How to Rebuild Credit From the Ground Up

If you’re a frequent reader of our blog, this topic might sound a little familiar. Back in December, we shared a list of our top tips to help improve your credit score, but we only just scratched the surface. “What will happen to my credit score?” is still a pretty hot topic for our clients when they first start the process of declaring bankruptcy or filing a consumer proposal. To help address some of their worries, we sat down with our Licensed Insolvency Trustees to delve deeper into this question and have put together a list of eight key tips you can start using to start improving your credit score now.

Before we get into how to rebuild your credit, we thought we’d give you a little bit of background on what a credit score is, what is a good credit score and how this score is calculated.

What is a credit score?

A credit score is a three-digit number ranging from 300 (just getting started) all the way up to 900. These three numbers allow lenders to determine a person’s credit risk should they offer them a credit card or loan. There are several factors that go into determining your credit score, but one thing is for sure – the lower your score, the less likely you are to be approved for credit of any kind. It may seem unimportant, but a low credit score can impact your ability to buy a house, lease a car or even finance a purchase.

What is a good credit score?

In Canada, each credit reporting agency views the score a little differently. Here is a summary of the ranges:

  • 750+ is considered excellent credit, and at this point you’re eligible for the best rates on all types of loans.
  • 700-749 is considered good credit, and you won’t have trouble getting a loan, but you may not be eligible for the best rates.
  • 650-699 is considered fair credit, which basically means it’ll be pretty easy for you to get a loan.
  • 600-649 is considered poor credit, and this is probably where you’ll find yourself if you’ve damaged your credit rating with previous money mistakes. It may mean you could have trouble securing a loan, and if you do, the interest rates will be higher.
  • Below 600 is considered bad credit and it will be difficult to get new credit.

How is a credit score calculated?

These are the major factors that providers use to calculate your credit rating:

  • Balance-to-limit ratio
    In most cases, a balance exceeding 50 percent of your credit limit will impact your credit rating. It’s best to keep your balances under 30 percent.
  • Several requests to obtain credit
    If all of a sudden you’re applyingfor multiple credit cards, apply for a loan and apply to increase your line of credit, this is a major warning sign to creditors that you’re experiencing some financial difficulties. Avoid applying for multiple credit cards and loans in a short period of time.
  • Hard versus soft inquiries
    A “hard inquiry” shows up on your credit report when you apply for new credit. This lowers your score. A “soft inquiry” shows up when you check your own credit rating or when a credit card company checks on your file for updates before offering you a credit limit increase. “Soft inquiries” do not impact your credit rating or appear on your file.
  • On-time payment history
    TransUnion says: “A good record of on-time payments will help boost your credit score.”
  • Collection Agencies
    If your account is sent to a collection agency, this impacts your credit rating.

And now, let’s get back to our top eight tips that will help you be successful in rebuilding your credit after a bankruptcy, consumer proposal or any other significant financial crisis that has left your credit score in shambles.

Tip 1: Check your credit report  

First things first, you’ve got to know where you stand with the credit bureau. This may feel daunting, but it’s always best practice to have a handle on your financial situation and where your credit score lies. It’s also important to check your credit report for fraudulent accounts and inaccuracies. If you discover any errors, bring it to the creditor so that they can fix the problem and revise your report. Another great reason why you should do this is because it’s free! Head to Equifax and TransUnion now to request a free copy of your credit report (it’s best to get a copy from each bureau because they could have different information about your credit history on file).

Tip 2: Settle your debts

Make sure that you have no unpaid debts or items in collections that have not been settled. A missed utility payment that is way past due, an outstanding cell phone bill or old parking tickets can get reported to the credit bureaus.

Tip 3: Open a secured credit card account

Sometimes the biggest obstacle you’ll face when building your credit history is actually getting credit. It’s an unfortunate but common dilemma. So, whether you have no credit history or need to get back on track to reflecting a positive payment history, a secure credit card account is the ticket!

A secured card functions like any other unsecured credit card – you’ll have access to credit and your payment information will get reported to the credit bureau each month, which helps boost those points (be sure to confirm that the secured card reports repayment behavior to TransUnion or Equifax – not all secured cards do, and that would just completely defeat the purpose of what we’re trying to do here).

So, what’s the catch? Unlike other cards, you will need to provide a security deposit as a form of collateral before you can use the card. It’s typically anywhere between $100 and $500, and it’s just a way to assure creditors you’ll 100% pay back the money you borrowed.

One last thing on this – the goal of this card is to build your credit rating, so we can’t stress enough the importance of not falling behind on your payments. Use this card for regular, planned, manageable, purchases and pay the bill as soon as it arrives in your inbox.

Tip 4: Pay at least the minimum payment, on time

Life happens and there might be a month or two where you’re unable to pay your account off in full. When this happens, pull together whatever pennies you can so that you can at least make the minimum payment. Late and missed payments will negatively impact your credit score, and you’ll be taking a few steps backwards.

Tip 5: Avoid pay-as-you-go phone plans

This can be a tad more expensive than buying your own phone or going with a no-contract, low-budget provider, but applying for a cell phone with a contract goes a long way when you’re rebuilding your credit. Major phone companies report your payment habits to the credit bureaus – so this will help gain you some points (as long as you’re paying your bill on time, every time)!

Tip 6: Don’t switch credit cards to get new rewards

We’re all tempted by promo deals and great offers – but don’t by swayed. If you’re constantly closing down credit card accounts to get new rewards, you’ll never develop a long-term credit history, and this will impact how quickly your score improves. You need to build an established credit history.

Also, every time you apply for a new card, this guarantees they will check your credit and it will show up as a hard inquiry, and trust us – you do not want hard inquiries on your credit file right now.

Even if your favourite shop is offering you 60% off to sign up for their new card, drop the item (you probably don’t need it anyways), say no thank you and walk the other way!

Tip 7: Start a budget and stick to it

Developing smart spending habits are crucial to rebuilding your credit score. Getting hit with NSF fees or overdrawing your account is a huge red flag to creditors. Set aside 30 minutes every week to go over your budget, check your bank balance and make sure you are living within your means.

Tip 8: Maintain a good credit card balance ratio

As if we haven’t bombarded you with enough information, now we’re talking about ratios – but this one’s pretty easy to wrap your head around. It’s important to monitor your credit utilization aka the amount of credit you use each month. If you’re racking up 80% of your credit each month, this is a warning sign to creditors, even if you’re making the payments on time every month. To keep your credit score moving in the right direction, try not to use more than 30% of your available credit.

As you can see, it takes time and dedication—years, even—to build good or excellent credit. It won’t happen overnight, but it will happen. As long as you cultivate and stick to the right habits, you’ll be able to pull up your score.

If you’ve found yourself turning to credit more often than you’d like to admit, this may be a sign you’re headed towards financial difficulties. At Smythe, our Licensed Insolvency Trustees are trained to work with you to determine the underlying cause of your financial difficulties, as well as assist you in improving your financial management skills, and provide you with effective budgeting strategies to help you achieve your monetary goals.

If you’d like to get a handle on your spending, or discuss ways out of debt, contact us today for your free, no-obligation consultation.