Look, there's no beating around the bush: Rebuilding credit takes time and patience! Unfortunately, it can be very easy to harm your credit but very hard to build it back up—and there are no quick fixes. So, if you’re looking to rebuild your credit, for real, here are some steps you can actually take.But first, a word of caution...
We know that rebuilding credit takes time, and there are no quick fixes. So, if you see ads offering a quick fix to "repair" or "fix" your credit—and they might do this by offering a loan, which you'll never see, but you will pay for—just walk away, run, or keep scrolling (they do online ads, too). These are usually credit repair scams or a loan scam that comes with an extremely high interest rate and no guarantee of actually improving your credit.
6 Ways to Begin Rebuilding Your Credit
1. Review Your Credit Report
If you don’t know what’s broken, you can’t fix it! That's why your first step is to get a copy of your credit report from TransUnion or Equifax (it’s best to obtain both).
If you’ve never looked at your report, do it! It can be a pretty eye-opening experience. You’ll find a wealth of information there, including details about every loan you've taken out in the last six years (TransUnion might go back even further), your payment history, how much you owe, your credit limits, and more. If you get a copy and you're not happy with the rating, it could be due to any number of reasons, such as late or missed payments, your debt utilization rate (how much you owe versus how much credit you have available), or maybe you've applied for too much credit (those credit cards they offer you at malls and stores show up on your credit report too, and they're usually considered dings). The good news is, once you know the reason why your credit rating might not be so great, you can actually take action to improve it. You can request a copy of your Equifax credit history for free, here.
You'll also want to check for any errors or inaccuracies on your report—it happens! There could be a debt on there you paid off years ago but it shows up as delinquent, or maybe there's a bill that's not yours, or a loan you never applied for. If you do find an error on your report, you can file a dispute directly with TransUnion or Equifax, but be prepared; it can be a lengthy process and you'll need to produce proof of your claim. So, if you have nothing in writing regarding a debt you paid off that shows up as delinquent, your chances of getting it corrected won't be too favourable. In this case, you might want to contact the creditor directly to see if there's anything they can do on their end. And remember to get everything in writing!
2. Book a FREE Credit Building Counselling Session
Having your credit report is one thing, but the other part of your complete credit picture is your credit score, and in most cases, getting it will cost you. Unless, of course, you book a free Credit Building Counselling session with us! During this session, we'll pull your credit report (if you want a copy, you'll have to go to Equifax and TransUnion), review it with you, provide you with different options to address any issues, next steps, and we'll get your Equifax credit score too, all for free.
Now I know what you're thinking... I can get my credit score for free from CreditKarma. And while this is somewhat true, just know that when a potential lender, creditor or employer pulls your credit report and score, they're not going to CreditKarma; they're going to the official credit bureaus, which in this case are Equifax and TransUnion. So your best bet is to get your actual credit score from them too, if you want to know where you really stand.
3. Get Your Accounts Up To Date
One of the biggest factors affecting your credit score is your payment history; it makes up 35% of your score. While it’s impossible to turn back the hands of time and make payments, you can get them up to date now and start improving your credit situation. If you’re financially unable to make the monthly payments as they currently stand, it might be worth contacting your creditors directly to see if you can negotiate a repayment plan that works within your budget. (And remember, get it in writing!)
Also, remember to focus on bad debt first. Bad debts are those you’ve acquired by purchasing items that aren't expected to appreciate in value over time. This includes credit card debt, personal loans, and long-term auto loans. On the other hand, good debts are those attached to something that's expected to grow in value, such as a home or an education fund. Of course, you need to maintain your payments on good debts too, but bad debt should be your focus if you want to repair your credit. Plus, paying these down first is a win-win: lenders like to see less of them on your report, and they're likely to have the highest interest rates too, so paying them off will save you money.
4. Get a Secured Credit Card
One of the best ways to begin restoring your credit is with a secured credit card. A secured credit card is used just like other credit cards, except that you deposit money on it as collateral (usually $100-$500). This deposit assures creditors that you will pay back the money you borrow. When you use the card to make a purchase, the purchases are not deducted from the deposit; instead, you’ll be expected to repay the amount just like a regular credit card. If you make your payments on time, this shows lenders you can be trusted and also reflects well on your credit report. In time, you can request that the secured card be upgraded to an unsecured card to further boost your score. Just be sure to make those payments on time!
5. At Least Make the Minimum Payments (on time!)
If you’re not making your payments on time each and every month, your credit rating and score will not improve. (This includes non-credit card bills too; a missed hydro payment, for example, can also be reported to credit bureaus.) In an ideal world, you would be paying off the balance in full every month, making your payments on time, of course. But the reality is that most of us can't always do that. Instead, try making at least the minimum payments on time, which will help keep your credit report clear and your credit score healthy as you begin to establish a reliable payment history.
To make sure you don’t forget a payment, you can set reminders on your phone or mark your calendar—whatever works for you. Just make sure you send your payments a few days before your monthly payment due date. And if you’re mailing in cheques, try to send them at least a week in advance.
Of course, you can also set up automatic payments that pull money directly from your bank account. While this is great for people rolling in dough, it can hurt the financially strapped when there’s not enough money in their account to cover the withdrawal. This results in non-sufficient fee (NSF) charges, which can add up if you continue using the card and forget about the automatic withdrawals.
6. Develop Better Money Habits
It can be difficult to change your ways if you stick to your old habits. So if you’re serious about improving your credit, it’s good to create a budget that accurately reflects how much you earn and how much you spend. With a budget, you’ll know how to live within your means, and you’ll be able to manage your money better (download our free Budget Tracker to help) and start saving for goals that are important to you. Another benefit is that if you don’t have enough money to cover your expenses, you can use your budget to prioritize your spending. If you really want to get your finances on track, consider cutting back on some things for a while or downgrading to less expensive purchases and food options. (Our Budget Calculator can help you see how much you can save by cutting out a few items.) We’ve written a couple blogs on the matter too:
How to Shop for Meals on a Budget
11 Bad Spending Habits You Need to Break
Most people don’t intend to fall behind financially. Emergencies come up, a bill slips our mind, life happens. But if you’ve done everything you can to improve your financial outlook and still find yourself struggling, Credit Canada can help. We're a non-profit organization, and we have certified counsellors standing by. Give us a call at 1.800.267.2272 and we'll book you a free counselling session. We can even help get you enrolled into a Debt Consolidation Program if that's your best option. We're always happy to help and it's just one phone call away.