Credit Repair 101: How to Fix Bad Credit in Canada

Your credit score can be an enormous deciding factor when it comes to qualifying for certain financial services and interest rates. However, for many Canadians, building a good credit score can seem unattainable. We’re here to say otherwise.

You might think you need to spend a lot of time and effort on your credit-building strategy. Although having a low credit score could impact your ability to buy a home, get an auto loan, or qualify for a line of credit, it’s something you can change.

Knowing how to improve your credit score is a great skill to have, especially when you have financial goals that require a good credit score, like getting approved for a business loan or a mortgage in the future.

So, let’s take a look at some of the things that can lower your credit score, how to repair bad credit, and how long it takes to rebuild credit. (Spoiler alert: It can take a while.)

The Importance of Strong Credit in Canada

It might seem like your credit score is just a number; however, that number can make a big difference in your life in more ways than you may realize. When you have a solid credit score, you’ll enjoy benefits like:

• Access to credit cards with lower interest rates, cash back, and other perks.
• Access to better housing opportunities if you rent and lower mortgage rates if you buy.
• Better car insurance rates.
• Not having to pay a security deposit when you connect utilities.
• Better loan terms.
• Higher credit limits.

If you haven’t taken a long, hard look at your credit before, you might not be sure what exactly “good” credit means. Different lenders have different criteria, but generally speaking, the categories of credit can be broken down this way:

• Excellent: 760 and up
• Very good: 725–759
• Good: 660–724
• Fair: 560–659
• Poor: Under 560

The journey of building or rebuilding credit can be long. If you start to get discouraged, think of the great benefits you’ll enjoy once you reach your goal.

How Easy Is It to Lower Your Credit Score?

Credit bureaus look at a lot of factors when calculating your credit score.

A credit bureau compiles data on consumer creditworthiness from different sources, including banks, credit card companies, credit unions, and collection agencies. Then they pass that information to lending organizations, such as banks, when a request for credit has been made by the consumer. The lender will look at the consumer’s credit score (as well as their credit history) which represents just how “creditworthy” the consumer is.

Anyone with a low credit score might feel pressured to learn how to improve their credit score fast. A higher credit score often means the difference between getting a loan and being declined—or even getting better terms on the loan that can make it more affordable, such as a lower interest rate.

But, how easy is it to lower your credit score? It can be as simple as:

• Failing to pay bills on time. If you miss bill payment dates or eventually get your account sent to collections, that information will appear in your credit history—dragging down your credit score. This is one of the major factors credit bureaus look at to assess creditworthiness.
  
  
• Running too close to your credit limit. If you have a high utilization rate, it will impact your credit score. Utilization rate is the ratio of how much credit you have available compared to how much you’ve used. So, if you had $10,000 of available credit, and used $3,000 of it, your utilization rate would be 30%—which is considered good. A utilization rate over 50% may harm your score.
  
  
• Not using any credit. If you haven’t been borrowing for long, that could impact your credit score all on its own simply because there’s not much information available to determine your creditworthiness. The only real fix for this is time. The longer you spend building a good credit history—which can include having a credit card or cell phone bill in your name that you pay every single month on time—the better. 
   
• Having many hard inquiries. To somewhat oversimplify it, a hard inquiry is what happens when you apply for a loan or a new credit card and the lender reaches out to the credit bureaus to check your credit report. Having many hard inquiries over a short period of time could lower your credit score. However, checking your own score (a soft inquiry) does not impact it. We recommend checking your credit score at least once a year to check for errors and look for opportunities to improve your score.
  
  
• Using credit cards irresponsibly. One of the benefits of credit cards is that you can rely on them if you get into a financial pinch. However, if you make a habit of doing so, you may look irresponsible to lenders, and your score is likely to drop.
  
  
• Being the victim of identity theft. If scammers get hold of your information, they can open credit accounts in your name — and then run them up. Until a credit reporting agency is made aware of the issue, those fraudulent accounts will impact your score. This is one reason why it’s so important to regularly review your credit report.
  
  
• Declaring bankruptcy or filing a consumer proposal. Bankruptcy or consumer proposals can be a great way to get a fresh start, but it can have a major negative impact on your credit score, at least temporarily.
  
  
• Defaulting on loans. If you take out a loan and can’t repay it as agreed, that’s a red flag to lenders.
  
  
• Errors on your credit report. Credit reports are generally accurate, but they aren’t perfect. Sometimes, incorrect information causes your score to drop. It’s wise to periodically check your credit report to make sure everything is accurate.

