5 Steps to Rebuild Credit in Canada Following Bankruptcy

Rebuilding Credit in Canada

No matter how bad your situation was (or currently is), you must remember that there’s always a bright future ahead if you follow our 5 steps to rebuild your credit in Canada.

Many people who experience unfortunate circumstances with their debt can often feel trapped, because as they default on their debt obligations, their credit score is impacted and they are subsequently unable to borrow.

However, through patience, perseverance and adopting the steps outlined in this piece, you can rebuild your credit in Canada.

That’s right…you read correctly, you can pick yourself back up, successfully build your credit rating and place yourself in a position where you’ll be able to borrow again.

If you’re interested in rebuilding your credit, please read on, as we’ve outlined five steps which are practical and effective.

Step 1: Your Credit report

Before you do anything, you must check your credit report.

Checking your report will allow you to immediately pinpoint the areas that need improvement…think of it as a map, which will guide you to your end point in the most efficient and safest way possible.

Your credit report contains all sorts of information about your credit facilities, such as:

  • When you opened your accounts;
  • Level of debt and utilization rates;
  • Whether you’ve missed payments and;
  • How often you breach your limits.

A lot of people don’t know that by law, you have the right to check this information and correct it if it’s wrong.

In Canada, there are two major consumer credit bureaus – Equifax and TransUnion.

They compile the information mentioned above and provide it to banks and other lenders, who use this information to assess your creditworthiness.

It’s important to note that each credit bureau may have different information about your credit history, so it’s wise to obtain copies from both agencies.

Step 2: Negotiate with your creditors

Your credit score is most impacted by your payment history, so if you really want to make an impact on your score, you must figure out a way to get your accounts up to date.

This isn’t as hard as you think and.

To make it easier for you, we’ve detailed some proven methods which you can adopt.

A great starting point is reaching out to your creditors and being truthful about your situation.

This might seem like counterintuitive advice, because we all know that it can be hard to face people when you’re going through a rough patch, especially if you owe them money, but being honest with them will likely lead to a better outcome.

Specifically, you should seek to put in place a win/win payment plan.

Win / Win Scenarios

A win/win scenario sees both parties get what they want, i.e. you don’t drown in debt repayments and they get some of their money back.

You might be thinking that no lender will ever agree to receiving less than what is owed to them, but think of it like this, if you are so under stress that you can’t pay a single cent, then they’ll get nothing – the fact that you’re willing to speak with them and put in place a plan which sees them get something is a far better option for them.

If the relationship between you and your creditors has broken down and an arrangement can’t be reached, one of our credit counsellors may be able to help you with a plan.

Ultimately, the goal is to get your accounts up to date as soon as possible, as this is a major driver of positive credit scores.

Getting your accounts up to date will not only mend the relationship between you and your creditors, and address the number one factor impacting your credit score, but it will also drop debt utilization limits, which is the second most important factor impacting your credit score.

What do I mean by credit utilization?

Let me provide you with a simple example:

  • Let’s assume you have an available credit limit of $30,000 and you’re currently using $15,000.
  • Your utilization limit on this debt is 50% (15,000/30,000).

This is important to know because if your utilization limits are too high, it means you don’t have as much available credit and as a result, your credit score will be impacted.

Your goal should be to drop your utilization limit to under 50%, noting that if you get it under 35%, you’re doing extremely well.

Anything above 75% will adversely affect your credit score, so whatever you do, try your best to get below this limit.

Step 3: Rebuild Your Credit

The first two steps deal with understanding the scary landscape that is your debt, as well as beginning to walk down the path of setting up and executing an intelligent payment plan on your account…Step 3 is all about rebuilding yourself.

Specifically, this step is all about building a consistent payment history and in doing so, demonstrating that you can pay back money you’ve borrowed.

This proves to creditors that you are responsible and know how to manage debt.

The best way to do this is through using a secured credit card (don’t just take our word for it – Forbes released a great article on this, which can be found here).

A secured credit card is exactly the same as a normal credit card, except for one key difference, you will need to provide a security deposit, which will be collateral for the card.

The card will grant you access to credit and as you spend with the card, your activity will be reported to the credit bureau’s each month.

This is critical, as this information is what will build your credit score.

Secured credit cards typically have lower limits than traditional cards, ranging anywhere between $100-$1,000, but they can be highly effective in building your history and lifting your score.

A common question that is asked is “how long do I need to use a secured card for, before I can upgrade to a normal, unsecured credit card?”

Generally speaking, it takes approximately 6-12 months of spending activity before you can ‘upgrade’.

