How To Repair Your Credit
Today having good credit provides you with far more opportunities than buying a home or financing a car.
Common advice used to be “Never spend your money before you’ve earned it” and people could choose to live solely off their weekly paycheques. It used to be that if somebody damaged their credit they would vow to stop using credit altogether to avoid getting themselves into another mess. Nowadays though it’s hard to live without credit.
Consider how having good credit could impact you in each of the following areas:
A Mortgage: Gone are the days of buying homes for a few thousand dollars. The price of a home would be a staggering amount if you were to consider paying for it in cash. In today’s market you’ll need to rely on mortgages to finance your housing needs.
Mortgages for people with bad credit are available but having good credit will save you money and make life easier.
Transportation: Buying a car with cash is nice, but most Canadians need a loan using their credit. Having good credit will get you a lower interest rate and save you money.
Employment: Many employers will routinely run a credit check before new hires to get an idea of their income needs. If you have bad credit your employer may worry that the compensation they offer may not be enough and that you’ll leave the position once you find a higher paying job. This can decrease your chances of getting hired.
Basic utilities: Many people think electricity a basic need but it’s not considered a right. You’ll effectively be borrowing the first month of electricity and if you don’t have good credit the electric company will want a large deposit. Ditto for water, cable, internet, etc.
Dreams, Goals and Health: Loans can help get a business idea off the ground or pursue a long-term dream. There may be a time in your life or a family member’s when your savings and insurance aren’t enough to cover your health needs. Having good credit can protect you in emergency situations.
The simple analogy is that of motor insurance; if you have an accident or commit a traffic offence your next years insurance will go up, same with mortgages if you damage your credit your next mortgage loan will have a higher interest rate.
The exact method used to calculate your score is a closely guarded secret and not available to the public. The bureaus do however provide the criteria they use in their calculations.
Your score will is calculated on your payment history, how it’s been used, how long you’ve had each individual credit account for, the frequency that you apply for credit, and the types of credit. Each of these criterions have different weights.
Payment history (35% of score)
The Bureau will look at how timely you pay your bills. If you are late then how late, if any bills have gone into collection, and if you’ve declared bankruptcy. If you’re in the process of repairing your credit it is essential to pay your bills on time to show lenders that you are now a responsible borrower. It’s never too late to start fixing your credit.
How much you depend on credit (Determines 30% of score) If it appears that you depend heavily on credit for your lifestyle it will reflect badly on your credit score. Try to keep your credit card balance under half of the limit. Missing payments is very frowned upon so always pay at least the minimum payment every month.
Borrowing history (Determines 15% of score) The length of time you’ve had a particular credit account impacts your score. Having had a credit account for many years and always paying it will help your credit score.
Applying for new credit (Determines 10% of score) Don’t make multiple credit applications at the same time. Because each lender will be contacting the credit bureau for your credit history, and this will negatively affect on your score.
How you use credit (Determines 10% of score) If you use credit to pay for everything from cash advances to other type loans could adversely affect your score. Using more credit doesn’t mean a better credit score, use it wisely. Lenders want to see you use credit but aren’t dependent on it.
It’s important to pay attention to all of the above to rebuild your credit or build credit for the first time.
Your credit score is a summary of your borrowing history and is a key component for the lender to decide to grant you a loan or mortgage.
If you think you have a reasonable credit history and it’s not reflected in your credit score then maybe there is an error.
You probably won’t realise there’s anything wrong with your credit score until you try to borrow money and the lender rejects your application for a loan or only agrees to a loan at a high interest rate.
If you think that there’s errors, you should begin by giving Equifax or Transunion a call and request a copy of your credit report. Reviewing your credit report will confirm any suspicions you might have.
What are some causes for errors?
Sometimes it can be mistaken identity, a clerical error, someone with the same name as you has had their history applied to your account.
More common is identity theft. The rate of identity thefts have been on the rise and protecting yourself has never been more important. You should routinely check your credit history once a year to check for suspicious activity; the sooner you spot identity theft the easier it is to fix.
How Do I fix errors?
If you discover an error, you will need to contact the organisation that issued the original credit and file an investigation request to the credit agencies. If you feel that your concern is not being taken seriously you should contact Consumer Affairs and proceed accordingly.
After damaging your credit score it will be difficult to find creditors to lend you money or offer you a mortgage, and when you do, you won’t get a very competitive interest rate.
It’s depressing but not hopeless; if you play smart you can fix your credit in a relatively short time. So how long does it take to rebuild your credit? That depends on your starting point and your definition of a “good credit score”. Credit scores are rated on a scale of 300 to 900, with the higher number being a better score. The following will help explain how your score will impact your borrowing ability:
Credit Score of Between 300-549 It’s going to difficult to get credit and you need to continue paying your bills on time and wait for your score reaches the next level.
