Rebuilding Credit

Your credit rating is important. Whenever you want to take out a loan, there’s a good chance that the lender will take a look at your credit report. If you have bad credit (or no credit) it is very tough to get a loan or to get a favourable interest rate when you do.

Therefore, improving a bad credit rating is important. However, most people don’t know what information is included in a credit report, so that makes it difficult to work on building a good score. Here are some tips that will help you rebuild your credit rating.

This is important to state right away: There is no quick or “instant” way to “fix” your credit report, unless there is an error in your report to begin with. If any companies promise you that, for a fee, they can improve your credit report quickly, don’t trust them.

The only way to improve your credit is by showing lenders that you reliably borrow reasonable amounts of money and pay these amounts back on time. You need to be able to do this consistently over a period of time, which means that your credit score can’t be fixed overnight.

As mentioned, the only way to “fix” your credit report quickly is if there are errors in your report to begin with. Some companies will want to charge you to correct errors in your report, but you can do this yourself if you’d like to.

Credit reports in Canada are maintained by the two major credit bureaus in this country: Equifax and TransUnion. Both bureaus will mail you a copy of your credit report for free if you request it. They also provide instant online copies for a fee.

Errors do happen, so it’s important to check. Sometimes a loan is entered incorrectly into your report, or a loan isn’t removed when it’s repaid. Sometimes, someone may have entered another individual’s information into your report! This can happen (for example, John Smith of Toronto, ON could be mixed up with John Smith of Oakville, ON) so it’s a good idea to verify that everything in your report is accurate.

If you find an error, both TransUnion and Equifax have processes for reporting and correcting errors in your credit report.

Outside of correcting errors, the only way to improve bad credit is by following good credit habits. This means that you will need to pay your debts on time. If you miss payments or make payments late, this is noted on your credit report. Contact your creditors and see if there is a way to modify your payment plan if you cannot pay your debts on time.

Information eventually falls off of your credit report over time (it takes approximately seven years or so) so, eventually, if you start following good credit habits and repay your loans on time, the bad information will disappear, leaving you with only a good credit history.

Establishing good credit requires borrowing money and paying it back on time. However, if you have no credit (for example, if you recently filed for bankruptcy) you’ll probably find it difficult to get a loan or a credit card in the first place. If this is the case, a secured credit card can be a good idea. With these cards, the financial institution holds your money as a security deposit while you use the card. For example, if you put down $500 as a security deposit, you can get a $500 secured credit card. You can use this card just like any other credit card to make purchases. If you use the card and pay your bills on time, eventually your credit rating will improve.

Keep in mind that a secured credit card is very different from a prepaid Visa or Mastercard. A prepaid card is like a gift card. It does not have a credit limit that changes as you use it and activity on these cards is not reported to credit bureaus, so it has no affect on your credit rating.

Having a lot of debt can also affect your credit score. Lenders do not like to see that you have “maxed out” your accounts. This means, if you have two credit cards with a combined limit of $10,000, for example, you don’t want to have a combined balance of $9,000 on these cards.

Aim to reduce your debt to less than 75% of the available balance (this means owing $7,500 if you have a credit limit of $10,000). If your balance owing is less than 50% of the available limit, that’s even better and less than 30% is optimal. Reducing the amount you owe means repaying your debt without adding on any additional debt. This could mean living without using your credit cards for several months (while continuing to make payments). You’ll need to create a budget and stick to it if you want to be able to afford all of your expenses without using credit cards.