Can You Fix Your Credit Score?

“Fixing” your credit score might not be the most accurate term. It’s more like “rebuilding” your credit and improving your credit score over time. 

Technically, you can’t “fix” your credit information; once it’s there, it’s there for a while. If the information in your credit report is accurate, you cannot change or remove it from your credit report. 

If the information on your credit report is inaccurate—for example, say there’s a loan on your credit report that has been paid in full but is appearing as though it’s in arrears—you can petition to have the error removed.

However, if you really did miss payments and it got reported to the credit bureaus, then no service can remove that information from your credit history for you. 

So, can you fix your credit? 

Technically, no. But you can rebuild your credit by creating a positive credit history. 

Beware of Credit Repair Scams — Warning Signs

Many people who have not-so-great credit scores (anything above 660 is considered “good” by most lenders) might research how to fix a bad credit score, only to get hit with a credit repair scam. These organizations often offer the impossible—saying they know how to fix bad credit instantly and remove negative information from your credit report—which can't be done.

Here are some of the main warning signs of a credit repair scam:

• Charging a large fee upfront.
• Promising to remove negative (but accurate) information from your credit report.
• Telling you to avoid contacting credit reporting companies.
• Refusing to explain your rights.
• Suggesting that you falsify information or adopt a new identity.

If you’ve ever heard the saying, “Nothing worth having comes easy,” the same can be said for building good credit. It can take some time to build, but once you have good credit, it’s definitely worth maintaining.

Enhance your credit score with our Credit Building service. We offer personalized strategies to help you achieve your financial goals. Discover More now.

How Long Does It Take to Rebuild Credit Following a Drop?

If you’re wondering how long it takes to rebuild your credit, you’re not alone. The amount of time it takes to rebuild your credit and increase your credit score depends on your credit profile, which can be very specific to each consumer.

These are some of the main factors that impact the speed of credit repair in Canada compiled by Richard Haggins, Sr. Education Facilitator at Credit Canada. 

• Payment history: Making your payments as agreed and on time is the single most important factor in improving your credit score. Delinquencies, collections, and other negative items significantly hurt your score. 
• Credit utilization ratio: The ratio of your current credit card balances to your credit limits. Keeping this ratio below 30% is generally recommended, and the lower is better.
• Length of credit history: The age of your oldest account, the average age of all your accounts, and how recently you've opened new accounts. The longer your credit history, the better your credit score usually will be. 
• Types of credit accounts: A mix of different types of credit accounts (e.g., credit cards, mortgages, installment loans) can positively influence your score.
• Recent credit inquiries: Hard inquiries from new credit applications can slightly lower your score.  However, multiple inquiries in a short period of time can have a significant negative impact.
• Credit report errors: Incorrect information on your credit report can hurt your score.
• Negative information age: Negative items (late payments, collections, etc.) lose impact over time. As these items age, their influence on your score diminishes.
• Utilizing credit responsibly: Regularly using and responsibly managing credit over time builds a positive credit history.
• Credit limit increases: Asking for credit limit increases can improve your credit utilization ratio, provided you don’t increase your spending accordingly.
• Settling or negotiating debts: Settling debts for less than you owe can still negatively impact your credit, but paying off debts, even negotiated settlements, can eventually lead to score improvements.
• Credit counselling or debt management plans/debt consolidation programs: Participating in these programs can sometimes positively influence your credit if they help you manage and reduce your debt effectively.

Also, certain activities can lower your credit score more than others. For example, missing a payment or being late on a single payment won’t affect your credit score as much as your account being sent to collections for multiple missed payments. 

Filing for bankruptcy or a consumer proposal will also lower your credit score temporarily, but you can still rebuild it. It might take a few years to build up your credit slowly after an insolvency, but with consistent on-time payments, you can start to see some improvement. 

How long does a bankruptcy take to no longer appear on your credit report? In most provinces, a bankruptcy no longer appears on your report after 6 years following the date of discharge. In New Brunswick, Ontario, Newfoundland, PEI, and Quebec, a bankruptcy will stay on a consumer's TransUnion credit report for 7 years after the date of discharge.

If you declare bankruptcy more than once, the bankruptcies will stay on your report for 14 years.

While you can engage in credit-building activities to help restore your credit, negative activity can weigh down your credit score until it finally no longer appears in your report.

The good news is that enough positive information can outweigh the impact of negative information in your report. So, even if you can’t get to a “great” credit score right away, you can start rebuilding your credit immediately by creating positive credit information in your report, which will eventually lead to a good credit score with some time and effort.