Credit Score Between 550-699 Getting above the 600 score is critical to getting some credit. If you’re paying your bills on time and getting your debt levels down you can get to the 600 level in quite a short time. At this stage the credit that you get will come at a relatively high interest rate because from the lenders perspective you’re still a significant risk.
Credit Score Between 700-759 At this point you will have no problem getting credit and it will be at reasonable interest rates.
Credit Score Between 760 or Higher When you’ve hit 760 or higher you’ll get the best interest rates available and your credit problems are behind you.
Your credit report will see improvements from the moment you start to pay your bills on time and lower your debt.
In Ontario bad debts on your credit bureau are deleted after 6 years and no longer appear on your record. Don’t forget the credit bureaus are legally obligated to send you a FREE credit report once per year if you ask. So ask.
Having bad credit will make getting a loan or a mortgage difficult. Credit repair takes time and commitment but it gets easier the more you understand how it works. It should be the top financial goal for everyone with a poor credit history.
Determine the root cause of your poor credit There are many causes why you might have poor credit and it’s important to identify the reasons so you can repair the problem. Bad credit is caused when you haven’t been a responsible borrower, or your your credit cards are maxed out all the time, or you haven’t paid your bills on time, or you have an unpaid outstanding loan. You should begin by obtaining a copy of your credit report from either Equifax or Transunion or both.
- Create a budget and remember to use it The key to getting control of your debt is by changing your spending habits with an itemized budget. Make a budget by drawing up a list of your monthly expenses, include your debt repayments and some for savings and then compare it to your income. You’ll need to cut costs to lower expenses everywhere you can, which could involve lifestyle changes. Without a written and followed budget, you’ll be in the dark acting on gut feeling and impulse.
- Get your debt down With a budget done you’ll know clearly what your financial situation is. It’s critical that you pay down debt to show creditors that you’re serious about paying back loans. Pay back your highest interest loans first and most aggressively because you will save money on interest. Make a payment on every debt even if it’s the minimum or just a dollar because even a payment of a dollar registers as payment and shows intent.
- Always make scheduled payments on time Show lenders that you respect them by always paying your bills on time every time.
- Keep your credit building Even after you have paid back all your debts, don’t stop using credit. It’s not enough to be clear of debt, to build your credit you need to use it. Credit is interest free if you always pay all the bill on the date specified.
Before filing for Bankruptcy consult a knowledgeable financial advisor. Bankruptcy should be used as a last resort for repaying debt. After you have filed for bankruptcy and your debts have been absolved it’s critical to start rebuilding your credit.
It takes time and commitment but if you follow our simple guidelines you will be able to get a mortgage and rebuild your credit quite quickly.
Spend less than you make You need to be very conscious of both your income and your outgoings.
Start Saving Now that you don’t have any credit, you need to have a rainy day fund for emergencies. Put some of your income into a savings account. It’s a good habit.
Always pay all your bills on time, all of the time Ensure that your bills get paid on time because any blemishes on your credit report will make it harder and it will take longer to repair your credit.
Apply for a secured credit card, not having a credit card means you can’t buy anything online, plus other inconveniences. By putting down a small deposit you can get yourself a secured credit card which works just like an ordinary one. Your spending limit is equal to your deposit or just a little more limiting the lenders’ exposure to loss.
If you fail to make your credit card payments you give the lender will take payment from your deposit. This lets lenders take the risk of lending you money while you rebuild your credit.
Get a small RRSP loan Save up the minimum and open up an RRSP. Then borrow against the RRSP and deposit it into your RRSP. Now you have $X in RRSP, which means that you’ll get a tax refund at the end of the tax year. Use the tax refunds to repay the bank. This will help you reestablish your credit. Ask your bank for details.
Managing debt and your finances can be overwhelming if you don’t know how to do it. The trick to successful debt management is knowledge, and reading this is a sign that you’re looking to improve your financial situation. To Resolve debt issues you need a definite goal, a clear plan, and a serious commitment to change.
It can be a huge help to have someone with expert knowledge help you to develop your plan to credit repair, which is where a credit counselor can help. There are some not-for-profit organizations that can help.
- They will examine your financial situation to establish your debt, your income, and where you can save.
- They will discuss your options and what is available to you based on your financial situation.
- They will aggregate all of your debts into one payment so that you only have one payment to think about.
- They will negotiate on your behalf with the Lenders that you owe money to and maybe get them to lower their interest rate or reduce some of the debt.
- Ultimately, lenders want to recover as much money as possible so they are often willing to do this.
- A credit counselor can teach you how to fix your credit, rebuild it, give financial coaching and show you how to budget so that you never fall into debt again.