Improve Your Credit Score
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-Factors that affect your credit score
-How long does poor credit stay on your report?
-How does bankruptcy affect your credit?
-How do credit checks affect your credit score?
-How to clear your credit report of negative items?
If you have bad credit, you’re going to have a harder time being approved for financing. Lenders want to be confident in a borrower’s ability to repay a loan, and if you have bad credit, they won’t be confident in your ability to repay. Don’t be worried if you have bad credit because you can improve your credit if you borrow responsibly. The amount of time it takes to improve your credit score varies based on your credit report, but it’s important to know how long it will take to so you can appropriately plan for the future. In this article, we’re going to explain what affects your credit score, how long credit slips stay on your credit report, the effect credit checks have on your score and how to get negative credit items off your report.
Factors That Affect Credit Score
The three main factors that affect your credit score are credit utilization rate (how much credit you used compared to how much the lender is willing to lend to you), how often you make your payments in full and on time and your overall credit history.
These three factors will score you somewhere between 300-900, 300 being the lowest possible score and 900 meaning you have perfect credit. The average credit score in Canada is 650, any score below 600 is considered non-prime. If you fall in the non-prime category, you’re likely going to have a harder time obtaining loans. While it’s not impossible to get financing as a non-prime borrower, typically these loans come with higher interest rates to make the loan worth the risk to the lender.
How Long Does Poor Credit Stay on Your Credit Report?
While there is no one answer to this question since everyone is in a unique credit situation, typically it takes up to 6 months to begin improving your credit score. While credit slips in your past can stay on your report for up to seven years, the quicker you act in repaying your debts, the quicker you’ll see your score increase. Credit scores are updated monthly so if you begin to repay your debts, you may see slight improvements in just 30 days.
How Long Do Collections Stay on Your Credit Report?
If you fail to repay your debts for over 6 months, the creditor may close the account and sell it to a collections agency. It doesn’t matter if you owe $100 for an outstanding phone bill or $5,000 for a car loan or home mortgage. If you fail to pay that debt for 6 months, it’s going to leave a nasty mark on your credit report. Once your debt info is sold to a collection agency, the number “9” will appear next to that particular loan on your credit report. The number 9 means that this loan has been sold to a collections agency and has the possibility of staying on your report for seven years. Not only does this mark a major red flag for any potential lenders looking at your credit history, but it can also decrease your credit score by up to 50 points.
How Does Bankruptcy Affect Your Credit?
According to Statistics Canada, 1 in 6 Canadians will file for bankruptcy during their lifetime. Filing for bankruptcy means being unable to pay your outstanding debts and it serves as a debt relief program to help Canadians start from scratch financially. Bankruptcy in Canada is governed by Canada’s Bankruptcy and Insolvency Act. If you file for bankruptcy, it typically takes a year for you to be approved for bankruptcy from an insolvency agent.
Bankruptcy should not be looked at as a “get out of jail free” card as there are severe implications to filing for bankruptcy. If you file for bankruptcy once, it will remain on your credit report for seven years. If you happen to file for bankruptcy a second time, this slip could stay on your credit report for 14 years, making getting loans nearly impossible.
How Do Credit Checks Affect Your Credit?
When you apply for a loan of any kind, the lender will need to see your credit history so they can determine whether or not to approve you, and at what rate. To see your credit history, they need to do what is called a credit check. There are two types of credit checks, the first being a “soft pull” credit check and the other being a “hard pull” credit check. It’s important to understand the differences between these two types of checks.
Soft Pull Credit Check
The biggest difference between a soft pull credit check and a hard pull credit check is that a soft pull does not go on your credit report and won’t affect your credit score. Soft pull credit checks are more informational and may take place if you’re looking to be pre-approved for a credit card or if a potential employer or landlord wants to see your credit standing. The soft pull checks don’t affect your credit score because you’re not applying for a loan. It’s not uncommon for soft pulls to happen without your request, therefore you won’t be penalized for them.
Hard Pull Credit Checks
Contrary to soft pull credit checks, hard pulls happen when you’re applying for a loan and lenders need to see your credit report to deem what you’re eligible for. For example, if you’re looking for a mortgage, car loan, personal loan or credit card, this will result in the lender doing a hard pull. It’s important to know that a single hard pull will not usually negatively affect your credit score. However, if you apply to a bunch of lenders about getting a loan, all of these hard pulls in a short period of time will negatively impact your credit score.
Since credit inquiries stay on your report for up to two years, it’s important to only apply for a loan when you need it. If lenders look at your credit report and see a ton of hard pull credit checks, they will likely see you as a higher-risk borrower, potentially giving you less favorable interest rates.
How to Clear Your Credit Report of Negative Items
As discussed earlier, when you apply for a loan, lenders are going to do a thorough check of your credit history. If the lender sees missed payments or a history of bankruptcy, this is going to hurt your chances of being approved. One thing that’s important for you to ensure is that there are no mistakes on your credit report. It’s smart to look through your credit report and make sure all the numbers and info are accurate. If you find a discrepancy, it’s critical that you address it immediately by sending a letter to the creditor showing the mistake. Most creditors are very good at being responsive in dealing with these types of situations, so if you did in fact find a mistake, expect it to be remedied by the creditor fairly quickly.
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