Zero Credit Score — What Now?

Thousands of Canadians access their credit report and check their score to make sure they’re in good financial standing. Some people, however, don’t see a three-digit number but a zero credit score.

How is this possible? Is this even a thing?

There are many reasons as to why someone may not have a credit score. Usually means the person lives mostly on cash-only and doesn’t have enough debt for credit agencies to rate his profile. Some argue that this is a good thing because being in debt means that you might take on loans that you cannot afford to pay back. 

 Let’s dive deeper into what zero credit score is, and what can be done to build it.

But first …

What is a credit score?

In simple terms, a credit score is a number given to those who use credit. There are several different score ranges (consumer credit score is usually between 300 and 900) and are determined based on information on your credit report. Lenders use the number and information to determine your ability to repay a business loan or make on-time payments on credit cards. There are two credit bureaus in Canada — Equifax and TransUnion.

How is a credit score calculated?

Your credit score is calculated by taking many factors from your business credit report into consideration. These include your payment history, delinquencies, length/history of accounts, balance-to-limit ratio, and the different types of business credits that you currently have and use regularly.

Why would I have a zero credit score?

First, you need to know that there is a difference between having a zero credit score and a low credit score. With a low credit score, you will have difficulty accessing capital or credit because you’d need to build your credit first. Not having a credit score means the credit bureaus don’t have enough information about you to produce a credit score for you.

There are several reasons why you might have a zero credit score:

New to credit usage

As mentioned previously, if you don’t have any credit history or account, the credit bureaus won’t have enough information to provide you with a score.

Recently immigrated

If you have recently immigrated to Canada, you have to rebuild your credit again from scratch. The credit history from your previous country or location won’t be taken into account. 

Just starting to utilize credit

If you had a credit card and used it regularly, you should have a credit score. But if you stopped using credit and instead resorted to using a debit card, the credit bureaus won’t have any information to produce a report and score for you.

Why is a credit score important?

It’s important to have an excellent credit score. A good credit score has significant effects on your overall financial well-being. It will allow you to access better credit cards, personal and business loans, and qualify for low or discounted insurance rates. Additionally, keeping tabs on your credit report and score on a regular basis can protect you against any type of fraud such as identity theft.

How to build a credit score?

Rome wasn’t built in a day – nor will your credit score. Building your credit score takes a lot of time and patience and definitely isn’t something to happen overnight. The main thing is to use your credit card wisely and responsibly. Managing payments is absolutely essential to building a credit score. So what does this entail? Here are some tips and advice to set you on the right path:

Check your credit report regularly

This is the first step in rebuilding your credit score. By checking your credit report, you can determine which areas need improvement. You can get a free copy of your credit report from both Equifax and TransUnion. This is a good idea because each creditor might have different information about your credit history.

You can sign up with Loop and get your free Equifax credit score within minutes.

Once you receive your credit report, check for these: any late or missed payments, high debt utilization, and bankruptcy. Once you have figured out the reason for your low credit score, you can then take action to improve it.

At the same time, make sure to check your credit report for any errors or fraudulent accounts, because these can significantly bring down your credit score. If you come across such inaccuracies, you should file a dispute to one of the credit bureaus. 

Make arrangements to pay off your debts

Payment history is one of the major factors affecting your credit score. Your credit won’t improve if you are behind on your payments or have been making late payments. If you can’t afford to bring those accounts up to date, the best thing to do is to contact your creditors and negotiate a payment arrangement that works within your budget.

Additionally, another key factor in rebuilding your credit score is paying down your debts. This is also known as credit utilization – the amount of debt you owe in relation to the available credit. For instance, if your available credit is $10,000 and you only use $5,500, your credit utilization is at 55%. It’s important to pay down as much of your debt as you can. You want to get your credit utilization to 30% – 35% and less. If you use more than 75% of your credit card or line of credit, know that it will have a negative impact on your credit score until you pay the balance in full.

Have a secured credit card 

You now have developed a plan to get your payments up to date. Great! The next step is to build a consistent payment history. Both banks and traditional lenders want to see that you can responsibly manage your debt and repay the borrowed amount on time. This is where a secured credit card comes into play.

With a secured credit card, you will have access to your credit and payment information that gets reported to the credit agencies each month. The only difference is that you need to provide collateral before you can even use the card. This can be in the form of a security deposit. It reassures lenders that you will repay the borrowed money. So be mindful of this credit and only make purchases that you know you can pay off.

Make payments on time or earlier 

As you take steps towards rebuilding your credit score, it’s important that you make payments on time. Any missed or late payments get reported to the credit bureaus; no matter how insignificant you might think they are. The most effective method to ensure you are consistently making on-time payments is to either set up reminders or automatic bill payments.

Get into good financial habits

That’s right! Start by developing smart saving and spending habits to better rebuild your credit score. The best way to do this is to create an annual business budget to keep track of how much you earn and spend. With a budget, you can also prioritize your spending and focus on items and resources that are most important to you. When you have the budget, get into the habit of setting up spending reminders. Create a sheet of all of your bill payments and date them to better keep track. This will help you see where your money goes and when you should be making the necessary payments. 

Final thoughts

Having bad credit can limit you in a lot of ways. For instance, you may not qualify for a loan, and if you do, your interest rate will be very high. There is no quick way to rebuild your credit score. It takes time and you must be prepared to get up to date on payments that you’re behind on. At the same time, with zero credit, you won’t be eligible for any personal or business loans, or to purchase equipment.

So go out there and get started. Follow the steps outlined above and within a year you will see significant improvement in your credit report and credit score!

Want to keep tabs on your personal and business’ financial health? Get your FREE Equifax Credit Score here!