Is All Debt Created Equal?
Good credit starts with a balance of credit and making payments on-time and in full. Credit cards and loans are popular forms of credit that all play a different role determining your overall credit score.
Debt has a bad reputation. It can limit freedom to make financial decisions, drain your savings account and negatively impact approval rates. However, these unfavourable debt outcomes happen only if the borrowed money is mismanaged. 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 understand the costs of borrowing to ensure optimal credit usage.
While debt can impact 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 impact 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 help you keep or establish a great score.
READ MORE: 5 Factors That Impact Your Credit Score in Canada
No debt is bad debt if you can manage it effectively. 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 reduce stress and increase the money you save! A reliable borrower ensures payments are made on time and paid off in full each month. According to Investopedia, roughly 35% of your overall credit score is based on your payment history. Thirty percent 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.
Understanding how loans can impact your score will get you one step closer to credit success! Check out these three types of loans and how they are calculated differently on your credit report.
READ MORE: Common Reasons Why Canadians Are Rejected for Car Loans
Auto Loans
Developing a healthy credit score is easily attainable 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 typically reported on your credit file as a type of installment loan. When financing a vehicle, the car is used as collateral for the entire loan term. Any delinquencies on a car loan will show up 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 scores will often have a more difficult time getting approved for the best finance rates. Canada Drives offers a free, online car loan application that can get Canadians facing all types of credit situations get approved for affordable car loans fast. Need a new car? Click hereto see how Canada Drives can get you driving today!
READ MORE: Common Reasons Why Canadians Are Rejected for Car Loans
Personal Loans
Personal loans are a great option for people who are interested in consolidating 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 stay the same over the course of the loan period.
Attainable 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 ways to use a personal loan. 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 important that you make your monthly payments on time to see your credit score grow!
READ MORE:Auto Loans vs. Personal Loans
Credit Cards
Credit cards are one of the most common types of debt amongst Canadians. Credit cards, a type of revolving credit, are automatically renewed 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 build credit, fees and rates can turn into huge expenses and create big credit issues 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 remain aware of all fees and changes to interest rates.
With revolving credit, you can borrow money at your own disclosure to make purchases. Carrying 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.
READ MORE: 3 Reasons Why You Should Use Your Credit Card
Late or missed loan payments will negatively impact a credit score. Your goal as a borrower is to make every monthly payment on time and pay off revolving credit accounts in full each month. Missing a monthly payment or going over your available credit card funds can hurt 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 result, this can lower your rating even further and make it challenging to obtain future loan approval.
