Credit, it’s a term that you tend to hear more often now than ever before. With Canadian families struggling under the weight of financial pressure more than ever before, loans are more and more commonly used to stave away landlords and bill collectors. Whether that be unforeseen childcare expenses for extracurriculars or an emergency medical expense that isn't covered by your OHIP plan or even potentially legal fees for an extended trial, loans are becoming more essential than ever for the average Canadian.
In fact, a recent Finder survey discovered that more than 65% of Canadians have taken out a personal loan yet their reasons for doing so have been as mixed as public opinion towards loans. A whopping nearly 15.75% of Canadians had actually taken out a personal loan for debt consolidation purposes. More than 13% had taken out a loan to fund renovations and nearly 11% had used the loan to pay for higher education. The two most common categories were however looking to purchase a car at more than 41% and financing a mortgage at 19.5%.
What these figures tell us is the vastly different stories and backgrounds of people looking to take out a personal loan. However, for every successful story, there is also one of rejection and all of it starts with one thing: credit scores.
Our Current System of Loans
When discussing lending, it’s important to view it from the perspective of a lender. For them, giving out a loan is putting money into an investment. They give an individual funds and expect those funds to be paid back in due time with interest resulting in a net profit for them. The problem arises when creditors need to decide whether or not to give out a loan.
As profit is the main motivator, lenders will only give out loans to consumers who they deem to be reliable and trustworthy enough to pay off their loan on time. Those that they lack confidence in will receive smaller sum loans or loans with tighter restrictions such as higher interest rates, frequent payment periods and large sums of collateral or potentially just be flat out refused a loan.
Credit Bureaus and Scores - The Foundation of Modern Lending
Your average banking institution, especially if it belongs to the “big 5” (i.e. TD, ScotiaBank, CIBC, RBC and BMO) will have stringent guidelines that their customers will need to follow to be eligible for their various loan options. An individuals’ eligibility is dependent on factors that determine their likelihood of paying off their loans. These include information about their income and employment such as financial statements and personal information as well as a list of assets and liabilities. However, there is another factor.
Credit scores are sort of the textbook resource for lenders in deciding on a borrower’s reliability. Credit scores are compiled from a variety of factors by credit bureaus. These credit bureaus compile your credit history based on your credit accounts using your SIN or other identification and then provide that information to lenders and creditors. The top three credit bureaus that gather information on and report about consumers are Equifax, TransUnion, and Experian.
Understanding Your Credit Score and Its Impact
All three of these companies compile their data about an individual with FICO, a data analytics company based in San Jose, CA, USA that focuses on credit scoring services to produce your credit score. According to one of the biggest firms, Equifax Canada, your credit score is compiled from these sets of data from most influential to least:
Payment History (35%): One of the most crucial and self explanatory factors is an individual’s history with paying off their loans. Someone who has had a history of repaying their credit on time will have the confidence of lenders and thus a higher credit score while someone who has struggled in the past will be less trusted and subsequently given a lower score.
Using Your Credit (30%): At first glance, this may seem odd. However, what this refers to is open-end credit. Open-end credit is a type of loan that allows you to withdraw from a limit set at your discretion with the most common examples being credit cards and home equity loans as opposed to other forms of credit when you are offered a lump sum upfront.
In general, lenders and creditors prefer for consumers to not use more than 30% of their lines of credit as using your funds up to your limit worries investors and is a sign of financial distress.
Credit History (15%): One of the most unfair but still influential factors is history length. Individuals who have had credit accounts exist for longer under their name receive favourable scores to those who are just starting out and don’t yet have experience. This results in a disproportionate skewing against younger adults when it comes to credit scores making it more difficult for them to receive the credit they need to fulfill their true potential.
Public Records and Inquiries (20%): This refers to any issuing of bankruptcy in the past associated with an individual as well as the times that a lender has requested for an inquiry to be done into the borrower’s credit account. Normally, an inquiry doesn’t change anything but several repeated inquiries may be a sign of financial distress and can turn lenders away from a potential candidate in the future.
Fighting for The Little Guy - Magical Credit
At the end of the day, the credit bureaus of Canada are those that uphold and preserve a system of big banking institutions offering flexible and reliable loan options to those with considerable income and prior well-documented credit history whilst shunning those with lower incomes and perhaps a less than stellar credit history.
Those rejected by big banks might find no other choice than to go to loan sharks who offer absurdly expensive payday loans of annual percentage rates that reach as high as 500-600% according to the Financial Consumer Agency of Canada.
Bad Credit Personal Loans at Good Prices
At Magical Credit, we provide access to reliable and affordable bad credit personal loans to families that need them most. This comes with a short-term loan calculator at our website, www.magicalcredit.ca that determines your payment amount by allowing you to adjust your payment frequency (bi-weekly, monthly, and semi-monthly), principal amount ($1,500 to 20,000) as well as the loan’s maturity date ranging anywhere from 12 months to 60.
All of this is matched with fixed payments and interest rates which start as low as 3.9% per month to give those who may have struggled in the past a chance to receive the much-needed credit to break free from the shackles that credit scores have imposed on them. Our team of debt resolution specialists at Magical credit is here to help with new applicants receiving a reply and money deposited within 24 hours by simply filling out our 5-minute application form or contacting us at 1-855-639-6888 today!