How to Rebuild Your Credit

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There is no quick fix for increasing your credit score. You have to be patient and re-pay your loans on time every month for a period of at least two years.

Many people think that after you have filed for bankruptcy you will never get credit again. This is not the case. Your credit can certainly be re-built and this article will explain how.

First we need to define the difference between your credit score and credit worthiness. You can have a good credit score but still not be able to qualify for new credit.

Having a good credit score alone is not enough. To be credit worthy (meaning your ability to acquire credit) you need two things:

1. A low debt to earnings ratio

2. A good credit score

After being discharged from bankruptcy your debt to earnings ratio will have improved as you will have extinguished all your unsecured debt. The next thing you need to work on is your credit score.

So the question is how do you do you improve your credit score?

Your credit score is calculated based on information on your credit bureau. There are two main credit bureaus namely Equifax and TransUnion. These bureaus record information on your various credit lines giving details such as credit limits, payment history, types of credit, creditor names etc.

Here are the steps you need to take to improve your credit score:

1. Check your credit bureaus to ensure that you are reported as being discharged from your bankruptcy. If not write to the credit bureau asking them to update your records. Also check that the balance against all the credit lines included in your bankruptcy are shown as zero.

2. Go to www.equifax.ca and check your credit score

3. Acquire new credit so that you may start reporting new history to your credit bureau. The main factor affecting your credit score is this credit history, so this is a very important step. Initially your credit will be poor so you will need to apply for secured credit in order to start improving your credit score. The easiest way is to apply for a secured credit card (or better, apply for 2 cards). With your credit application you will need to submit a deposit and the creditor will send you a credit card with a credit limit equivalent to the amount of the deposit. Start using the credit card to make a small purchase each month and ensure that you pay off the full balance at the end of each month. This will build up your credit history. Also ensure that the balance on your card at no time exceeds a third of the available credit. So if your credit limit is $6000 never carry a balance of more than $2000. This ensures your credit utilization is kept low which will also help your credit score.

4. After 12 to 18 months check your credit score. If it exceeds 650 try applying for a store card such as Canadian Tire or The Bay etc. Use these cards in a similar fashion to that explained above. By using these additional cards you will further build your credit history and improve your credit score. If your application for additional credit is declined wait for 6 months before re-applying as being declined for credit will drop your score.

5. Check your credit score again and monitor your improvement

Your goal should be to eventually comply with the rule of 2: you want to have 2 credit lines each with a credit limit of $2000 and each 2 years old.

You may also consider car loans, RRSP loans or even a secured GIC loan which will which will help you to build your credit history further and thus improve your credit score. Beware of high fees and interest!!

Other factors which will affect your credit:

Credit utilization: this is the amount of the available credit you have used up at any point in time. You want to keep this below 30%. As explained above if you have a credit limit of $6000 never carry a balance of more than $2000 at any time

Type of credit: the credit bureaus like to see different types of credit on your record, so as well as applying for secured credit cards you may also consider a bank loan, line of credit, overdraft, car loan and RSP loan etc.

Average age of credit: the credit bureaus also like to see credit lines which are more than two years old. As a general rule the older the better, so do not close an old credit card account as this will reduce your credit score.

There is no quick fix for increasing your credit score. You have to be patient and re-pay your loans on time every month for a period of at least two years. Eventually your credit score will increase despite the fact that you filed for bankruptcy. Some of my clients who filed for bankruptcy have even been able to qualify for more a mortgage for a house two years after being discharged from their bankruptcy. So it can be done!

For more detailed information please contact me.
Peter Temple E: petert@4pillars.ca T: 778.340.4002