Reasons why credit is not approved in Canada

Obviously everyone's financial situation in Canada is different; here are some common reasons why applications are often declined by Canadian banks, credit unions and credit card companies:

1. Credit history of missed or late payments

Forget to pay a bill on time? Or worse miss a payment altogether? This will lead to a lower credit rating on your Equifax Canada or TransUnion Canada national credit agency score (often also referred as a FICA score). The negative impact on your credit ranking is worsened if any previous creditors were forced to write off a loss to you.

2. Inadequate proof of income

Generally, a Canadian T4 slip or a pay stub is required as minimum proof of income. Depending on the type of income you earn (for example, if you are self-employed or a contracted employee) and the type of loan you require, more information may be required by the bank or credit union to prove your annual revenue.

3. Lack of employment or income stability

Changing jobs frequently can be a red flag on your credit file. Based on your employment history, it must appear reasonable that your income will continue into the future. Otherwise the lender may be uncertain about your long-term stability and ability to repay the loan.

4. Insufficient income to support debts

If you are living well beyond your means, no responsible lender was to add to your financial burden. Your total income must support your current liabilities and living expenses plus the additional credit you are requesting. If your income doesn't meet the requirement, you may be able to have your application co-signed by a relative or friend who does meet the criteria and who will agree to be liable for the debt if you fail to make the payments. CitiFinancial Canada reviews every applicant's credit history carefully in order to find ways to help Canadians get the money they need.

5. Lack of collateral

Depending on the type and size of the credit requested, you may be required to provide collateral of sufficient value to support the debt. For example, a personal mortgage or home equity secured line of credit requires the security of a residential property. When it comes to a line of credit, homeowners are sometimes preferred to renters since the security of house ownership lends value to the applicant.

Maintaining a good credit history in Canada

You create your own Canadian credit rating through the way you manage your money and debts. Below is a list of steps you can take that will help you maintain a good history and access to credit in the future.

1. Pay all bills on time

This step cannot be emphasized enough. Failing to make your payments on time or missing them entirely can have a major impact on your ability to obtain credit. Setting up pre-authorized payments is a great way to ensure payments are made on a regular basis. Especially these days with online banking, you can actually set up pre-payments for up to five years or 60 months on long-term loans.

2. Pay minimum balances when you can't pay the entire amount

Paying something, rather than doing nothing is vital. Making at least your minimum payments, when the option is available, will help to maintain a strong credit rating.

3. If you have missed payments, get current and stay current

Bad debt behaviours can be corrected. What matters most is your long-term pattern of behaviour. Paying your bills on time, over the long term, will result in a better credit rating. Avoid applying for credit too often. Frequent requests for credit may be interpreted as a sign that you have poor money management skills.

4. Establish a good credit history

Responsible use of credit cards and loans will produce a better credit rating than no history at all. If you are just starting to establish your credit history because you are becoming the age of majority, are new to Canada, or have recently been divorced, be cautious about opening too many new accounts. It's best to build your credit history gradually and responsibly.

5. Keep your total debt load in check

It's easy to run up credit card bills. Several small balances quickly add up to an unmanageable situation. For example, avoid revolving debt on several credit cards at once. Try to stick to one MasterCard, Visa or American Express credit card. If you need more than one Canadian credit card for personal or business reasons, be careful about the credit limits. Keep them as low as possible.

6. Avoid using credit to pay off credit

Consolidating balances from several credit cards into a lower-rate loan may be a smart move to reduce your interest charges and lower your payments so that you can keep them current, as long as you don't continue to increase your debt load. But simply making payments on one credit card with funds drawn, for example, from another credit card does not necessarily improve your overall rating because it can be seen as an attempt to avoid paying off your debt. It's much better to focus on paying off the credit you have.

7. Ask for help

If you find yourself getting in over your head, talk to your bank branch, credit union staff or your other creditors. Most creditors will help you to find a short-term solution to a problem if you contact them in advance. In addition, there are qualified credit counselling services available to help you better manage debt.

Following these steps while avoiding common credit pitfalls should result in a strong Canadian credit report when your bank or credit union contacts EquifaxCanada or TransUnionCanada. You can also receive your own Canadian credit report online by visiting either website of the two national Canadian credit bureaus - Equifax or Trans Union . It costs very little and you can correct any mistakes in your credit file. In fact, I recommend getting your own credit report first before applying for any Canadian mortgage, loan or credit cards. It costs very little but gives you an exact picture about what the banks and financial institutions see when they review your credit application.