Debt is seen bad by most people. It can limit the financial decisions, drain your savings and negatively impact approval rates. However, these unfavorable debt outcomes take place only if borrowed money is mistreated. Debt that is managed responsibly can provide major financial benefits over the long-term. But, is all debt created equal on your credit report? Canadians who want to rebuild their credit profile must know how each kind of debt is calculated. If you break down the advantages and disadvantages of various debts, you can better relate to the costs of borrowing to ensure optimal credit usage.
While debt can influence financial circumstances, every credit domain has its own set of implications. Specific across all loan and credit categories are different ways that debt management can affect your credit score and your overall finances. The secret to credit success and getting a good score starts with having a healthy balance of debt. Having both installment and revolving credit amongst your credit products can lead you to a great score.
No debt is bad debt if you can manage it efficiently. Every loan is calculated differently – interest rates, fees, terms and cost principles are specific to the debt. Finding the right loan balance for you can alleviate stress and increase the money you save! A reliable borrower ensures payments are made on-time and paid off in full each month. Investopedia states that roughly 35% of your overall credit score is based on your payment history. Thirty per cent of your score is based on the amount of debt you owe and 10% is based on the number of credit lines that you have opened.
Knowing how loans can impact your score will get you one step closer to credit success! Go through these three types of loans and how they are calculated differently on your credit report.
Building a healthy credit score is easily achievable with consistent payments towards an auto loan. Not only will it look good to lenders, but it could also mean a future trade-in with a better vehicle and lower rates. Financing an auto loan is available through a bank or independent lender, however, car loans offered by an auto company typically have lower interest rates compared to loans from a financial institution.
Lenders can see the status of your auto loan (whether you’re capable of making on-time payments) as well as the type of account that’s opened. Auto loans are usually reported on your credit file as a type of installment loan. When financing a vehicle, the car is used as a collateral for the entire loan term. Any delinquencies on a car loan will appear on your credit history, which could drop your credit score.
Vehicles are great for having a set of wheels at your disposal, and they can also be an asset to your credit history. Canadians with low or no credit score will often have a more difficult time getting approved for the best finance rates. Canada Auto Experts offers a free, online car loan application that can get Canadians facing all types of credit situations get approved for affordable car loans fast. Looking for a new car? Click here to see how we can get you driving today!
Personal loans are great for people who are wanting to consolidate debt and rebuilding credit. This type of credit can range anywhere from $500 to $35,000 dollars and comes with a fixed interest rate and repayment term. Unlike credit cards, which can have varying interest rates and fees, the monthly rates and payments on a personal loan will remain fixed over the course of the loan span.
Obtainable through financial institutions or independent lenders, personal loans are transferred into your account and can be used for virtually anything. Home repairs, medical bills and reducing credit card debt are just a few areas where a personal loan can be used. If you’re interested in applying for a personal loan, be sure to ask if there is an open repayment schedule. An open repayment schedule on the contract means that you’ll be able to increase your monthly payment or make a lump sum payment whenever you can to pay off the loan sooner with no extra charges. With any loan, it’s crucial that you make your monthly payments on-time to improve your credit score.
Credit cards are one of the most common kinds of debt amongst Canadians. Credit cards, a type of revolving credit, are automatically revamped as soon as you pay them off. Financial institutions offer credit cards with a variety of different interest rates and fees attached. While credit cards can help a person establish credit, fees and rates can turn into huge expenses and create big credit problems if not managed responsibly. It’s important to have both installment and revolving credit on your file to show lenders that you’re capable of handling all forms of debt. Having one or two credit cards is great if you can keep up with payments and be aware of all fees and changes to interest rates.
With revolving credit, you can borrow money at your own disclosure to make purchases. Using credit cards is a convenient option for handling less cash, and some credit card companies offer interest-free grace periods on new cards or have rewards and benefits that can help you save.
Late or missed loan payments will negatively show on your credit report. Your goal as a borrower is to make every monthly payment on-time and pay off revolving credit accounts in full each month. Skipping a monthly payment or going over your available credit card funds can damage your score. Carrying high balances that are very close to your credit card limit, especially on more than one account, can indicate that you are unable to stay on top of your credit levels. As a consequence, this can lower you rating even further and make it challenging to attain future loan approval.