The three types of people with bad credit: which one are you?

Bad credit is something that can happen to almost anyone, no matter their current financial situation. If you’re reading this and thinking “well bad credit isn’t ever going to be a problem for me”, you might be wrong.

At Refresh, we’ve identified three main types of people with bad credit - bad credit by blindside, bad credit by lack of knowledge, and bad credit by bad habits. These three types of people cover the majority of those who find themselves with a less-than desirable credit score.

Bad credit by blindside

People who fall into this category were probably once financially stable and able to pay their bills on time, and they didn’t have to worry about not getting approval for a loan or credit card. Now, however, they’re struggling with bad credit. If this sounds like you, it’s likely that somewhere along the way, life threw you a curveball that disrupted everything. Maybe it was a costly divorce, a lengthy illness, a job loss, or business venture that went south. You may even have had to declare bankruptcy as a result. Whatever the reason for your credit going downhill, it was a blindside. This was not part of your life plan! But you’re not alone - in fact, in the case of an emergency, 35% of Canadians would take out a small loan or pay for it on their credit card - which, if you’re not able to repay, quickly leads to negative reporting on your credit score.

Bad credit can happen to anyone - even good people - and it’s not always as a result of low income. There are many people who earn a healthy living, but have overextended themselves, and not prepared for the future. They are only one or two pay-cheques away from having to resort to credit cards to make repayments on other loans. Those who are blindsided by bad credit are mostly aware of the importance of a good credit score, and having emergency savings, but just can’t seem to get either of them on track at the moment.

Despite these unfortunate circumstances, the ones who are successful at rebuilding their financial future aren’t resentful. They pick themselves up, dust themselves off, and invest the time and effort to become more financially stable.

Credit tips:

• Plan for unexpected expenses. Put a little aside each month, whatever you can afford so that you have at least a small nest-egg of savings. There’s a saying “Make hay while the sun shines” - well, when you have income, save some each month to be better prepared for one of those nasty blindsides so it won't lead to bad credit.
• If you can, pay off  more than the minimum amount owed, and bring your debts down - it’s one of the fastest way to a better credit score because it lowers your  credit usage percentage - making up 30% of your credit score.

Bad credit from a lack of knowledge

Credit is a tricky subject, and it’s unfortunately not something that is taught in school. If you’ve recently discovered that you have bad credit, but you’re not really sure how or why, you’re not alone - almost half of Canadians (42%) learned about credit the hard way – by ‘making a mistake’.

Have you recently closed a credit card account? That can bring down your credit score. Did you go through a breakup and learn your ex had bills in your name that you haven’t paid. That too can lead to bad credit. Have you made a few late payments but thought nothing of it? Yes, that’s right, it’s impacting your bad credit! Without understanding why your credit score is so important, or not knowing what can impact your credit score, you don’t know if your current financial practices are helping, or harming, your credit score.

Credit tips:

• If you’re just learning about the importance of your credit score, but you’re willing to do whatever it takes to start building it, educate yourself about money, credit, finances etc. Determine exactly what has led to your poor credit score. Once you know what you did wrong, you’re more informed not to make the same mistakes again.
• Get started on a set-it-and-forget-it credit building program. It’s one of the easiest ways to get your credit score climbing and you don’t even have to think about it

Bad credit from bad habits

Do you make purchases based on wants rather than needs? Do you buy items on your credit card knowing you don’t have, and may never have, the finances to pay it off? Do you miss bill payments and have them wind up in collections? You, my friend, have bad habits that are probably putting your credit score in a downward spiral. If you carry on this way, it’s likely you will never get yourself out of your financial hole. If you need credit, you will either be declined every time you apply, or you will only be offered it at the highest interest rates.

If this sounds, like you, there is hope. If you recognize this behaviour in yourself, but want to change, it is possible...with some hard work and discipline. However, unless you can own up to your bad spending habits, and admit that things need to change, you won't be successful long-term at building credit.

Credit tip:

Change your bad habits/adopt new, good habits:

• Don’t miss payments.
• Check credit card balances daily!
• Budget for daily/weekly/monthly expenses
• Save for emergencies
• Find ways to curb your impulse buying
• Get a  secured card so you can’t go into debt

Read more good money habits to adopt here!

The credit rebuilding journey

Whatever the reason for your bad credit, take responsibility for the problem. In fact, don’t view it as a problem at all, view it as a challenge. It’s understandable that some people will be resentful of the credit-building process, looking to blame others for putting them in this situation, but the reality is, this is where you are now. Tackle the challenge head on, and view this next phase of your life as an exciting journey rather than an arduous chore. With some self-discipline and sacrifice, you’ll soon be on the path to credit recovery.

*******

Refresh financial offers custom credit building solutions to help you build your credit score FAST.