During this time, you must be diligent with your spending and meet monthly repayments, as and when they fall due.

Remember, you must always act responsibly with credit, even if it’s secured.

Credit cards shouldn’t be used irresponsibly.

Step 4: Minimum payments and due dates

Nothing will undo all of the hard work you undertake to improve your credit score like a late payment.

Put simply, you cannot afford to do this.

It is absolutely critical you continue to meet the minimum monthly repayments ON-TIME for both your credit and non-credit bills.

Things like missing utility bills, or paying old phone bills late, or even missing a parking ticket, all register with the credit bureaus and paying them late severely impacts your credit score.

You must be a reliable payer across all of your credit and non-credit bills if you want to maintain and improve your score.

The best way to ensure you don’t miss payments, is to set up automatic bill payments, so that each month, your accounts will be debited and your bills will be paid.

This is a seamless approach and is also very low on administration fees, as you won’t need to pay for things like envelopes, stamp and cheques.

You’ll also save a lot of time not having to visit the bank.

Automatic payments can be set for whatever amount you choose, but it’s wise to at least pay the minimum monthly repayment.

Setting Up Automatic Payments

If you do decide to use automatic payments as a way to manage your monthly bills, you must ensure that your bank account has enough money to cover the monthly debit.

If you don’t have the required balance to meet the repayment, the automated payment will fail and you will miss the repayment for that month.

It will be a major setback in your quest to rebuild your credit.

If the payment does make it through, even without the required balance of funds being in your account, your bank will likely charge you a Non-Sufficient Funds Fee, which can range between $27-$35.

If setting up automatic payments isn’t your thing, you can simply set reminders for yourself in your calendar.

Do this across your phone and desktop, so you don’t miss the monthly repayments – they are important, so give yourself the best chance of meeting them.

Once again, the goal is to rebuild your credit, so it’s imperative that you don’t ‘skip a beat’ when it comes to payment and always meet the minimum monthly repayments.

Step 5: Financial Habits

Developing and maintaining strong financial habits will be the foundation of your long-term success.

Habits such as saving money each month and never missing your monthly repayments will form a strong foundation from which you can rebuild your credit score.

The most important financial habit you can adopt, if you haven’t already, is building and constantly referring to a personal budget.

It’s amazing how few people do this, yet it’s so powerful.

Having a budget will help you live within your means and effectively plan for the future.

It can be used as an extremely effective tool that will help you prioritize your spending.

Using monthly calendar reminders, automatic payments and budgets can be a powerful combination that will set you well and truly on the right path to rebuilding your credit and improving your ability to access finance in the future.

Another proven financial habit you can adopt is living frugally.

Many people think that this is simply about saving money, but it’s more than that.

Living frugally is all about thinking deeply about what you truly need in your life.

It’s fair to say that many of us have too many possessions…if we sat and thought about what we truly need, we’d see that there’s a lot of clutter we could sell or dispose of.

To learn more about frugal living habits, click here.

Patience is a virtue

When you’re on the path to rebuilding your credit, it’s important to remember that you must be patient.

All of the methods, steps and habits outlined above take time to work, especially if you’re coming from a low credit score.

Having a bad credit score is very limiting and it will impact your life in more ways than one, so it’s important to take it seriously.

Have a look at some of the ways a bad credit score will impact you in everyday life:

  • Accessing loans: Your ability to access loans will be severely weakened and even if you do qualify for credit, the interest rate you’ll pay will be too high.
  • Insurance: You’ll pay far higher insurance premiums when you have a low credit score. Insurance companies take into account a variety of factors when determining your premiums, and personal credit scores carry significant weight in their decisioning process.
  • Securing employment: Employers don’t see your full credit score, but they do see a modified report, which shows debt and payment history. If the report shows signs of distress, it may indicate to them there’ll be problems on the horizon. Think about it, late payments could be interpreted as being unorganized, and having extremely high utilization limits could be viewed as being irresponsible, and thus, being a poor fit for the job.
  • Renting: Just like applying for a loan, when you apply for a rental property, the landlord will likely want to see your credit history, as this will be a good indicator of how you’ll handle your payment.

As you can see, these items listed a above are core pillars of your life, so it’s important to have a strong credit score and maintain it.

You may feel a bit daunted or overwhelmed, but if you stick to the five strategies listed above, you’ll build momentum and successfully rebuild your credit score.

Bankruptcy isn’t the end of your financial future, it’s simply the beginning of another chapter, which you can build from.

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