Credit Focus: A Small Bad Debt Doesn’t Have to Destroy Your Credit

You know the old cliché about small things making a big difference? If you have a small amount of bad debt, that saying can come true.

Even a small amount of bad debt can significantly harm your credit. The minimum for a consumer proposal is $8,000, but many people have debts under that amount that are still hurting their credit scores. It’s just as easy to bruise your credit with small collections, such as phone bills, payday loans, or a low but unpaid credit card balance. This can result in being blocked from getting credit.

Even when debts are under the consumer proposal of $8,000, it can still be difficult to pay off all at once. Not many people have thousands of dollars sitting around that they are able to access on a whim.

But luckily there are steps you can take to get rid of a small debt and achieve credit repair. If you’re in this situation, read on…

Step 1: Order your credit report to see what bad debt is reporting – Equifax and TransUnion  both provide credit reports in Canada.

Step 2: Approach your creditor or collection agency (if the creditor has assigned your debt) to negotiate a settlement to reduce the debt. You can also hire a financial professional to do this for you. Most collection agencies and creditors have discretion to settle a bad debt for as low as half of what is owed, depending on how old the debt is. If your creditor agrees to a settlement, which will likely be less than what you owe, they will want to receive payment in full.

Step 3: If the amount is still too much to pay in full, now is the time to seek financing. There are lenders who will finance people with bad credit. Avoid payday loans – they are very expensive and do nothing to help your credit. You will need to rebuild credit, so you want to get a loan from a company who reports to the credit agencies. Take a look at what you can pledge as security. Perhaps secured financing is a better bet, such as on a vehicle you own that is paid off.

Step 4: Get everything in writing. If your creditor agrees to a settlement, ask for it in writing with the date to which it will expire so it’s clear.

Step 5: Pay the debt by certified means.

Step 6: Get a letter from the creditor receiving payment acknowledging that the debt is settled in full.

Step 7: Send a copy of the letter and the proof of payment to the credit reporting agency to ensure your credit report is updated.

Step 8: Rebuild credit by taking out new credit and managing it responsibly. For example, if you take out a loan to settle your debt, be sure it’s from a lender who reports to the credit agencies and then be diligent about paying it back in full and on time every month.

A small bad debt can affect your financial standing, but credit repair is possible.

Prudent Financial Services offers personal loans that report to the credit agencies, secured loans, and more. We lend to people with good credit, bad credit, and who are self-employed.

Contact us today for a free consultation: 1-888-852-7647 or

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