest yet highly overlooked way of fixing your bad credit. If you still have bills to pay, pay them on time. A series of timely credit payments will improve your credit score.
Your credit score depends a lot (35%) on your payment history. Even a single missed payment can have a significant impact on your score. You can avoid this by:
- Setting up automated payments
- Keeping a sufficient balance in your account
- Paying the minimum due on every account
If you are regular in your payments, six to twelve months are enough to come out of bad credit.
Reduce Your Credit Utilization Ratio
Your credit utilization ratio reflects the percentage of your overall credit limit you use. Ideally, this ratio should be less than 30%. This means that you shouldn’t spend more than 30% of your credit limit. Going overboard will impact your credit score, worsening your bad credit.
You can reduce your credit utilization ratio by:
- Aggressively paying down your balances
- Requesting a higher credit limit (keeping your spending the same)
- Preventing your credit cards from maxing out
These practices will improve your credit score in a few billing cycles. If you already have bad credit, a low credit utilization ratio will give you major relief.
Check Before You Apply For Credit
Every time you apply for new credit, a hard inquiry can take a toll on your credit score. Things can get worse if you already have a low score.
As long as possible, avoid applying for any new credit if you already have bad credit. If you do, avoid making multiple credit inquiries in a short period. Pay off your existing debts, keep some buffer time, and then make new credit inquiries.
Get A Secure Credit Card
If you cannot use a traditional credit card, you should use a secure credit card to rebuild your lost credit. Here, you can deposit a specific amount as collateral and use it as your credit limit.
Using this card responsibly by making small borrowings and regular payments will slowly increase your credit score over time.
Diversify Your Credit Mix
A diverse credit mix is always better for increasing your credit score. As long as you can repay your debt, choose a diverse credit mix instead of borrowing from a single source. However, never get more credit just to diversify the mix. It will only increase your financial burden and worsen your credit score.
Have Patience And Persistence
Finally, you need patience and persistence to fix your bad credit. Such changes do not happen overnight. You will need to change your borrowing, spending, and repaying habits on a long-term basis to see favorable results.
Once you understand what’s keeping your credit score low, take immediate preventive measures and keep at it. Stick to your plan, seek professional help, and monitor your progress until you reach the desired credit score.
The Final Word
Bad credit can have serious implications on your borrowing power. From getting credit cards to mortgages from conventional lenders, things can get tricky with a consistently low credit score. You can fix it by analyzing the problem, controlling your spending, paying off your debts, and being mindful while getting new credit.
If you want to get a mortgage despite bad credit, you can approach reliable alternative mortgage lenders in your city. Unlike conventional lenders, they focus more on the marketability of the property you want to buy than on your credit score.
