Canadians have a lot of choices when it comes to borrowing money for anything from everyday expenses to buying a car or a home. However, every choice you make about how and where you borrow money can have a positive or negative affect on your credit score.
Not all forms of credit are the same. Some, like credit cards and lines of credit, can keep people in a constant cycle of revolving debt if they don’t pay them off. Others, such as a bad credit loan, can help to improve your credit while paying off debt.
Below, we explore three common forms of credit and how each one can get you into and out of financial distress.
1. Credit cards
It’s difficult to imagine getting by these days without a credit card. We need them to order things online, pay for tickets, book travel, and order in dinner. We tap for groceries, gas, coffees and diapers. Living without a credit card is probably not an option for most of us. However, all of those taps, swipes and clicks can have a negative effect on your credit score if you end up charging more than you can afford and not paying off your balance every month.
Avoiding bad credit with credit cards
A credit card is a form of “revolving credit”. This means the unpaid portion of your outstanding balance rolls (revolves) into the next month, along with the interest you owe. This means there is no deadline or maturity date on your debt. It just keeps rolling along and it’s constantly available.
This is not a problem if you pay off all or most of the balance and keep your interest payments to a minimum, but that’s not always possible. That’s where your credit rating can get in trouble. Your credit score gets worse when you:
- Make a late payment
- Apply for a new credit card
- Max out your credit limit
2. Lines of credit
Lines of credit make sense for many people. They let you borrow an amount up to your available credit limit with the option to pay off the outstanding balance at any time or make minimum payments. A line of credit is always active; you don’t need to keep re-applying for credit every time you need additional funds.
Avoiding bad credit with a line of credit
Like credit cards, a line of credit is also a form of revolving credit. You must make the minimum payment on your outstanding balance, but beyond that you’re in control of how long it takes to pay off your debt. That’s good if you have the discipline to pay it off fast, but not so good for your credit rating if you:
- Make a late payment
- Owe a lot compared to your income and ability to make payments
The alternative to revolving credit
If you find it difficult to keep on top of all your revolving credit balances and you fall into the trap of making minimum payments, there is an alternative that can actually help you repair your credit score and start to reduce the amount of money you owe.
Even if you have a low credit score, a bad credit installment loan can put you on the path to a brighter financial future where you spend less money on interest and have more for life’s other priorities.
Bad credit installment loans 101
Installment loans are the opposite of revolving credit. When you take out an installment loan, you agree to make regular payments that include the amount you borrowed plus interest. The payment amount is always the same and the entire balance gets paid off by a specific date. They are often used to consolidate debt or as an alternative to an auto loan.
Here’s how it works:
1. Choose an amount
A loan expert can help you determine how much you can comfortably afford to borrow based on your income and your other expenses.
2. Decide how much time you need to pay it off
A bad credit loan can have terms up to 84 months. You might not need that long, but it’s nice to know you have options that can lower your payments.
3. Time your payments
Many people find if convenient to time their loan payments with their incoming paycheques. That’s why most loans provide the option of weekly, biweekly, bimonthly or monthly payments.
TIP: Set up Automatic Transfers from your bank account to guarantee that you never miss a loan payment.
Once you settle into the rhythm of making regular, predictable payments, you may want to take advantage of value-added features that let you make lump-sum payments to pay off your loan faster.
Types of bad credit loans
Secured - You offer a form of collateral to lower the risk level. Commonly, the collateral used is the thing you are buying. For example, a car becomes collateral for a bad credit auto loan. If you are looking to buy a home with a bad credit loan, the home is used as collateral.
If you are looking for a loan and banks aren’t an option, talk to an easyfinancial loan expert at your local branch or apply online today.
Whether you are looking to consolidate debt, cover bills and expenses, buy a car or a home, we can help with loans that provide flexible payment options with no credit history required.