Important factors that lenders consider before extending credit
Earlier in this module you reviewed the factors that you should consider when borrowing money. Borrowing money entails a relationship between you and the lender. It's important for you, as a potential borrower, to learn about the factors that lenders consider when making loan decisions.
Gaining the lender’s trust
Much of a lender’s willingness to lend money is based on the level of confidence that they will be repaid. Lenders may consider your credit score as a major factor when deciding to lend you money. Credit scores are for the benefit of lenders. Your credit score is based on:
- whether you make your payments on time;
- how much of your available credit you’ve used;
- how long you’ve had credit;
- the different types of credit products you have; and,
- how many enquiries (or hits) are on your credit file.
It is important to understand that the way you use credit will always be reflected on your credit rating. Responsible use of credit is key to being able to borrow.
Lenders get your credit score from credit reporting agencies. These agencies collect information from lenders on the way that you use credit and then share this information.
Lenders may also consider other factors before lending you money. For example, your bank may be more likely to lend you money if you have a long-standing relationship with them.
How insolvency affects your credit rating
Your insolvency will affect your credit rating. The table below details certain insolvency timelines (for specifics, it's best to check directly with credit reporting agencies and/or provincial authorities).
Check your credit report on an annual basis to make sure there are no errors.Learn how to order your credit report
The only way to repair your damaged credit history is to practise responsible financial habits moving forward. Lenders will recognize this and, in time, you will see it reflected in an improved credit score. Rebuilding your credit score after your insolvency takes time, so do not give up or get discouraged!
Some lenders may be willing to give you credit immediately after your discharge or completed proposal. However, that usually comes at a high interest rate, which could put you in danger of being unable to manage debts again. Also beware of any promises to remove negative information from your credit record sooner than would otherwise be possible. By law, this cannot be done.
You can discuss additional options to repair your credit rating at your in-person counselling session with your counsellor. If you have questions, write them down and bring them to your in-person counselling session.