The Dangers of a Bad Credit File
Your credit record has not always been very good and you wonder why? Here are the 2 main reasons that can explain a poor credit score and 2 examples that illustrate the impact on your everyday life.
Indeed, a good credit history not only facilitates access to credit but also significantly reduces the interest rates charged by financial institutions for a mortgage, car loan, personal loan, or line of credit.
Conversely, a bad record could complicate your life and even raise the premiums of your auto and home insurance! Here are some examples of the difficulties encountered by consumers with a poor credit record.
1st Cause: Poor Payment Habits
Emily* has been late on the payment of her cell phone bill on several occasions over the past 2 years. Debt repayment habits is the most influential factor in the score given by credit agencies.
“A neglected bill, many delays, or an account that ends up in collection will have a disastrous impact on your credit record, regardless of whether it’s an amount of $500 or $5000,” says Pierre Fortin, a licensed insolvency trustee, president of Jean Fortin and Associates. Only time will allow you to recover, as the older the bad credit rating gets, the less it will hurt your score.
2nd Cause: High Credit Utilization Rate
Benoit has 2 credit cards, with combined limits amounting to $6000. He carries a total balance of $5000 and pays the minimum balance each month. Can he get a loan to buy a used car priced at $7500? “The utilization rate of the credit card or a line of credit is the second most influential factor in the credit score,” mentions Pierre Fortin.
“A balance of less than 50 % of the authorized credit limit sends the message that you have the capacity to go into debt, but you choose not to. That is reassuring for creditors,” says Pierre Fortin. In Jacques’ case, he is at 83 % of his credit limit, which will certainly have a negative impact on the interest rate for the auto loan.
Example #1: Applying for a Job
Charles* was contacted by a headhunter for an account manager position at a financial institution. He lacked consistency in paying his student loan and wonders if this can hurt his application. “Depending on the type of job, employers can indeed request a credit history check,” emphasizes Pierre Fortin.
In Charles’ case, given the nature of the position, a poor credit record could be a disadvantage. One should be prepared for any eventuality and check in advance what’s in his/her record. In any case, be upfront and take the initiative to explain the situation to the potential employer.
Example #2: Buying a House
After facing financial problems, Stéphanie and Éric filed a consumer proposal. They finished repaying it 2 years ago and now want to buy a house. They wonder if a bank will grant them a loan. “Free from their debt, the couple continued to save $400 per month – the amount they paid for the proposal – and set it aside to make a down payment of $10,000. Their low debt ratio combined with a good credit score is more likely to them eligible for a mortgage from major financial institutions,” indicates Pierre Fortin.
- Take care of your credit record, pay your bills promptly, and never miss a payment.
- Check your file with each credit agencies (Equifax and TransUnion) annually. One can get a free online. Correct errors if necessary.
The score on your record is a determining factor. It starts at 300 (worst) and goes up to 900 (best). It takes into account the credit limit utilization, adherence to payment deadlines, outstanding bills and, depending on the type of loan requested, the minimum required by a financial institution is around 680.
**The names of the individuals have been changed to preserve their anonymity.**