Interested in restoring your credit?
A good credit score is essential to your financial health. It provides access to the best credit products on the market. Do you want to get a car loan or a mortgage? Lenders will accept or deny your application based on your credit rating.
Credit scores fluctuate with borrowing and repayment habits.
If you’ve ever had trouble managing your finances, missed payments, or participated in a financial recovery program like a consumer proposal or bankruptcy, all of this will impact your credit rating.
With the right tools and the right resources, you can restore your credit. The important thing is to remember that it will take time. Building your credit is cumulative: you have to repeat positive behaviors and know the mistakes to avoid.
Understand how credit works
To restore your credit, start by understanding how credit works. Every time you borrow money or apply for credit from a financial institution, they share information with credit reporting agencies, such as Equifax and TransUnion, who then update your credit file.
A credit report is a detailed report of your credit history, which includes your credit score and rating. There, you’ll find a summary of your current credit balances and types, the amount of time your credit accounts have been in effect, and your payment habits. The credit file is updated regularly by the companies that lend you money or issue credit (banks, credit unions, credit card companies, etc.)
How is the credit rating calculated?
A credit score reflects borrowing clothes, what you do or don’t do with the credit you have been given. Determining the credit score depends on certain factors:
Repayment history (35%)
Do you always make your payments on time? Your repayment history is the most important element of your credit rating. They include all information about your past payments, including deferred, late, or missed payments, debt collections, and financial recovery programs like consumer proposal and bankruptcy.
Amount of debt (30%)
How much leeway do you have left with your current debts? A balance of less than 30% of your credit limit is ideal. Indeed, if your credit card is maxed out, reducing your balance even a little bit will help improve your credit.
Length of credit history (15%)
The longer your credit history, the more accurate your credit score will be in determining your borrowing habits.
New credit applications (10%)
How often do you reapply for credit? Credit reporting agencies are notified each time a lender checks your credit when applying for credit. So avoid “shopping for credit” because it could lower your rating.
Remember that your credit rating may vary between financial institutions and credit reporting agencies. Other factors such as your income, your assets, and the number of years in your current job can contribute to the evaluation of the risk that you present as a borrower.
How does your credit score differ from your credit rating?
Your credit score or your “credit score” can vary between 300 and 900. The higher it is, the better your creditworthiness.
Your credit rating relates to your credit history with the same lender. Your credit score can range from 1 to 9, with the lower number being better, with a letter that describes the type of credit:
I (installation credit such as car loan or bank loan);
O (open credit like a line of credit or student loan;
R (revolving credit like a credit card).
How to check your credit report?
You can request a copy of the record over the phone, by mail, or in person, free of charge, from Equifax or TransUnion.
Reviewing your credit report once a year to check for errors is a good idea. Is there something wrong? Contact the credit bureau and your financial institution. You have the right to dispute any information that you believe is incorrect on your credit file and you can ask the credit bureaus to correct errors free of charge. See how to spot errors here.
How does consumer proposal and bankruptcy affect your credit?
Both consumer proposal and bankruptcy provide immediate debt relief and a pathway to improved financial well-being. However, they affect your credit rating.
If you opt for the consumer proposal, you will have an R7 score in your credit report or solvency report, which is the second-lowest score that the agencies use. The consumer proposal will remain on your credit report for six years from the date of your application or three years after you are released from the proposal, whichever comes first.
If you decide to file for bankruptcy, your credit report will show an R9 rating, which is the lowest rating used by credit reporting agencies. The R9 rating stays on your file for six years after you are released from bankruptcy.
But for many people, a financial recovery program can be the first step toward improving their credit rating. If your debts are eating up your finances, they’re probably already hurting your credit. A financial recovery program can help you develop new financial habits to better manage your finances, which over time will have a positive effect on your credit rating.
How to improve your credit report
Building and restoring your credit is an important goal for your long-term financial health. It is a process that takes time. There is no quick fix. When trying to improve your credit rating, money management habits are the most important thing to consider. Good credit has many components because it’s a way to assess your overall financial health.
Keep your expenses below your income
Learning to budget is the very foundation of financial health. This is how you become aware of your spending and reveal savings opportunities. How aware are you of your money? Your credit rating is a direct reflection of your financial health and your ability to manage your financial obligations.
Pay your bills on time and in full
Late payment may seem like a trivial matter, but paying it off is part of your financial obligation to your lender. This delay tells him that you are not fully respecting your agreement. When you pay in full and on time, you fulfill your financial obligation and prove yourself worthy of credit.
Keep your balances below your credit limits
Are your credit cards or lines of credit at their maximum? Even reducing your scales to 75% will help. 50% usage of your credit is good, but 30% usage is great. When you keep your balances below your credit limit, you are demonstrating strong financial health and proving that you are not dependent on credit for a living.
Apply for and then establish new credit
The more responsibly you use credit, the better your credit rating will improve. This means you need to reapply for credit to improve your credit rating. Borrow, pay, repeat. When lenders see that you have a history of repaying your debts, your risk profile will be lower.
Do you need credit repair services to improve your credit?
Some companies specialize in “credit repair services.” All they can do is correct errors in your credit report or credit report, which you can do yourself. The real credit improvement is in future money management habits.
Restoring Credit with a Secured Credit Card: A First Step
You’ve budgeted, paid your bills, and kept your balances below your credit limits. And now?
The only way to prove to lenders that you have sound financial habits is to show them that you can handle credit. When you meet the terms of a loan by repaying it in full, your creditworthiness increases.
After a bankruptcy or a consumer proposal, you will need to apply for a low-risk credit product, such as a secured credit card, for which you must deposit money upfront.
Advantages of the secured credit card
- No interest if you pay the full balance monthly
- Revolving credit can help you more than an installment loan
- Affordable: often low annual fees