These days, most people rely on credit for any number of financial needs. Whether you wish to borrow at favourable credit rates, get approval for a mortgage, buy a car, or get approved for a credit card, the status of your credit rating will impact your ability to do so. Without a credit card, for example, simple activities we often take for granted like online shopping or renting a car become impossible. Also, credit cards are often helpful for larger purchases like furniture, or for placing rental car or hotel reservations.
There is no quick fix for rebuilding credit; it’s a lot easier to damage your credit score than it is to repair it. Having the right tools and information helps.
Credit scores range between 300 and 900. With a higher credit score, you are more likely to get approval for loans and favourable lending rates. The goal of any rebuilding program is to achieve a score of 650 or higher and qualify for a CMHC approved mortgage.
The sooner you take action to improve your credit rating, the sooner you can improve your credit history and get your finances back on track. Factors that affect your credit score are:
Payment history. This is the most important factor. Late and missed payments reduce your credit score and make creditors nervous.
How much is owed. Higher credit balances negatively affect your credit rating. It’s ideal to keep the balance owing below 30% of the available credit.
Length of credit history. A short and/or poor credit history reduces your score. Using credit responsibly over the long-term is your best bet.
New credit applications. Applying for multiple credit cards and loans in a short period of time is seen as a sign of potential financial difficulty, and makes creditors wary. These “hard inquiries” hurt your score, as opposed to “soft inquiries”, which are just checks on your file for updates.
Types of credit. Although the least significant factor, certain types such as deferred interest or payment plans can indicate financial instability.
If looking for a company to help you rebuild your credit rating. Be careful. Don’t just jump at a sales pitch. Take your time, interview companies, find out what their processes and systems look like. You will want them to do things like:
Assessment. Analyze your credit score and help you fix any errors that might be affecting it. Also look into addressing any debts in collection, if necessary.
Create a Credit Rebuilding Plan. Using the best credit rebuilding products in the industry to create a customized plan aimed at increasing your credit score to 650+ within 24 months. The plan should include helping you get new credit and use it properly going forward.
Protect Your Credit Rating. Once you’ve starting building a stronger credit score, will the discuss the critical habits to maintain, and the common credit mistakes to avoid? Will they teach you about the potential risks and work with you to steer clear of them.
Each of these steps involves comprehensive planning. Ask the company if they will guide you through the entire rebuilding process to see you successfully meet your future credit needs. With patience and discipline you can rebuild, even after bankruptcy.
To get you started, here are a few basic tips to consider:
Check your credit report. This gives you an opportunity to understand where you went wrong and gain visibility to potential inconsistencies or errors in your credit report that may need correction. You are entitled to a free yearly copy of your report from the credit bureaus, Equifax and TransUnion. While it is stressful to review your credit history when it’s in bad shape, remember—you are taking the initiative to fix it for a better financial future.
Make minimum payments by the due date. Missed and late payments hurt you when trying to repair credit. Making payments may be tough depending on your current financial status but if at all possible, it will help you re-establish a reliable payment history. Be cautious when using automatic bill payments, unless you are confident there are sufficient funds in your account. NSF fees and overdrawing your account are red flags to creditors.
Create a budget. It requires financial discipline to rebuild your credit score. Awareness of your spending habits will help down the road as you get your finances in order, and also gives you a greater sense of control. Review day-to-day expenditures and prioritize spending on what’s most important.
Lastly, remember that your credit rating is not you. Do not wear it. A credit rating is numbers on paper based on some system made up by bankers. You can take the steps to rebuild credit. However, treat it like a process, something that you work on within a daily schedule, but do not carry the weight of it. There is much more to life than a credit rating.