What actions worsen your credit rating?

A credit score is a vital financial tool for Calgary residents, affecting their ability to rent a home, obtain loans at favorable interest rates, and even find employment in certain fields. Understanding what actions can negatively impact your credit score is critical to maintaining a healthy financial reputation in the Canadian system. In Canada, credit scores range from 300 to 900, and even minor mistakes can result in a significant drop in your score, which will have long-term consequences for your financial opportunities.

Missed and late payments: the biggest threat

Payment history accounts for approximately 35% of your overall credit score and is the most important factor in determining it. Even a single missed payment can result in a catastrophic drop of 90-150 points in your credit score. This loss can be particularly painful for people with high credit scores, as they have more points to lose compared to those whose scores have already been lowered by previous financial problems.

Reporting deadlines and consequences

Payments are usually considered delinquent and reported to credit bureaus after 30 days past due. If you are less than 30 days late on a payment, your credit score should not be affected, although you may still have to pay late fees and interest. However, once you cross the 30-day threshold, the situation becomes serious.

The longer a payment remains unpaid, the greater the negative impact it has on your credit score:

  • 30 days past due: slight decrease in credit score

  • 60-90 days past due: more significant impact on credit score

  • 120+ days late: the account may be referred to a collection agency, resulting in a serious drop in your credit rating

Long-term consequences of missed payments

Missed payments remain on your credit report for six years from the date of the missed payment in Canada. This means that even if you eventually rectify the situation, the negative information will continue to affect your credit rating for a long time. However, the good news is that the impact of missed payments diminishes over time, especially if you demonstrate responsible financial behavior afterwards.

Recovering from missed payments

It can take up to 18 months for your credit score to fully recover after missed payments. The recovery time depends on many factors, including your previous credit score, the number of missed payments, and your subsequent financial behavior. People with higher credit scores typically experience a greater initial impact but also recover more quickly when they return to regular payments.

High credit utilization: a silent threat

Credit utilization is approximately 30% of your credit score on the FICO system and 20% on the VantageScore system. This metric measures how much of your available credit you actually use and is critical to maintaining a healthy credit score.

Credit utilization thresholds and their impact

Different levels of credit utilization affect your credit score in different ways:

  • 0-10% utilization: excellent for your credit score, demonstrating strong financial management

  • 11-30% utilization: good, but slightly higher risk compared to the optimal range

  • 31-50% utilization: acceptable range, but may start to negatively impact your score

  • Over 50% utilization: considered high and can significantly lower your credit score

The general recommendation is to keep your credit utilization below 30%, although experts advise keeping it even lower for optimal results. People with the highest credit scores typically have utilization rates in the single digits.

Exceeding your credit limit

Exceeding your authorized credit limit on a credit card can lower your credit score. Not only does this result in penalty fees, but it also signals to lenders that you may be experiencing financial difficulties or are unable to manage your credit effectively.

Closing credit accounts and their consequences

Closing credit accounts can have a complex impact on your credit score through several mechanisms. The Canadian credit scoring system considers both the length of your credit history and your total available credit when calculating your score.

Impact on credit history length

Closing an old credit account can reduce the average age of your credit accounts, which will negatively impact your credit score. Length of credit history accounts for approximately 15% of your overall credit score, so closing your oldest account can have a significant impact. This is especially problematic for people with a short credit history or few active accounts.

Change in credit utilization ratio

When you close a credit account, your total available credit limit decreases. If you continue to carry the same level of debt on your remaining accounts, your utilization ratio automatically increases. For example, if you have two credit cards with limits of $4,000 each (for a total of $8,000) and you carry a balance of $2,000, your utilization is 25%. If you close one card, your total limit becomes $4,000 and your utilization increases to 50%.

When closing accounts may be justified

Despite the potential negative consequences, sometimes closing a credit account may be the right decision. If a card has a high annual fee that you can't justify with the benefits, or if you're trying to control spending, closing the account may make sense. Many banks allow you to switch to a free version of the card instead of closing it completely.

Multiple credit inquiries: a sign of financial stress

Hard credit checks account for about 10% of your credit score, but their cumulative effect can be significant if not managed properly. Each hard check can temporarily lower your credit score by a few points, but multiple inquiries in a short period can lead to a more serious decline.

The difference between soft and hard checks

Soft credit checks do not affect your credit score and include checking your own credit report, offers from credit companies, and checks by existing lenders. Hard checks occur when you apply for new credit products and can negatively impact your score.

Duration of hard checks

Hard credit checks remain on your credit report for two years, but their impact on your credit score decreases significantly after a few months. Statistics show that people with six or more hard inquiries on their credit report are more likely to file for bankruptcy than those with no inquiries.

Exception for shopping around

Credit scoring systems recognize that people often compare different loan offers before making a decision. FICO and VantageScore have special rules for “shopping around”:

  • VantageScore: Treats multiple hard inquiries within a 14-day period as a single inquiry.
  • FICO: uses a 45-day window for newer models and 14 days for older ones, but only applies this to auto, mortgage, and student loans.

Bankruptcy and consumer proposals: the most serious consequences

Bankruptcy and consumer proposals have the most serious and long-lasting impact on your credit score of all possible actions.

Consumer proposals and their impact

A consumer proposal results in an R7 rating on your credit report. This rating indicates that you have reached an agreement with your creditor to pay off part of your debt but were unable to pay it off in full. A consumer proposal remains on your credit report for three years after completion or six years from the date of filing, whichever comes first.

Bankruptcy and long-term consequences

Bankruptcy receives an R9 rating, which is the worst possible rating in the Canadian system. A first bankruptcy remains on your credit report for six years after you are discharged from your debts, while a second bankruptcy can remain for up to 14 years.

