Bad credit: what changes, and what a lender can still see

What changes in this situation

Bad credit is a description of your file, not a status that removes your right to apply. What changes is the number of lenders willing to review the file, the shape of the product they are willing to offer, and the price they attach to the uncertainty. The arithmetic does not change, and neither does the law.

Three things move at once. The pool of lenders shrinks, because many of them price to a score band and decline below it without reading anything else. The product changes, because lenders who work with damaged files tend to prefer security, a co-signer, a shorter term or a smaller amount. The paperwork gets heavier, because the person reviewing the file wants the context that a credit report does not carry.

Some of what is holding the file down has a clock attached to it. A consumer proposal stays on a credit report for three years after completion, or six years from filing, whichever comes first. A first bankruptcy stays on a credit report for six years after discharge. Canada has two national credit reporting bureaus, Equifax Canada and TransUnion Canada, and a free copy of your credit report is available from each. Lenders do not all report to both, so the two files can tell slightly different stories.

Lending in Canada is licensed provincially, so the regulator and the rules differ by province and territory. That matters for getting a loan on bad credit. A borrower in one province may have options that do not exist in another, particularly at the short-term end of the market.

What a lender can and cannot see

A lender sees your report, not your reasons. It sees the accounts, the balances, the payment history, the inquiries, any collection items, and any consumer proposal or bankruptcy while those remain on file. It may see public records such as judgments where those are reported. It does not see why an item happened, whether the cause was a job loss, an illness or a separation, and it does not see the recovery you have made since.

It also cannot see your income unless you document it, and it cannot see savings or a rent payment history that was never reported. What it can see is thin, and it is that thinness that gets priced. This is why shopping for a loan on poor credit is different from shopping with a clean file: the same borrower can be declined at one lender and reviewed at another, because each lender sets its own risk appetite inside the rules its regulator applies.

Some of those rules are fixed. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, and they qualify an uninsured mortgage at the greater of the contract rate plus two percentage points and 5.25%, under OSFI Guideline B-20. Insured mortgages and provincially regulated lenders are not all subject to B-20. At federally regulated lenders, a home equity line of credit is generally limited to 65% of appraised property value, with total secured lending usually capped at 80%. Canadian fixed-rate mortgages are compounded semi-annually by law.

At the short end, a payday loan is generally up to $1,500 for a term of 62 days or less. Where a province operates a licensed payday lending regime, the federal Payday Lending Regulations cap the cost of borrowing at $14 per $100 advanced, and some provinces set a lower cap that applies instead. Quebec does not license payday lending, which effectively prohibits the model there. Across all consumer lending, the Criminal Code criminal rate of interest is 35% per year.

loanmoose.ca is not a lender. It does not make loans, set rates or make credit decisions. It matches and compares.

Routes that exist

• A smaller or provincially licensed lender. These lenders are supervised by the province rather than a federal regulator, and they often assess a file by hand rather than by score band alone. The trade-off is a higher cost of borrowing, a shorter amortization or a smaller amount than a mainstream lender would consider.
• Secured borrowing against something you own. A home equity line of credit or a secured loan is priced against the asset as well as the file. The trade-off is real: the asset stands behind the debt, and a missed payment puts it at risk. Keep the 65% and 80% limits in mind at federally regulated lenders.
• Bad credit loans with a co-signer or guarantor. Adding a second person with a stronger file can move an application from decline to review. The trade-off is that the co-signer carries the debt with you, and their own credit is exposed if you miss a payment.
• A rebuild-and-wait route. Using a small secured product, keeping balances low and letting dated items age off the report improves the file without adding new debt. The trade-off is time, because a proposal or a bankruptcy only leaves the report on its own schedule.
• Short-term payday-style credit. This exists for a shortfall against a known pay date, is capped as described above, and sits on a different pricing scale from instalment lending. The trade-off is that it is built to be repaid at the next pay date, not over months.
• An insolvency route through a licensed insolvency trustee. A consumer proposal or a bankruptcy is administered only by a licensed trustee, regulated by the Office of the Superintendent of Bankruptcy Canada. The trade-off is that it is a formal legal process with lasting reporting consequences, and it is a decision to make with advice rather than alone.

What to have ready

1. Your credit report from both national bureaus. A free copy is available from each, and comparing them shows you what a lender will actually see.
2. A dated list of every negative item, noting when a proposal was filed and completed or when a discharge occurred. The reporting clock runs on those dates, and you should know where you are on it.
3. Income documentation: recent pay statements, benefit or pension statements, or tax assessments, plus two years of filings if you are self-employed.
4. Your monthly debt obligations and balances, written out. A lender will total them against your income, so you should know that total before they do.
5. Identification, proof of address, and banking details for pre-authorized payments.
6. A short written explanation of what happened and what has changed since. Some lenders read it and some do not, but it costs nothing to have it ready.

What not to do

• Do not fire applications at many lenders in a short window. Each application can appear as an inquiry, and a cluster of them reads as distress rather than as shopping.
• Do not pay an upfront fee to anyone who promises a loan, or to anyone who promises to delete accurate items from your credit report. Accurate information cannot be removed, and money taken before a loan exists is a warning sign.
• Do not use a short-term payday-style product to cover a gap you cannot repay on the next pay date. That pattern is how a single shortfall becomes a chain of them.
• Do not take on secured borrowing without accepting the consequence. If an asset stands behind the debt, the asset can be lost.