Why Is It So Hard to Get a Loan When Your Credit is Bad?

Date posted: Sept. 8, 2015

If you have bad credit and you have ever tried to get a traditional loan, credit card, or store line of credit, then you know repeated denials are frustrating. There are reasons why banks and financiers do not provide loans and lines of credit to individuals with bad credit, though. It is all about perceived risk. Learning about how the Canadian credit reporting system works and what you can do to improve your credit score will put you back on the road to financial freedom.

Understanding Your Credit Score

Most lenders utilize a rating system known as Fair Isaac Corporation, or FICO. In Canada, FICO scores range from a low of 300 to a high of 900 with classifications issued as follows:

  • Excellent Credit – 750 and up
  • Good to Fair Credit – 600 to 749
  • Bad Credit – 599 and below
  • No Credit – No FICO score/no established credit history

You can obtain a free copy of your FICO score by visiting the TransUnion and/or Equifax websites. Each of these credit-reporting agencies issues its own FICO score based upon your credit history.

How Does One Get Bad Credit, Anyway?

Your FICO score is based on a number of factors, but the two most important are the timely repayment of debts and your debt load. For instance, if you have an auto loan, each time you make a payment (and even when you fail to pay on time), this information is reported to one or both of the credit agencies. If you make your payments on time, it boosts your score because it shows that you use credit responsibly. If you always make payments late, this decreases your credit score because you are not using the credit responsibly. What's more, if you have a very high debt load (meaning you owe a significant portion of the money you make), this can also decrease your credit score.

How Bad Credit Affects Your Ability to Borrow

A longstanding history of late payments or a very high debt load affects your ability to borrow significantly because it reflects in your FICO score. Most lenders view your FICO score as an indicator of your ability to repay your debts, and if your score is low, they view you as a serious risk and will not lend to you. On the other hand, if your credit score is very high, this shows that you utilize your lines of credit well, maintain low balances, and repay your debts on time. Financiers actually want to lend to people who have good credit because it is almost a guarantee of timely repayment.

How to Restore Your Credit Rating

If your FICO score is 599 or below, the chances of obtaining a traditional loan with a subprime interest rate are more difficult. Even individuals with credit scores between 600 and 650 have some trouble securing outstanding rates. Ideally, your credit score should be near 750 or higher. To raise your score, first look for discrepancies in your credit report that will boost you score if removed. Next, work to repay your debts. The more you repay, the higher your score will climb. Finally, if you use credit cards, maintain a balance that is between 25% and 35% of your total credit limit. This is ideal, and it will help you raise your score significantly.

If you have bad credit, lenders do not view you as a responsible borrower. In order to gain access to larger loans with outstanding interest rates, it is necessary to improve your FICO score over time with responsible borrowing and repayment. 

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