While your credit score is only three digits, it holds a lot of power. It affects nearly every financial decision you make, from whether you get approved for a mortgage to how much interest you’ll pay. A bad credit score can make it more challenging to secure a loan, but it’s not impossible. Bad credit loans are available, and if used wisely, a bad credit loan can help you rebuild your credit and improve your financial future.
Understanding Bad Credit
Credit scores in Canada typically range from 300 to 900. A bad credit score, also known as a “poor” credit score, is anything under 579.1 Lenders use your credit score to determine how risky it is to lend you money or extend your credit. A bad credit score signals a higher level of risk to lenders. This can result in fewer lenders willing to extend you money, as well as higher interest rates. Lenders have different criteria for what they consider an acceptable score.
FICO Credit Score Ratings:
- Bad/Poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very Good: 740 to 799
- Exceptional: 800 to 900
Actions that can cause your credit score to drop include:
- Paying your bills late. Your payment history accounts for the largest portion of your credit score. A late or missed payment can negatively impact your score.
- Maxing out your credit limit. Using all your available credit is a red flag to lenders that you may struggle to manage credit.
- Closing credit accounts. Closing credit accounts can reduce the length of your credit history, which can lower your score.
- Applying for new credit. Each time you apply for new credit, your credit score can take a slight, temporary dip.
- Mistakes on your credit report. Inaccurate information on your credit score could cause your score to decrease.
- Bankruptcy. If you’ve filed for Bankruptcy or a Consumer Proposal, this can significantly contribute to your low credit score for up to seven years.2
Assessing Loan Options for Bad Credit
So, what do you do if you have a bad credit score and need to access credit?
While you may have a more limited pool of options, there are many bad credit personal loans available.
Traditional lenders like big banks generally have more stringent eligibility requirements including a good credit score and a low debt-to-income ratio. Meanwhile, certain personal loans such as payday loans, flex loans, private lender loans, direct lender loans, etc. are usually accompanied with extremely high interest rates (APR or annual percentage rate) and late fees.
Alternatively, there are certain bad credit lenders that are typically more open to issuing bad credit loans. Some companies that specialize in delivering quick online loans with an easy application process and low credit requirements include:
These services aggregate and offer the best bad credit loan options and help individuals with a poor credit rating secure flexible term personal loans to assist with their financial needs.
Strategies to Get Approved for Bad Credit Loans
If you want to take out a loan but you often struggle to pass a hard credit check, there are steps you can take to help improve your options over time.
Improve your credit score
If you currently have a low score, consider taking some time to improve your credit score before applying for your next personal loan. Tips for improving your credit score include:
- Review your credit report and correct any errors
- Pay down your existing debt, consider a debt consolidation program
- Pay your bills on time, every time
- Only apply for new credit when you really need it
Provide collateral
If you want to improve your chances of securing the best bad credit loans, consider a collateral loan, also known as a secured loan. With a collateral loan, you back up the loan with an asset. Collateral loans often come with a lower interest rate or better terms than an unsecured loan. However, if you default on a collateral loan, the lender can sell your asset to try and recoup the money. Collateral can include your home, car, investments, or an insurance policy.
Include a co-signer
A co-signer is someone who agrees to pay off your loan if you can’t make your monthly payments. Adding a co-signer can improve your loan application since it lowers the risk to the lender. If you don’t make your loan payment, your co-signer is on the hook to pay for you. Ideally, you want a co-signer with a high credit score and a strong income source so they can pass a hard credit check and meet more minimum credit score requirements.
Research and compare loan options
Taking the time to compare multiple lenders can help you find the best bad credit loan for your needs and budget. By prequalifying for multiple loans, you can compare how much you can borrow, as well as interest rates and loan terms. Prequalifying for a loan will not impact your credit score as lenders perform a soft credit pull. This is a great and often free way to determine the best personal loan for you.
Prepare necessary documentation
When applying for a loan, lenders typically ask to see a combination of personal and financial documents. Having your documents prepared in advance can help to speed up the application process and reduce the headache of repeating the administrative work involved in applying for traditional personal loans. Common documents lenders will ask to see include:
- Driver’s license or passport to confirm your identity
- Pay stubs or T4s to confirm proof of income and employer
- Utility bills to confirm your address
- Bank account information
Rebuilding Your Financial Future
If you have a poor credit score and are working to rebuild your financial future, there are a variety of actions you can take to achieve your goal.
Develop a budget and stick to it
A budget is simply a plan for your money. It’s a way of keeping track of how much income you have coming in and how much you’re spending on fixed and variable expenses. A fixed expense is a bill that stays the same, such as your monthly rent or mortgage payment. A variable expense changes from month to month, such as how much you spend on eating out or other entertainment.
