Starting Over - How to Rebuild your Credit
After a Personal Bankruptcy or a Consumer Proposal
First things first: if you want to rebuild your credit, you first need to get out of debt.
Beware of using debt settlement companies - they will make empty promises and leave you in a worse position than before.
Getting out of debt using the Consumer Proposal or Personal Bankruptcy process is relatively straightforward. However, what often isn't discussed is how one goes about rebuilding their credit afterwards.
This topic will be discussed on a step by step basis. First, we’ll provide information about how credit bureaus operate and how they determine your credit score or credit rating. Next, we’ll provide an overview of secured credit cards and how they can be used to rebuild your credit score or rating
Finally, we recognize that while you are rebuilding your credit, you don’t want to fall into the trap of getting back into debt. We’ll provide you with a tool called a “Paycheque Planner” which you’ll find very useful for managing your cash-flow.
Information About Credit Scores/Credit Ratings
When a business gives you credit, it may send information about the history of your debt payments to a credit-reporting agency. Credit-reporting agencies, also known as credit bureaus, are businesses that collect information about your debt repayment history. This information is called your "credit history". When you want to borrow money in the future, the lender will check with a credit-reporting agency to see if you have a good credit history.
If your credit history is poor, a lender can refuse to give you a loan. If the lender does decide to give you the loan, it may charge a higher rate of interest due to a poor credit history
A credit-reporting agency provides information about credit history in two ways, as a credit report and as a credit score or credit rating.
What is a credit report?
Your credit history is recorded in files maintained by at least one of Canada's two major credit-reporting agencies: Equifax and Trans Union Canada. These files are called credit reports.
A credit report is a "snapshot" of your credit history. It is one of the main tools lenders use to decide whether or not to give you credit.
You have the right to see your credit report. Here are links to the two major credit bureaus’ websites which allow you to request your credit report:
The contents of your credit report are confidential and not accessible by anyone but you. However, whenever you submit a credit application, the prospective lender will usually require you to provide them with consent for a credit check, which will allow it to check your credit history.
What is a credit score or credit rating?
A credit score or credit rating is a judgment about your financial health, at a specific point in time. It indicates the risk you represent for lenders, compared with other consumers.
The credit scoring system is used by Trans Union Canada. The credit rating system is used by Equifax Canada. Each of these different credit assessment systems will be discussed separately.
1. Credit Rating - Equifax
Here is an excerpt from Equifax’s website:
Every piece of credit history information in your credit file is assigned a rating by the credit grantor. The most common ratings are "R" ratings. These are known as North American Standard Account Ratings and are the most frequently used. The "R" indicates that the item being described involves revolving credit. If you always pay on time, it will be coded an R1. If an amount was written off because you never paid it back, it is coded R9. The R ratings are a coding system that translates "on time", "one month late", "two months late", etc., into two-digit codes.
Rating What it Means
- R0 Too new to rate; approved but not used
- R1 Pays (or paid) within 30 days of payment due date or not over one payment past due
- R2 Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due
- R3 Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due
- R4 Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due
- R5 Account is at least 120 days overdue, but is not yet rated "9"
- R7 Making regular payments through a special arrangement to settle your debts
- R8 Repossession (voluntary or involuntary return of merchandise)
- R9 Bad debt; placed for collection; moved without giving a new address
2. Credit Score – Trans Union Canada
Your credit score is a judgment about your financial health, at a specific point in time. It indicates the risk you represent for lenders, compared with other consumers.
There are many different ways to work out credit scores. Trans Union Canada uses a scale from 300 to 900. High scores on this scale are desirable - the higher your score, the lower the risk for the lender.
Here is an excerpt from Trans Union Canada’s website:
The basic credit scoring formula takes into account several factors from your credit profile. The impact of each element fluctuates based your own credit profile:
- Payment history - A good record of on-time payments will help boost your credit score.
- Outstanding debt - Balances above 50 percent of your credit limits will harm your credit. Aim for balances under 30 percent.
- Credit account history - An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
- Recent inquiries - When a lender or business checks your credit, it causes a hard inquiry to your credit file. Apply for new credit in moderation.
- Types of credit - A healthy credit profile has a balanced mix of credit accounts and loans.
If your credit score is above 650 you will probably qualify for a standard loan. Under 650, you may have trouble receiving new credit.
How long do these factors affect your credit score or rating?
Information that affects your credit score is usually removed from your credit report after a certain period of time. The length of time that information must stay in your report depends on the province or territory where you live and the type of information.
The following charts show how long it takes before information is removed from Trans Union Canada and Equifax credit reports if your reside in Ontario:
|Event Type||Trans Union||Equifax|
|Credit transactions (from the first date of delinquency)||6 years||6 years|
|Judgments (from the reporting date)||7 years||6 years|
|Collections (from the first date of delinquency)||6 years||6 years|
|Secured loans (from the date opened)||5 years||6 years|
|Bankruptcy (from date of discharge)||7 years||6 years|
|Consumer Proposal (from date of completion)||3 years||3 years|
|Credit counselling (from date of completion)||2 years||3 years|
How do I rebuild my credit rating after a bankruptcy or a proposal?
Here are some general tips for anyone seeking to improve their score or rating, not just recently discharge bankrupts:
- Try to pay your bills in full by the due date. If you aren't able to do this, pay at least the required minimum amount shown on your monthly credit card statement.
- Don't go over the credit limit on your credit card. Try to keep your balance well below the limit. The higher your balance, the more impact it has on your credit score.
- Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short period of time, this may have a negative effect on your score. However, your score does not change when you ask for information about your own credit report.
- You can build a credit history by using a secured credit card. See the next section to find out how.
REBUILD YOUR CREDIT WITH A SECURED CREDIT CARD
A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Thus if the cardholder puts down $1,000, he or she will be given credit of $1,000. This deposit is held in a special savings account.
The cardholder of a secured credit card is still expected to make regular payments, as he or she would with a regular credit card, but should he or she default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows for rebuilding of positive credit history.
Here is a link to a booklet about secured credit cards published by the Financial Consumer Agency of Canada , an agency of the Government of Canada. We encourage you to review this booklet to educate yourself before applying for a secured card:
The best product we're aware of is the Home Trust Secured VISA. They require a minimum of just $500 to get you started. Here is a link to the application form.
Many individuals get into financial trouble even though they earn a good income. On paper at least, it appears that they're earning enough to cover their living expenses.
However, more often that not, expenses come due between pay periods and when it's time to pay the bills, there isn't enough money left over from the last paycheque to cover them. Many resort to borrowing money from credit card cash advances or payday loan outlets. Because these forms of borrowing are so convenient but expensive, it's not too long before someone can find herself (again, if she was previously bankrupt) with a lot of debt due to poor cash-flow management.
Here is a tool called the Paycheque Planner. It's essentially a monthly budget broken down into pay periods. Its objective is to allow individuals to budget their spending so they don’t run out of money before the next pay date:
Here's how to use it:
- Click and save the spreadsheet to your computer and then open it. You will need to have Microsoft Excel to use this tool.
- The spreadsheet automatically calculates the subtotals and totals. You just need to input the data. Use the appropriate worksheet depending on whether you're paid bi-weekly, twice-monthly, or monthly.
- For each pay period, input the date you'll be paid (in the Yellow cells) and the amount you'll be paid
- Input your estimated monthly expenses, paying particular attention to which pay period the expense becomes due
- After inputting this information, you'll be able to see on the bottom of the form whether you will have a cash surplus or deficit for a particular pay period. You should adjust your expenses accordingly.