How To: Credit Repair

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Not everyone is born knowing how to balance a budget or save for retirement. Many people, when it comes to financial planning, just close their eyes and cross their fingers. For those people, the first push towards educating themselves about finances often comes when disaster strikes: say, they are refused a mortgage. Bad credit can sneak up on you. You miss a credit card payment here, you let an unpaid bill go to collections there, and suddenly your credit score is way below the 650 mark and no-one will lend money to you any more. In this article, we’ll look at how to live with bad credit and how to rebuild your credit score to something a bit more impressive.

Living With Bad Credit

Living with bad credit is no picnic, but it doesn’t have to be a financial death sentence either. First, while you won’t have all the same options as someone with a high credit score, some sources of finance are still available. Although you should consider going cardless if it was poor credit card use that damaged your credit card rating in the first place, there are even some credit card options for you. Guaranteed approval credit cards work the way the name suggests: even with a history of bad credit, or no credit history at all, your application will be approved. People with poor credit may be required to make a security deposit.

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However, this no-questions-asked approval comes at a price. Because they are typically used by people with poor or no credit history, guaranteed cards tend to come with high interest rates, high fees, and low credit limits. Users of guaranteed credit cards should be especially careful: while they are great for building a good credit history if used responsibly, those high fees and rates can make a bad credit score worse very quickly. In fact, this is the general rule with bad credit loans, from auto loans to credit cards: you will pay a higher interest rate and larger fees.

If a guaranteed credit card doesn’t sound appealing, a secured credit card might be more your style. With a secured credit card, you deposit money with the card issuer in advance. You are almost guaranteed a credit card with a credit limit equal to your initial deposit: the card issuer is taking very little risk, as you have already given them the money that they will then loan back to you. Like the guaranteed credit cards, you may face high fees and interest rates.

Rebuilding Your Credit

Rebuilding your credit is a long process. For example, a first bankruptcy will linger on your credit card for typically six or seven years depending on the province you live in. Further bankruptcies will appear for 14 years. Most examples of poor credit, like defaulting or having a debt sent to collections, will stay for six years. However, the journey of a thousand miles begins with a single step, so here are a few steps you can take right now.

Identify the problem. Residents of Canada are entitled to unlimited free credit reports from Equifax or TransUnion, so long as they apply in writing. Look over yours for any bad debts. In particular, look for any bad debts that you don’t remember incurring: according to a 2005 study by the Public Interest Advocacy Centre, 18% of those surveyed reported errors in their credit reports. If you find them, dispute them. Look also for any debts that have gone to collections and pay those off as soon as possible, then ask the creditor to remove their collection notice from your credit report. Pay all bills on time, and try to reduce future bills to make this easier.

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Check your lines of credit. Responsible use of credit, for example the secured credit cards mentioned earlier, will put some good into your credit history. Don’t use them too much, though. One major component of your credit score is your utilisation ratio: the amount of money that you have borrowed compared to the amount that you could in theory borrow if you maxed out all of your lines of credit. The lower your ratio, the higher your credit score, with the sole exception of zero utilisation. This is why going cardless should be a last resort, but also why you should pay down your debts.

Declare bankruptcy? This is your nuclear option, and should only be done under the advice of a credit counsellor. A declaration of bankruptcy will wipe most debt from your credit report, although not everything (see our article on bankruptcy for details). It will also ruin your credit rating and stay on your credit report for years, making it the slowest way to rebuild your credit. Only do this if you cannot meet your existing debt repayment obligations without incurring further debt, even after attempts at debt renegotiation.

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