A credit score may be only three numbers long, but it can nonetheless affect your life in big ways.
As important as it is, not all of us have had the benefit of being good with money all of our lives. And in the aftermath of the COVID-19 pandemic, some of us have had to make difficult decisions that led to dips in our credit scores.
Don’t fret if that sounds like you and you’re wondering what you can do to help your score recover. Here’s how you can start the process of rebuilding your credit today.
Create A Budget: Know Where Your Money Goes
Use a budgeting system that works for you to track your spending. Then, plan how to pay down debt and put money away for emergencies.
Start Saving: Plan For The Future
No one knows what the future holds, but you can prepare for it to a degree. First, make sure you have an emergency fund and start planning for retirement.
Credit Repair: Fight Any Mistakes On Your Credit Report
Get a copy of your credit report and make sure everything is correct. Keep an eye out for fraudulent accounts that may be ruining your score.
Don’t Struggle With Debt: Get Help From A Professional
Credit counselling or a debt management plan may be a way to help you get your debt under control. You may even consider debt settlement, but your credit score will take a hit.
Practice Good Credit Habits: Be Organized And Proactive
Know your credit balance, keep track of your credit score and monitor your credit report. Sign up for a free service and update your budget regularly.
Focus on the 5 factors of your credit score
#1 Payment History: Pay Your Bills on Time
With a weighting of 35%, your payment history is the single factor with the biggest influence on your credit score.
This is because lenders want to know that you have a history of making your payments on time. If they know you’ve paid other creditors without delay, then there’s a little less risk of non-payment if they lend you money.
When you’ve got a bill due, skipping it can be tempting to increase your budget. But the fact of the matter is that one missed payment can have a serious impact on your credit. So if you want to get your credit to where it needs to be, your credit-building strategy has to include a plan for making all of your minimum payments.
Did you know you can now have your rent reported to be counted toward your credit score? So make sure to get your payment in on time. If you are worried about making a bill on time, contact the landlord or billing department and ask if it is possible for an extension or a new payment arrangement. Make sure to do so BEFORE the due date.
#2 Credit Utilization or Outstanding Debt: Keep Balances Low
Remember the previous point about how your payment history affects your credit score? The second-biggest factor that influences your credit score is what’s known as a credit utilization ratio.
This might sound like a complex term, but all this ratio does is look at how much of your credit limit you’re spending. You can calculate yours by dividing how much you’ve spent over how much you’re able to spend, on available credit. In a perfect world, your credit utilization ratio would be 30% or lower.
You can bring your ratio down by paying down high credit balances, increasing your credit limit, or doing some combination of both. If you have debt troubles, start by settling debt.
Be cautious when trying to raise your credit limits. If you are prone to break your budget, asking for more credit may not be a good idea. As well, opening too much new credit in a short time can hurt your score because they usually require a hard credit pull. If you do apply, secured credit cards and credit builder loans are a good way to go.
#3 Length of Credit History: Avoid shutting down accounts
If you’ve paid off a credit card, should you close it down? No, and there are a few reasons why. First, credit history accounts for 15% of your credit score, so keeping old accounts open is important to a long history. Keeping an account open with a low balance improves your utilization rate if the accounts are in good standing. Closing accounts reduces your available credit, which causes your ratio to go up.
#4 Credit Inquiries or New Credit: Limit New Accounts
Limit how often you apply for new accounts because this accounts for 10% of your score. Though opening new accounts may help with your utilization rate in the long run, too many inquiries can create a blemish on your report because it looks like multiple rejections. Switching plans, opening new cards, or applying for pre-approved promotions will trigger a hard inquiry, so proceed with caution. Unless you are reducing your rates, it may not be worth the credit hit.
If you do open new accounts, make sure you can handle the new credit and that the terms and conditions are right for you.
Consider a Secured Credit Card
Rebuilding your credit score isn’t just a matter of paying down your current debts. It’s also about showing lenders that you’re able to handle the credit you have responsibly.
According to the Canadian Bankers Association, 95% of Canadians have a credit card. To that end, you may want to consider applying for a secured credit card.
You’ve probably seen one of these cards around before. But basically, how they work is that the borrower makes an application and then provides a cash deposit to receive the card.
Just like with any other card, you can spend and make payments on it. Then, your credit card issuer will report to the credit bureaus at the end of every month. However, the major difference between secured and unsecured credit cards is that it’s often easier to qualify for this type of card because of the required cash deposit.
