5 Steps to Re-Establish or Fix Your Credit in Canada

How to Fix Your Credit Score (Rating) Yourself

If you have poor credit, you can fix it, but it can take time, even years. Therefore, we prefer to talk about this process in terms of re-building or re-establishing your credit rather than simply “fixing your credit.”  Fixing sounds like a quick process, but there is rarely anything quick about it.

How to quickly “fix your credit”

If the problem is a low credit score (or credit rating), caused by one of these two issues, then here is how you may be able to fix it quickly:

1. Reduce your credit card or line of credit balances to below 75% of your limit. If your low credit score is due to having maxed out credit cards or very high balances on your revolving debts (e.g. line of credit or credit cards), this can be fixed as quickly as you can bring your balances owing, down to below 75% of your credit limits (below 50% is best). About a month after you pay down your balances (and keep them there), your credit score should rebound as long as you don’t have any other negatives against you, like late payments.
   
   
2. Get collections removed from your credit report. If your credit score is being held back because of collections reporting on the public records section of your credit report, you may be able to revive your flagging credit score by paying off the collections and then requesting that those creditors remove their collection notations from your credit report. The type of collections that appear under the public records section of a credit report are things like unpaid utility bills, cable bills, telephone bills, cell phone bills, parking tickets and other debts that are in collections that weren’t originally a credit account.

You can quickly find out if either of these two issues is causing you problems. Simply request a copy of your credit report along with your credit score to find out.

If you have more problems on your credit report than the two mentioned above, then there is no quick fix for your credit score. Your credit will need to be re-established. It will take time for you to rebuild it, but it can be done. Below we discuss five steps to help you rebuild your credit.

5 Steps to Rebuilding Your Credit Score

1. Identify why you have a credit problem

If you obtain a copy of your credit report along with your credit score, you can find out if you have bad credit. Knowing that you don’t have good credit is not enough. You need to know why you have bad credit.

For many people their credit problems may have been brought on by circumstances largely beyond their control like an injury or illness, unemployment, reduced income, or a separation or divorce. If this is what has happened to you, then skip ahead to point number 2. If you aren’t exactly sure why you have credit problems, then read on.

Some people focus on “easy” credit solutions like declaring bankruptcy and don’t take the time to figure out how they got into a financial mess until they are facing the prospect of a second or third bankruptcy. It is important to figure out why you got into the trouble you are in so that you can learn from your mistakes and not repeat the same mistake twice.

If you can’t figure out why you are having financial or credit problems, speak with someone who can help you. Talk with a trusted friend or family member, a Financial Planner or a Credit Counsellor.

2. Create a spending plan

One of the key reasons that so many people end up with credit problems and low credit scores is they haven’t made a spending plan, or if they have, they haven’t followed it. A spending plan is another name for a budget. If you really want to fix your credit and maintain good credit going forward, you have to have a spending plan or a budget. Without one, you will likely spend more than you earn and end up in trouble. Click here to learn how to create a budget.

There is one critical part of a budget that many people overlook, and that is allocating some money every month to a separate savings account. You need to do this even if you are up to your eyeballs in debt (if you are drowning in debt, click here for help). If you don’t have any savings, what will you do when the next “emergency” or unplanned expense pops up? Will you put it on credit? Unplanned expenses happen all the time. It is part of life. If you don’t have any savings, it will be extra hard to get out of debt.

To begin your savings, put aside a few hundred dollars and then work up to $500 and eventually $1,000. If this seems like a lot of money to keep in savings, think about how much emergency car repairs or home repairs could cost. How much would an emergency trip to visit an ill family member cost? Hopefully you can see that having some savings on hand is critical to staying within your budget and getting out of debt (we’ll talk more about getting out of debt under point number 3).

3. Deal with your debt

Pay down your balances
Once you have a spending plan or budget in place, you can look at dealing with your debt. The best way to deal with debt that is causing credit problems is to start paying it off. Click here to learn about ways of paying off debt more quickly. If you are using 75% or more of your limit on any of your credit cards or line of credit, than you should focus on paying down your debt as quickly as possible. When you use 75% of more of any of your credit limits, it negatively impacts your credit score. Paying your credit cards down to below 50% of their limits will really help your credit score the most. This will also help your budget since you will be paying less interest.

Catch up your late payments
If you are late on any payments, do your best to catch up. If you don’t catch up your late payments, then they will continue to report on your credit report as being overdue. This will make your credit report look worse and worse over time. If you can’t make up the missed payments, call your creditors and see if they can work with you to get things back on track. If you can’t get caught up or if creditors will not work with you, contact a non-profit credit counselling service to help you get your situation straightened out. Credit counselling organizations can offer debt repayment programs that will help you pay off your debts with one affordable monthly payment, and then at the end of the program, you get to re-establish your credit rating with a clean slate. This option isn’t for everyone, but it helps a lot of people re-establish their credit much more quickly than any other credit fixing option can.

Can bankruptcy fix my credit?
If you have exhausted all of your options and a reputable Credit Counsellor has told you that bankruptcy is your only option, then you can go bankrupt to fix your credit. Unfortunately, many people don’t speak with a Credit Counsellor before choosing this option and end up regretting this choice. Bankruptcy should only be used as a last resort. It is also the slowest way to fix your credit. The whole bankruptcy process can end up impacting you negatively for 8 to 10 years and may not deal with all of your debts.

