Credit problems can make your financial life both frustrating and expensive. With a bad credit score, you may have trouble qualifying for loans or credit cards. It may be hard to land certain types of jobs or to get an apartment. Perhaps worst of all, you tend to pay more on interest rates, insurance premiums, and even security deposits than people with good credit pay for the same.
Living with poor credit can be difficult, but it doesn’t need to be a fact of life. You can rebuild your credit, although it usually takes patience and perseverance. Rebuilding credit is a process of increasing your credit score over time. If you’re ready to work on rebuilding your credit, continue reading.
What is a credit score?
Your credit score is your ticket to qualifying for a loan, securing a credit card, or locking in a great interest rate on a mortgage. While your credit score is just a number, it’s a vital indicator that lets banks and lenders know you’re responsible for your finances. A credit score is a number between 300 and 900 that changes over time. That’s normal. The higher your score, the better.
Your credit score shows lenders if you’re a good credit risk. If you have a score between 780 and 900, that’s excellent. If your score is between 700 and 780, that’s considered a strong score, and you shouldn’t have too much trouble getting approved at a great rate. When you start hitting 625 and below, your score is getting low, and you’ll start finding it more and more tough to qualify for a loan.
What’s Influencing Your Credit Score?
Many factors can influence credit scores. Some of the most common credit scoring factors are:
- Payment History. A record of on-time payments you make as well as late or missed payments. It’s the most significant portion of how your score is calculated.
- Credit history. This includes the types of credit accounts you have and how long they’ve been open. Having a long credit history and showing that you have different types of credit may improve your score.
- Credit usage (or credit utilization ratio). This is the percentage of available credit you’re using right now. It’s another crucial part of your credit score. Keeping your total balances below 30% of your available credit can help you maintain your credit score.
- The number and type of debt. This is your mix of loans. Having a variety of accounts such as a mortgage, credit card, and line of credit can have a positive impact on your credit score. Be careful with debt—make sure you have a good debt-to-income ratio.
- Recent credit behavior. This is the part of calculating your credit score in which inquiries, also known as credit checks, come into play. A “hard inquiry” involves an application for new credit. This lowers your score. A “soft inquiry” pertains to checking your credit rating or a credit card checking on your file for updates (such as you recently took out a new car loan) before offering you a credit limit increase. “Soft inquiries” do not impact your credit rating or appear on your file.
How to Rebuild Bad Credit
Rebuilding credit isn’t a one-day process. It takes you some time to improve it. Here are the following steps you can take to rebuild your bad credit.
Check your credit report
If you’re trying to rebuild your credit, looking at your credit report is the best first step to learning what you’re doing wrong and where you stand with your accounts. You can get a copy of your credit report once a year for free from the two main credit bureaus in Canada. The Equifax and TransUnion. You should request a copy of your credit report from both bureaus since they may have different information.
It’s also important to check your credit report for any errors or fraudulent accounts. These errors can bring your credit score down. If you discover an inaccuracy in your credit report, bring it to the attention of your creditor. So they can remedy the problem and revise what they are reporting.
Get collections and bad debts settled
Make sure there are no unpaid debts or items in collections that have not been settled. If you have outstanding bad debts, these need to be dealt with before starting any credit rebuilding. Simply clearing old collection debts from your credit report can lead to a potentially huge improvement in your score.
Pay your bills on time
An important factor in rebuilding your credit is making on-time payments no matter what amount you owe. Your payment history accounts for 35% of your score! Missing just one payment can set back your hard work significantly. Set a reminder on your phone or calendar to ensure you never forget to pay on time. You can also enroll in automatic bill payments so that your credit statement will be paid off monthly without worrying about it.
Consider a secured credit card
When you’re seen as a risk to lenders, qualifying for something as simple as a credit card can be an uphill climb. Your best bet is to open a secured credit card, in which you’ll put down an upfront security deposit that will equal or exceed your credit card limit. Use this card responsibly and diligently pay the minimum balance at the very least. This step will help you rebuild your credit. It’s good to double-check with your secured card issuer that they report payments to a credit bureau before signing up. Otherwise, all your hard work won’t have much of an impact on your credit score.
