How to Rebuild Your Credit

Poor or bad credit can close doors for you when you’re trying to qualify for loans.  Often you end up having to settle for less than desirable terms such as higher interest rates or insurance premiums.  Some employers even check credit reports before deciding to hire someone.

Rebuilding your credit doesn’t have to be a complicated process, whether you’ve been through bankruptcy, divorce, or just made a few of your own financial mistakes.  Starting with a simple step-by-step plan you’ll soon be on your way to improving your credit rating.

  1. Check your credit report. The first thing to do is find out where your current credit rating is.  Once you have established your current credit standing, developing a comprehensive plan of action to improve on it will be easier to create.  There are two main credit bureaus in Canada: Equifax Canada and TransUnion Canada and you can ask for a free copy of your credit file by mail or for instant access you can pay a small fee.
  2. Bring all of your accounts up to date. The largest factor which can affect your credit rating is your payment history of your accounts.  If you’ve consistently missed payments or been late paying your accounts, you won’t be able to improve your credit rating.  Simply contacting your creditors and making a payment arrangement plan will set you in the right direction.  Always be upfront and let them know your situation and how much you can pay and for how long.  In many cases, it’s possible to work out an arrangement which everyone can live with.
  3. Moving forward, pay your bills on time. Establishing a reliable payment pattern is essential to rebuilding your credit.  If you have to, set up automatic payment withdrawals to avoid any missing payments in the future.  Having a cell phone is one of the easiest ways to build or destroy credit, so always make sure that these bills are paid on time as this information is reported to the bureau.
  4. Avoid closing credit card accounts. Remember, the longer your credit history, the better your score.  Depending on your situation, if you have to close an account, try to keep the longest running accounts active so that you have a substantial credit history on your side.  However, be aware of any inactive credit accounts, for example, a renewal card intercepted for fraudulent reasons which had not been noticed, as this can also contribute to a negative impact on your credit rating.
  5. Pay down debt. Credit utilization is the second most important factor in your credit score.  Essentially, it is a percentage of the amount of available credit you have used out of all available credit.  For example, if you have $10 000 and you are using $7 500, then your credit utilization is 75%.  Create a plan to pay any of the debt down a little faster, preferably, 30% or less to improve your score.
  6. Secured credit card. If you’re having troubles qualifying for a regular credit card, then a secured credit card will help to boost your overall credit rating because it requires that you keep money in a linked savings account as “collateral” and your payments are reported to the bureau every month so it makes a big difference by showing that you make payments regularly.  It’s one of the best ways to build a credit history.  Don’t confuse this with a pre-paid credit card which does not contribute to your credit and is not reported to the bureau.

 Always remember, if you’re still unsure about your own situation, to contact a professional credit advisor to help you develop a plan suitable for your needs.  You can find more information from the Financial Consumer Agency of Canada.