#5 Credit Type or Mix: Maintain a variety of accounts
Did you know that it’s possible to improve your credit by taking out a loan?
Credit-builder loans do exactly what they’re named for. And while secured loans aren’t necessarily designed for credit-boosting, that’s exactly what you can use them for.
That being said, we’re going to delve into these separately.
Credit Builder Loans
If you’re like most people, then the type of loan you’re familiar with is one where you apply, the lender approves the application, and you’re given a lump sum that you have to repay at a set interest rate.
That’s not the case with a credit builder loan. Sure, if you go this route, you may have to make an application. But you won’t get the money until after you’ve paid off the loan. In the meantime, lenders will often set aside the funds in a TFSA or an interest-bearing account until the funds are ready to be released.
What’s nice about this loan is that it’s generally easy to qualify for. This, in turn, makes credit builder loans a fantastic option for people seeking a way to strengthen their credit scores.
A secured loan is a loan that requires you to put up assets, like a house or a car, as collateral in the event of non-payment. Put another way. This means that if you miss payments on a secured loan, the lender can take ownership of your property.
While this might seem riskier for borrowers, secured loans are often more common than you think.
Case in point, from March to September 2020, Global News reported that car title loan-related searches in Canada had roughly tripled from 5,900 a month to 16,900 a month.
If you’re learning how to rebuild credit, it’s often easier to qualify for a secured loan as opposed to an unsecured loan because lenders already know that they’ll be getting value back even if things go wrong.
Whether you hold on to the money and pay the interest or decide to spend it all and pay it all back, this is another loan option that can help you build up your credit score.
Find a Cosigner or Become an Authorized User
If you have reason to believe that lenders will be reluctant to give you more credit, you do have another option potentially at your disposal:
You can ask a close friend or a family member with good credit to cosign for you.
Of course, this is a tough request to make because a missed payment can affect your cosigner’s credit. And, even when you’re making all your payments on time, if your cosigner applies for a mortgage or an auto loan during your repayment period, they may not be able to borrow as much.
Luckily, cosigning a loan isn’t the only way that friends and family can help you out. They can also let you become an authorized user on one or two of their credit cards.
This helps your credit by increasing your credit limit, giving you payment history, and, ultimately, helping you build up the age of your credit accounts. But instead of you being responsible for making the payments the way you would in a cosigning situation, your friend or family member with stellar credit is the one covering the bill.
How To Rebuild Credit – Frequently Asked Questions
Question #1: Is It Possible to Increase My Score in a Month?
The answer to this is a lot more complicated than it might seem on the surface.
Many credit card issuers, banks, and other financial institutions will report your payments to the credit bureau every month. As such, it’s possible to see updated balances and accounts listed on your credit report from month to month.
But will good financial behaviour raise your credit score in that time frame? Possibly. But not likely. Improvements with your credit score take time.
Unless your credit score is being held down by a problem with your credit report, increasing your score in 30 days or less is unrealistic.
Question #2: If Not Within a Month, How Long Will It Take for My Credit Score to Recover?
It depends on your specific situation.
According to the Government of Canada, a bankruptcy or a collections debt can stay on your credit report for as long as 6 or 7 years. But, on the other hand, if your credit score dipped because of a higher credit utilization ratio or a credit inquiry, you could see a recovery in way less time than that.
Question #3: Are There Other Tools I Can Use to Rebuild My Credit?
Automatic payments and notifications sent over email or text can do a lot to prevent forgetfulness when it comes to paying bills. In addition, you can use credit monitoring for more personalized advice on improving your credit score. Finally, budget and debt repayment planners can also help you develop a consistent monthly plan for tackling debt and outstanding loan balances head-on.
Here’s the Real Secret to Building Your Credit Score
A good credit score is often easy to lose and harder to regain. But when you know how to rebuild credit the right way, it’s easier to navigate. If you’re still unsure of how to rebuild credit, consider the below.
All it takes is a two-pronged approach:
First, you can improve your credit by managing debts and being mindful of your credit utilization ratio. And then, you can improve your credit score by using loans or credit cards to build up your payment history.
Even if you do everything right, you can’t expect your credit score to change overnight. Once you have a solid working strategy, the key ingredient to credit recovery is simply time. So put in the work every week, keep to your budget, and monitor your credit score.