Using a budget, you can determine if you’re spending more money than you’re making. If you are, you can use your budget to identify areas where you can cut. Incorporating tools and apps designed for budgeting can also streamline the process, providing real-time insights into your spending patterns and helping you stay on track. Regularly reviewing and adjusting your budget to reflect changes in your financial needs ensures it remains effective and aligned with your goals.
Build an emergency fund
An emergency fund is a pool of money you save over time to help cover your living expenses should you encounter an emergency. An emergency can include a job loss, a medical emergency, or a major unexpected car or home repair. When you’re starting your emergency fund don’t get hung up on how much you should contribute each month. Just put away what you can afford (even if it’s $5) and be consistent. Setting up automatic transfers to your emergency fund can help make saving a seamless part of your financial routine.
Additionally, consider placing your emergency fund in a high-yield savings account or a money market account where it can grow, yet remains accessible without penalties or significant delays. This way, your emergency fund not only provides a safety net but also contributes to your financial growth.
Establish a positive credit history
Like it or not, your credit history is a really important part of a successful financial future. To rebuild your credit and establish a positive credit history, focus on making your payments on time every month as your payment history accounts for the largest portion of your credit score.
Consider using a mix of credit types responsibly to show lenders your reliability across different credit scenarios. This could include a combination of revolving credit (like credit cards) and installment loans (such as auto or home equity loans). However, overall you should be working on reducing your debt and avoid maxing out your credit cards.
Regularly monitoring your credit report for errors and disputing any inaccuracies is also crucial. Most major credit bureaus offer one free report annually, allowing you to keep a close eye on your credit standing and make corrections as needed.
Seek financial advice and guidance
If you feel overwhelmed by your finances and don’t know where to start, you can reach out to a qualified financial professional for guidance and advice. Whether you’re drowning in debt or just need some advice on creating a budget, you can speak to a not-for-profit credit counsellor in Canada. To find a reputable credit counsellor, you can check out the Credit Counselling Canada website.
Moreover, exploring financial literacy workshops, online courses, and community resources can empower you with the knowledge to make informed financial decisions. Remember, investing in your financial education is investing in your future, providing you with the tools to navigate financial challenges and opportunities alike.
Tips for Successful Loan Repayment
If you already have a loan and you're struggling with repayment, this has the potential to negatively impact your credit score. A late or missed payment can significantly harm your credit rating, but by adopting a strategic approach to debt repayment, you can navigate through financial challenges more effectively. Consider the following tips:
Create a repayment plan
Juggling multiple debts can make debt repayment a challenge. A repayment plan can help you organize which debts to pay first. You can try the debt snowball repayment method, where you plan to pay your smallest debt first and work your way up to your largest debt while making the minimum payment on all of your debts. This plan is good for those who benefit from a quick win early on to keep up the motivation.
There’s also the debt avalanche method, where you start paying your highest-interest debt first and work down to your lowest interest rate. The goal is to save as much as you can on interest by paying the highest interest rate first.
Prioritize loan payments
When creating your budget, prioritize debt repayment. If you want to improve your credit score or prevent it from dropping, you must make your payments on time. Consider automating loan payments to ensure they are made on time, removing the risk of human error or forgetfulness and helping you avoid late fees. If you find your budget stretched too thin, scrutinize your spending to identify areas where you can cut back, such as non-essential subscriptions or discretionary spending. If there’s simply not enough money in your budget, consider taking on a side hustle or getting a part-time job to help you earn more money.
Avoid taking on unnecessary debt
The last thing you need to do when you’re struggling to pay off debt is take on more debt. Before taking on new debt, consider if you can borrow money from a friend or family member or find an additional source of income.
Communicate with lenders in case of financial difficulties
If you know you can’t afford your loan payment, reach out to your lender as soon as possible to see if you can negotiate a payment plan. Your lender doesn’t want you to default on your loan, so they are often open to working with you to find a solution.
Start Rebuilding Your Financial Future
While a bad credit score isn’t ideal, with time and hard work, it’s possible to improve it. If you don’t know where to start, consider speaking to a not-for-profit credit counsellor who can help you create a budget and provide tips for how to manage credit. Once you have a plan in place, focus on paying your bills on time every month and paying off debt. Stay consistent, and you’re on your way to building the financial future you really want.
References:
- Fico Score, "FAQs about FICO Scores in Canada." Accessed February 17, 2024
- Government of Canada, “How long information stays on your credit report.” Accessed February 18, 2024.
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