Credit Rebuilding Basics, Part 4 — Rebuilding Your Credit

Always keep in mind that improvements to your credit score will still take time. You can trash your credit score in a couple of months, but building it back will take much, much longer.

One major hurdle you must overcome in your credit rebuilding program is this: you need to start using credit again! It may be hard to accept that you need to start using credit again if you’ve just filed a proposal or bankruptcy or if you’ve had issues before with managing credit. However, it’s the only way to re-establish your relationship with the lenders and credit bureaus.

Your purpose in using credit now will be completely different. Before, you probably relied on credit to make ends meet every month. Once you file a proposal or bankruptcy, your take-home pay every month should be sufficient for your living expenses and leave some leftover for savings.

Your use of credit now will be for the sole purpose of rebuilding your credit. Following are the most significant actions you can take in this rebuilding phase. Remember, do not take these steps unless you have done the work necessary to repair your credit. Not all of these steps will apply to every situation—take advantage of the steps that apply to you.

1. Apply for a Secured Credit Card

The first and most essential credit rebuilding tool is a secured credit card. What makes these cards ‘secured’ is that you submit a deposit to the credit card company, typically between $200 and $500. The amount you have on deposit also acts as your credit limit. Don’t apply for a secured credit card until you have surplus funds set aside, as you may need to keep your security deposit with the company for several years.

Use the card every month for purchases that are already in your budget—gas expenses are an obvious choice. As you pay the balance off in full every month, you build a positive track record with the bureaus. One quick note: make sure you wait to receive your bill from the card company. If you pay the bill too soon, the debt may not register with the credit bureaus, which is your main objective in using credit vs. another payment method. A professional bankruptcy trustee can help you out with more tips in this regard to build out a good credit score for you.

Several companies offer secured cards in Canada—check out each of them to make sure you’re getting the card that best fits your needs. Look carefully at their terms and conditions, especially:

• their interest rates

• the grace period for payment—length of time from billing until expected payment

• the annual fee for the card, if any

• do they report to both credit bureaus in Canada?

2. See if your Rent Can Report to Equifax

Until recently, it was not possible in Canada to have your regular rental payments report to the credit bureaus. Landlords could check your credit rating and history to assess your suitability as a tenant. As the tenant, however, your positive rental history did not report to the bureaus.

However, recently Equifax has begun to accept records of positive payment information from landlords. If you are a tenant, it certainly is worth exploring if your landlord is willing to work with Equifax to report your regular monthly rental payments.

This option will be of significant interest to those who are just beginning to build a credit profile, as well as those whose credit is severely damaged and who have a long road back to positive credit. Trying to have your rental payments reported to the bureaus is also a bigger priority for anyone who cannot afford any credit products in their monthly budget.

3. Consider a Phone Contract with a Major Supplier

It may not be the cheapest option, but by taking out a contract for a cell phone, your monthly phone bill payments will report to the bureaus. If your credit score and history are very poor, you may need to make a security deposit. However, this is another simple way to take an existing expense and turn it into an item that reports monthly to the bureaus.

4. Add Installment Credit

Once you have a secured credit card in place, adding installment credit is another significant step in your credit rebuilding journey. You should ONLY do this if you can afford the monthly payments for a loan within your budget. There are three main choices for adding installment credit.

Registered Retirement Savings Plan Loans

One frequently used choice for installment credit is a Registered Retirement Savings Plan (RRSP) loan. You invest the funds in an RRSP, benefit from the tax deduction, and use the tax savings (refund) to accelerate your loan repayment. The RRSP loan will show up as a separate item on your credit report. Make a preliminary inquiry with your bank but remember to advise them if you have filed a consumer proposal or bankruptcy so they do not needlessly make a credit inquiry.

Vehicle Loans

Another possibility for an installment loan is a vehicle loan. Of course, this will only be applicable if you need to replace a vehicle. Be very careful with this, however! If you have filed a consumer proposal or bankruptcy or have damaged credit, the interest rate charged will be very high.

Ideally, you will look at an older vehicle and have some money saved for a down payment. Do NOT finance the car or truck’s entire value at very high interest rates—this is a prescription for financial disaster! Ensure that the loan’s length matches the expected vehicle life—you don’t want to be owing money on a vehicle with no useful life left.

Credit Rebuilding Loan

Another option for installment credit is a credit rebuilding loan. A few companies offer these. Again, be careful of the terms and conditions and make sure the monthly payment fits comfortably in your budget. You also want to be sure that you understand the total cost of borrowing for a credit rebuilding loan, as the interest rate is likely to be high.

5. Keep Your Credit Utilization Ratio Low

As much as possible, keep your credit utilization ratio at 30% or lower. A rate of 10 to 20% is even better.

Your credit utilization ratio is calculated by taking the amount of revolving (credit card and line of credit) debt you have and dividing it by the total amount of credit available. If you are using $5,000 of $10,000 available credit, your utilization rate is 50%. Your credit utilization ratio includes all of your credit cards and any lines of credit you have. One card or line of credit with a higher ratio can be offset by another revolving credit with a lower usage percentage.

6. Reactivate Dormant Accounts

If you have older credit accounts in good standing, begin using them again if you can. The lenders and credit bureaus like to see you successfully managing credit over a long time. Even using these accounts once or twice a year will allow the history to show up on your report and benefit your score.

This advice also applies if you filed a consumer proposal but had a credit card account at a zero balance that was not listed in the proposal. In this situation, you should start using the card again after the consumer proposal is agreed to by your creditors. You will need to check with the lender that the credit is still available to you after your filing.

7. Limit New Credit Applications

Limit your credit applications to three or four per year as new credit applications negatively affect your credit score. Also, do your best to limit applications to situations where you are reasonably confident of being approved. Avoid chasing after offers for credit where you are ‘pre-approved.’ You still have to apply for these offers, and when you do, they will generate a hard inquiry on your report that will report negatively.

If you apply for credit and are declined, ask the lender for an explanation. If you don’t receive a satisfactory answer, get your credit report and see what issues are causing a problem. Do NOT apply to several other lenders immediately after being rejected for credit. Multiple applications within a short time are a major red flag to the bureaus and can take dozens of points off your score within weeks.

In the early stages of credit rebuilding, it is essential to advise new creditors of your proposal or bankruptcy before applying for credit with them. Usually, they can tell you about their lending policies toward people who have filed a consumer proposal or personal bankruptcy. When looking to rebuild credit after a consumer proposal or bankruptcy there is no point in taking the hard hit from a credit inquiry if the lender will refuse your application as a matter of policy.

If you take the above steps (the ones that apply in your situation), your credit will improve in a very significant way over time. Remember to be patient and persistent with your credit rebuilding efforts. Once you get some of the basic building blocks in place, such as a secured credit card and some installment credit, credit rebuilding will happen automatically without giving it a lot of thought.

However, it is always critical to ensure that you follow good practices with your credit, such as always making your payments on time. In the following article in this series, we’ll cover what you need to do to fine-tune and monitor your credit.