Recovery from bankruptcy or consumer proposal

Although bankruptcy and consumer proposals have a serious negative impact, credit recovery is possible. It is important to start rebuilding your credit history as soon as possible after the process is complete by using secured credit cards and demonstrating responsible financial behavior.

Accounts in collection: long-term pain

When a debt is transferred to a collection agency, it has an immediate and significant negative impact on your credit score. An account in collection can lower your credit score by 50-100 points, depending on your credit history.

How long it stays on your credit report

Accounts in collection remain on your credit report for six years from the date of the first missed payment in Canada, regardless of whether the debt has been paid. Equifax counts this period from the date of the last payment, while TransUnion starts counting from the date the debt became past due.

Impact of paid and unpaid collections

Paying a debt in collection does not remove it from your credit report, but it usually marks it as “paid.” While this is better for your credit than an unpaid collection, the negative record still remains on your report for the full six-year period.

Legal consequences of collection

Even after a debt is removed from your credit report after six years, the actual debt may not disappear. Creditors and collection agencies may continue to pursue repayment depending on provincial laws.

Mistakes in managing different types of credit

Misuse of credit cards

Carrying a balance on credit cards or regularly missing payments can lower your score. Even if you make minimum payments, high balances relative to credit limits negatively impact your utilization ratio.

Problems with automatic payments

Insufficient funds (NSF) in your account for automatic payments can result in missed payments and, as a result, a lower credit score. It is important to ensure that you have sufficient funds in your account for all automatic debits.

Closing checking accounts with a negative balance

If you close a bank account with a negative balance and do not pay off the debt, the bank may refer the debt to collections. This can result in a negative entry on your credit report, even if it was not originally a credit product.

Factors that do NOT affect your credit score

Demographic and personal factors

Your age, gender, race, marital status, religious beliefs, and occupation are NOT considered when calculating your credit score. Canadian human rights laws prohibit the use of these factors in credit decisions.

Financial factors that are not taken into account

Income alone does NOT affect your credit rating, although lenders may take it into account when making approval decisions. Having savings accounts, investments in RRSPs, TFSAs, or other non-credit accounts also does not affect your rating.

Actions that are safe for credit

Checking your own credit report or score does NOT affect your credit rating. Paying traffic fines on time also does not appear on your credit report. Using a debit card or gift cards does not affect your credit.

Impact of interest rate increases

Penalty interest rates

If your payments are 60 days or more past due, some credit card issuers may increase your interest rate to 30%. While the rate itself does not affect your credit score, it can make it more difficult to pay off your debt and lead to further payment problems.

Loss of promotional rates

If you regularly miss payments, you may lose your promotional 0% annual interest rate and end up with a much higher rate. This can create a cycle of debt dependency, where high interest rates make it difficult to pay off the principal amount of the debt.

Regional characteristics of Calgary and Alberta

Alberta's economic challenges

Alberta has historically been dependent on the oil and gas industry, which makes the province's economy volatile. Periods of economic downturn can lead to job losses and financial hardship for Calgary residents, which can negatively impact their ability to maintain good credit scores.

Housing costs and their impact

Calgary has one of the highest housing costs in Canada, which may force residents to take on more debt to purchase real estate or pay rent. This can lead to high credit utilization ratios and potential payment problems.

Access to financial services

Calgary has a wide range of financial institutions, including major Canadian banks, credit unions, and alternative lenders. This provides residents with more options for managing credit, but can also lead to the temptation to take on too much debt at once.

Strategies to prevent credit deterioration

Automate payments

Setting up automatic payments for all credit accounts can help avoid accidental missed payments. However, it is important to ensure that there are sufficient funds in the account to cover all automatic debits.

Regular credit monitoring

Checking your credit report at least once a year can help you catch errors or fraudulent activity before they seriously damage your score. In Canada, you can get free credit reports from Equifax and TransUnion.

Conservative credit planning

Only apply for new credit products when you really need them, and leave at least six months between applications. This will help you avoid accumulating multiple hard inquiries in a short period of time.

Create a financial cushion

Maintaining an emergency fund equivalent to at least three months of expenses can help you avoid missed payments during financial difficulties. This is especially important for Calgary residents due to the volatility of the local economy.

Recovering from credit damage

Recovery timeframes

  • Missed payments: 12-18 months for full recovery
  • Accounts in collection: 2-4 years for significant improvement
  • Consumer offers: 3-5 years
  • Bankruptcy: 6-10 years

Active steps for recovery

Start by obtaining a secured credit card and use it responsibly to build a positive payment history. Keep your credit utilization below 30% and always make payments on time.

Legal aspects and consumer rights

Debt collection laws

Alberta has strict laws governing the activities of collection agencies. Consumers are entitled to fair treatment and can file complaints with Alberta Consumer Protection if they experience harassment or unfair practices.

Credit report rights

Canadians have the right to dispute inaccurate information on their credit reports free of charge. If you find errors, you can file a dispute with the credit bureaus, which must investigate and correct the inaccuracies within 30 days.

Understanding what actions can damage your credit score is critical for Calgary residents who want to maintain a healthy financial reputation. Missed payments, high credit utilization, multiple credit inquiries, bankruptcy, and accounts in collection can have serious and long-lasting consequences for your financial life. However, with a proper understanding of these factors and a proactive approach to credit management, you can avoid most of these pitfalls and maintain a healthy credit score. The key is to monitor your credit situation regularly, make payments on time, use credit responsibly, and respond quickly to any problems that may arise. For Calgary residents, it is also important to consider the unique characteristics of the local economy and plan your finances with the potential economic fluctuations characteristic of Alberta in mind.