The longest that negative information can stay on your credit bureau
If you don’t go bankrupt, the longest time that most negative information is allowed to stay on your credit report is 6 - 7 years, depending on which province you live in. For bankruptcies, it’s 6 – 7 years after you’ve been discharged and judgements can be renewed for up to 10 years, if someone has obtained a judgement against you. For example, if you had a string of late payments on a credit card, but then you began to make your payments on time and continued paying on time for six years, then after 6/7 years, all record of those late payments should be erased from your credit report. As far as anyone is concerned who reads your credit report, those late payments never happened. If the late payments continue to show after 6/7 years, you should contact the credit bureau company that is reporting the old information and request that they stop reporting it. They are required to look into the matter and follow up on your request if they are reporting any derogatory information that is more than 6/7 years old.

What if I can’t go bankrupt?
If you are in a very difficult financial situation and bankruptcy is your best option, what do you do if you can’t afford to go bankrupt? There are two types of people who can’t go bankrupt: those who can’t afford the $1,500 to $2,000 bankruptcy fee, and those who earn too much money or have too many assets to qualify for bankruptcy. If you earn too much or your assets are worth too much, meet with a Credit Counsellor to work out a plan for repaying your creditors. If you can’t afford the bankruptcy fee, than you can essentially do the same thing as going bankrupt by doing nothing. If don’t make any payments on your debts for 6 full years, then by law, your debts will no longer be collectable. You will essentially be free of them. This option should only be considered by those who are in a desperate financial situation and cannot afford to pay their debts. Creditors will not let someone who has a job or owns any assets get away with this. If you have a job or assets, creditors can take you to court and seek a judgment against you. If a judge agrees with them and grants a judgment, it is good for 10 years and can be renewed for another 10 years thereafter. So if you are looking for an easy way out, don’t look at this option. However, if you are in a really bad financial situation, than this option could make sense, and you could rebuild your credit after waiting 6 years. Just make sure that you write letters to your creditors and inform them in writing that you only wish to be contacted in writing. This will stop their collection calls, and then they will only send you letters in the mail. This will work until your debts are sold to collection agencies, then you will have to write them letters as well. Otherwise they will call you too.

4. Make your payments as agreed

Once you have caught up your late payments and are now paying your debts on time, it is important to continue paying as agreed (on time) if you want to re-build your credit. This is the simplest way to restore and maintain good credit—just make your payments as agreed. Pay on time every month, and work at paying down your balances and everything else should take care of itself. It really isn’t any more complicated than this.

When it comes to paying your bills on time, just remember that computers keep track of your payments, not people. If you are late, there are no excuses. Computers are ruthless when it comes to keeping track of things, and you can’t argue with them. Always pay your bills two or three days before they are due just in case there is a delay in your creditor receiving your payment.

5. How to re-establish credit

Once you get started fixing your credit, don’t wait until all of the negative information on your credit report falls off before you try to re-establish your credit. Some people get themselves into a situation where they end up with no active credit—only debts that they have paid off. If you have paid off all of your debts, and none of your past negative information is reporting on your credit bureau, you will have no credit score (or a negative score) unless you have at least one active credit account reporting. Without an active credit account, the computers that calculate credit scores can not generate a positive credit score for you because they can’t evaluate how you are currently using credit. This is why it can be a good idea to have at least one credit account (this can be a credit card, line of credit or overdraft) that you maintain responsibly at all times so that the credit system can create a positive credit score for you.

If you are in the process of fixing your credit by paying your credit cards as agreed and waiting for time to pass, it may be a good idea to get one credit card or an overdraft account so that it can report on your credit bureau. This way when the negative information falls off your credit report there is a history of good information which can instantly give you a good credit score once the bad stuff is gone.

If you still have negative information on your credit report, than you will most likely have to apply for a secured credit card or secured overdraft account. With a secured card or secured overdraft, your financial institution will hold your money as security for your credit limit. This way if you fail to make your payments, they will just close your account and pay it off with your money that they are holding on to. If you are interested in checking out something like this, check with your bank, your credit union or with the major credit card companies to see if they offer something like this. We discuss this option in more detail on our “Establishing Credit” page.

You can also re-establish your credit by taking care of your credit issues then have someone co-sign a loan, credit card or overdraft for you. This person must of course qualify for additional credit on their own. If you have someone who is willing to do this, you can consider this option. However, there are some dangers to co-signing that you should be aware of.

Conclusion

If you have damaged your credit, following the suggestions offered on this page should help you get re-establish. Many people go to great lengths to try to improve or maintain their credit. We don’t think that your credit score is as important as many people hold it out to be. Whatever decision you make, you need to do what makes the most sense for you, your situation and your family. Sometimes doing the right thing for your situation may hurt your credit score for a while. The only time that you need a great credit score for is when you plan to apply for credit. If you have no plans of applying for credit any time soon, then just try to be responsible and do the right thing, but don’t get too carried away about the importance of your credit score. Many banks and credit unions have their own credit scoring systems which they use instead of the standard FICO credit scoring system. So no one can give you precise advice on how to beat the system and have the very best score. Your objective should be to have a good credit situation from anyone’s point of view—not just from the perspective of one score.