If you have a bad credit history, whether it’s from a previous insolvency or a series of youthful mistakes, don’t worry. This is not a life sentence! Various tools are available to restore your credit report, which will increase your score and allow you to obtain credit on favorable terms.
To rebuild your credit report, you must create a new track record that shows that you are able to pay your accounts as well as your debts while respecting the established deadlines. So you have to go find new credit and repay it properly to show your creditors that they can trust you.
This article was written in collaboration by Pierre-Antoine Blain and Vanessa Fiorito, financial reorganization advisors at Pierre Roy & Associés
Before starting the process, it is very important to check your credit report in order to detect potential errors and have them corrected. This will allow your future creditors to review your credit application while analyzing up-to-date information that reflects your current financial situation.
To do this, you will need to start by obtaining a copy of your credit report from the 2 credit bureaus in Canada, Equifax and Trans-Union. Their respective websites are very good at how to get a free copy of the report in question. Not many people know this, but these bureaus are in fact personal information agents: they bring together the information submitted to them by the various banking institutions and service companies. It is therefore not guaranteed that all the information relating to your accounts as well as your debts will be found there, it depends entirely on the information transmitted to them.
For this reason, it can be difficult to make corrections if errors have crept into your file. If the credit bureaus are not cooperating with you, the Commission d’accès à l’information du Québec can help you make the necessary corrections to your credit report so that it reflects your financial situation. Details can be found on their website at the following address (available only in French): https://www.cai.gouv.qc.ca/questions-frequentes/les-dossiers-de-credit/
It is important to note that verifying the accuracy of the information contained in your credit report is essential since in 80% of cases, there are errors! These could be a problem to obtain new credit or to qualify for rent. In 90% of cases, incorrect entries can affect your credit score downward. It is therefore necessary to contact the credit bureaus in order to rectify them.
To learn more about how the credit file works as well as all the elements that make it up, we invite you to consult a very complete document prepared by the Financial Consumer Agency of Canada: Understanding Your Credit Report and Credit Score (PDF)
As mentioned earlier, we need to create a new credit history in order to demonstrate to our future creditors that we are trustworthy. That being said, it can be a bit difficult to get credit when we have a bad credit history. That’s why the first step is to apply for a secured credit card, so for which you must return a deposit to the bank as security or collateral. The latter will keep it in order to reduce the risk related to credit and over time, the sums could be returned to you following a history of good payments. The credit limit of the card may also be increased.
Several companies offer secure credit cards, for example:
- Capital One
- Rogers Bank (Chatr)
- Refresh Financial
- Home Trust
- Banque TD
In the case of Capital One, their website indicates that the approval of the card is guaranteed as long as 4 conditions are met. Of these, you must not have an account that was not in good standing within the past year. So if you have filed for bankruptcy, you can apply within a year of your discharge. In the event of a consumer proposal, it will be necessary to wait at least one year after the filing of the procedure to make the request.
According to our research, although the Mastercard offered by Tangerine Bank is not “secured”, its approval rate is higher than the average for other financial institutions.
It is suggested that you only have one credit card and pay it off regularly before the end of each month. Of course, it is always best to use the card within your monthly budget to pay off the balance in full. Thus, you will have a good credit rating and your budget will be well balanced. This also helps prevent the accumulation of interest to be repaid on a residual balance on the card.
As a general rule, never use more than 30-35% of your available credit limit. This will help you demonstrate to your creditors that you are not dependent on credit and that the majority of your income is for non-credit expenses.
In order to continue to accumulate good credit, we suggest that you consider obtaining a secured loan from a financial institution such as a bank. This will also be guaranteed by a deposit and will appear in your credit report. The repayment according to the established terms will have the effect of giving a good credit rating to the loan in question and will allow you to increase your score.
A good strategy is to apply for the smallest amount offered by the bank, and then to repay the amounts according to the established agreement. Once the loan is repaid, go back to your institution and request a new one. Do this to get 3 or 4 secured loans in a row. Thus, your future creditors will see that despite your negative credit history, all your most recent transactions have a very good rating and that your score will be greatly improved! It will then become easier to obtain unsecured credit and benefit from favorable interest rates. You can also consider the possibility of making a larger purchase such as a car or even a property.
For more information on credit you can refer to Canada Credit Counselling.
There is no magic formula to rebuilding your credit report. The key is to get new credit and pay it off in order to create a positive payment history. This takes time and thoroughness and cannot be done by anyone other than you.
This is why you should be careful when some companies say they can rebuild your credit report for you! Many of them promote that they can help you get rid of bad credit bureau debt and even increase your credit rating for you.
Most of these companies offer the following services:
- Analysis of your credit bureau
- Improve your credit rating
- Remove negative items
- Remove negative mentions
The monthly cost of their services ranges between $50 and $150 per month. They start with getting a copy of your credit report. Then, they execute their strategy to remove the so-called negative mentions. Often times, they get the services of lawyers to put pressure on the credit bureaus.
You have to be careful since most of the time, only prescribed debts can be removed from credit reports! You can complete this step yourself without the help of a lawyer.
Negative mentions are often caused by poor financial management or by negligence in paying off your debts. So the records must remain in order to demonstrate the history and status of the debt in question. This entry will appear on your credit report as long as you have not made a payment agreement with your creditors or have not filed legal proceedings to settle your debts, such as a consumer proposal or a bankruptcy. Once released, the time to register for a first bankruptcy with the credit bureaus is 6 years for Equifax and 7 years for Trans-Union. A consumer proposal remains on the credit file for a period of 3 years after its full execution.
Some of these companies also offer a loan service, including mortgage loans. Pay special attention to the terms of the loan and especially the interest rate! Some of them offer commissions to their representatives for the sale of small loans with high interest rates. Others will sell you a product like a tablet, for example, to keep track of your credit report. There could also be hidden fees as well as conditions to the use of high interest loans.
Just having a secure credit card and putting it to good use will go a long way in rebuilding your credit, even after bankruptcy or a consumer proposal. In addition, any form of savings or investment will have the effect of lowering your debt ratio. This is an increasingly important factor when analyzing your financial situation by banking institutions.
Good companies will take the time to analyze your situation and explain how credit bureaus work. However, the reality is that their services are not necessary since you can do all the legwork yourself for free. It will take a little patience, but you will get there!