Consider a credit builder loan
Similar to a secured credit card, a credit builder loan is a low-risk way for a lender to help you build your credit profile. Not every financial institution offers this product, which is more popular with credit unions and smaller, local banks, so you may need to look around.
With a credit builder loan, the lender keeps the loan funds. You “repay” the loan each month. Once you’ve fully repaid the loan amount, the funds are released to you, and your credit score has hopefully improved in the process. With both credit builder loans and secured credit cards, you’ll want to ensure that your payments are being reported to the credit bureaus.
Use credit wisely
Don’t go over your credit limit. If you have a credit card with a $5,000 limit, try not to go over that limit. Borrowing more than the authorized limit on a credit card can lower your credit score. Try to use less than 35% of your available credit. Lenders will see you as a greater risk if you use a lot of your available credit. This is true even if you pay your balance in full by the due date.
Become an authorized user
Another way to help your credit is by having a trusted individual with a strong credit score add you to their credit card account. Their account’s payment history will show on your credit report. To rebuild your score as an authorized user, choose a credit card with a low balance, high credit limit, and good payment history. If you plan to use the card, work with the account holder to agree on a monthly budget and how you’ll pay them back. Even if you use the card, being an authorized user won’t impact your score as much as opening your credit card account. That’s because the primary account holder is legally responsible for the debt.
Hang onto longstanding accounts
There are merits to hanging onto a long-established credit card account, especially the one you’ve kept in good standing. It helps to increase the average age of your account.
Have a diverse credit mix
Having a mix of credit types, such as a credit card, a car loan, and a line of credit will gain you more points on your file. Of course, this must be done carefully and only apply when you know you will qualify and that any debt you take can be repaid. Be careful! Don’t carry too many accounts. Having too many credit accounts can be a warning sign for creditors.
Be careful with new credit
The most crucial factor in rebuilding credit is managing finances responsibly. Among the main factors influencing your credit score is credit behavior. Whenever you apply for a credit account, the lender will make a hard inquiry on your credit report. Every hard inquiry can provide your score with a minor and temporary decline.
Applying to one or two credit accounts won’t severely hurt your score but applying to more within a short space of time could have a more significant negative effect. It will signal to lenders that you’re desperately seeking credit. Therefore, you might be less able to make your payments.
Adopt good financial habits
Developing smart spending and saving habits are crucial to rebuilding your credit score, and one of the best ways to do this is to create a budget that accurately reflects how much you earn and how much you spend. With a budget, you’ll know how to live within your means, and you’ll be able to manage your money better.
Rebuilding credit is a process that takes time and patience. The time needed can depend on what is weighing down your score. As negative items age, they have less effect on your score. Eventually, they’ll drop off your credit report. Hard inquiries typically stick for around 2years. Delinquencies can stay for up to 7 years. Public record items (bankruptcy or foreclosures) can remain on your report for 7 to 10 years. If you manage your credit responsibly, your score will gradually improve.
Rebuilding credit is an arduous task that involves many moving parts, from budgeting, managing creditors, and cleaning up accounts that could have fallen into collections. If you’re inundated and don’t know where to start, contact a certified, non-profit credit counsellor to help you sort through your finances. A certified, non-profit credit counsellor can help you in several ways, depending on your needs. Some of the services they provide include assisting in building a debt repayment plan, negotiating lower interest rates with your creditors, and creating a budget with debt repayments to help you stay accountable.
How long does it take to rebuild credit?
There’s no fixed timeline for rebuilding your credit. It all depends on your situation. If you have damaged your credit, following the suggestions offered on this page should help you re-established. Improving credit is an ongoing process. With some time, patience, and financial discipline, you’ll be able to achieve your desired credit score. It’s never too late to adopt good habits.
Getting an auto loan to rebuild credit
An Auto Loan is one of the best forms of credit that can help you tremendously improve your credit rating. If you are thinking of securing an auto loan, we can assist. Toronto Auto Loans can get you approved for an auto loan despite having a bad credit score. We are for people with all sorts of credit. We can get your financing set up and approved immediately. Get pre-approved here now! With our expertise, rest assured you’ll only have a great experience.