6 Ways to Begin Rebuilding Your Credit

Restoring your credit can do wonders for your financial health. But if you’re like many Canadians, you might not know where to start. Here’s how to begin rebuilding your credit — or start building it up for the first time.

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). You can request a copy of your Equifax credit history for free here. Be sure to get your credit report directly from these credit bureaus so you have a complete and accurate picture of your credit history and current financial standing.  

Review the report for the following:

• Late or missed payments
• Your debt utilization rate (how much you owe versus how much credit you have available).
• All open accounts (those credit cards they offer you at malls and stores show up on your credit report too).

You'll also want to check for any errors or inaccuracies on your report. 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. Unless, of course, you book a free Credit Building Counselling session with us! During this session, we'll pull your credit report, 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.

Ready to start rebuilding your credit? Contact Credit Canada to get started. Our credit counselling services are confidential, non-judemental and free.

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. 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. 

You can also set up automatic payments that pull money directly from your bank account. If you are not financially stable, however, this can result in non-sufficient fee (NSF) charges, if there is not enough money in their account to cover the withdrawal.

4. Have a strategy to pay off debts

Consider the snowball or avalanche method to help you prioritize payments. In the snowball method, you’ll put as money money as possible on your smallest debt while paying minimum payments on the rest. Once it’s paid, add that amount to the next highest debt, and so on.

In the avalanche method, you’ll focus on paying off the highest interest debt first while maintaining minimum payments on the rest. Once it’s paid, add that amount to your debt with the next highest interest rate and so on.

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!)

5. 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!

6. Develop Better Money Habits

It can be difficult to adopt new habits but 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 understand how to live within your means, and you’ll be able to manage your money better 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. You may also want to 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.) 

7. Keep Your Credit Utilization Low

Even if you pay your bill on time every month, consistently keeping high balances on your credit cards will harm your score.

If your credit cards are routinely almost maxed out, creditors might think you have trouble repaying. Do your best to keep your credit utilization (both on each card and in total) under 50%. If you can keep it below 20-30%, even better.

8. Don’t Shut Down Your Accounts (or Open New Ones)

Some people pay down their debts and then close their credit card accounts, thinking it will help them avoid the temptation of racking up more debt. That may be true, but when you’re trying to rebuild your credit, shutting down existing accounts can harm your credit score.

The total length of your credit history is an important part of your score. Once you close down an account, it won’t show up on your report. Your credit history can then look shorter, causing your score to drop.

Another important consideration is credit utilization, as mentioned above. Only using a small percentage of your total credit looks good to lenders. If you shut down an account with available credit, your credit utilization will increase, even if you don’t actually incur any additional debt.

Common Credit Repair Mistakes to Avoid

Repairing your credit can take a long time, even when you do everything right. Making mistakes along the way can prolong that timeframe even further. 

When you’re rebuilding credit, maintaining a perfect repayment history is absolutely necessary. Some credit-reporting agencies rate your credit history on a scale of 1 to 9 depending on how on-time your payments are. “Equifax will rate an account at the best rating of 1 if it is, in their words, ‘paid as agreed and up to date.’ So there's the simple formula for rebuilding credit:  Pay what you owe, and get the money there on time,” says Haggins.

Other common pitfalls include:

• Not regularly checking your credit reports and ignoring errors.
• Closing old accounts.
• Maxing out credit cards.
• Applying for new credit.
• Only making minimum payments and not having a plan to pay down debt.
• Falling for credit repair scams and unauthorized credit use.
• Having no emergency fund to prevent reliance on credit for unexpected expenses.

The more you know about what to do (and what not to do) when it comes to repairing your credit, the more successful you’re likely to be.

How Credit Canada Can Help Rebuild Your Credit

Building good credit can feel like a lonely journey, especially if you aren’t entirely sure what steps to take. Regularly checking your credit report, fixing delinquent accounts, and building better money habits are great places to start, but sometimes, you might need a little more guidance.

Fortunately, this isn’t a journey you have to make alone. At Credit Canada, we’ve been helping people find relief from debt and rebuild healthy credit for more than 50 years. As a non-profit agency, we offer free credit counselling, low-cost debt relief, and other resources to help Canadians rediscover financial wellness — or find it for the first time.

Need help and advice on building your credit, improving your credit score, or getting out of debt? Reach out to Credit Canada today to get support! Call us today at 1-800-267-2272 for a free consultation with one of our Credit Cousellors.