Are you struggling with debt or wondering what you can do to deal with a bad credit score and move forward financially? The good news is there are actions you can take to improve your financial situation and credit score. Read on to learn tips for re-establishing a positive credit history and boosting your credit rating – and what consumers should avoid doing.
Where Your Credit Score Comes From
Your credit score is a constantly changing number (between 300 and 900, with 900 being the best) that is calculated based on your credit history, and you’ll gain or lose points depending on your actions.
- Credit scores are intended to help a lender decide whether they will offer you credit, how risky it may be to do so, and the borrowing terms they will offer you.
- Because Canada’s two credit bureaus have access to different information and use their own formulas to calculate your score, you probably won’t have the same rating with both agencies.
Credit bureaus don’t disclose the exact algorithms they use to calculate your score, but some of the factors from your credit history they use include:
- Payment history: This is the most important factor. Do you pay all your bills on time, every time?
- Note that ‘non-credit’ accounts such as your cellphone plan and special accounts like your mortgage can provide information to credit bureaus. If you’re keeping your account paid up to date this may not offer you any benefit, but, if left unpaid, these accounts are likely to reflect negatively on your credit history and score.
- Credit usage: How much credit do you have, and what types of accounts? How much of your available credit are you using? Have you gone over your limit?
- Length of history: How established are your accounts?
- Credit seeking: How many ‘hard’ credit checks are noted in your report within the last three years? Have you been seeking a lot of credit in a short period of time?
- Credit checks are categorized as ‘hard’ or ‘soft’ hits. Hard hits may refer to checks done as you apply for credit, and soft hits may happen when a business wants your report to update a record, or when you ask for a copy of your report.
By having a general idea as to what influences your credit score, you can understand some of the actions that you’ll want to take, and which to try to avoid.
Learn More About Credit Reports (and How and Why to Check Yours)
Common Causes of Low Credit Scores
By understanding that your credit score is largely influenced by your payment history, you can consider why your score might be low. Do any of the following scenarios sound familiar?
- Making payments late, not making the full payment required, or having a payment bounce.
- Going over your borrowing limit.
- Using a high proportion of your available credit, which lenders may view as risky (even when your payments are being made as required).
- Having unpaid accounts passed to collections.
- A lot of credit checks being done, which lenders often interpret as urgent credit seeking.
- Not having enough credit history established, or closing a longstanding account which results in losing the credit history, resulting in too little information for potential lenders to consider your credit use.
Difficulty in managing debts and payments may not be the only cause of a low credit score. On the contrary, steps you may take to keep control of your finances can cause a lower credit score, such as:
- Having minimal credit history, or only having one type of credit account: This means lenders have less credit history to consider in assessing your lendability.
- Closing a credit account you are no longer using: You will lose any positive payment and credit history associated with this account.
Can I Do Anything About my ‘Bad’ Credit?
Any time you don’t pay your debts as agreed your credit score will be impacted in some way, but, if you’ve had trouble with this, know that while positive information for active accounts can be kept on your credit report indefinitely – negative information does expire.
Timing for common ‘negative information’ to expire in BC is as follows, and this can vary depending on the province / territory and credit bureau:
- Late payments and NSFs both show for up to six years from the date reported (even if you pay the past-due balance).
- Collections accounts will be removed six years from the date of your last payment.
- Judgments from court action show for six years as well.
- Bankruptcy is only shown on your credit report temporarily, for just six years after you are discharged (released).
- Credit counselling plans show for two years after your debts included in the plan are paid off.
- A Consumer Proposal will show for only three years from the date you finish it, or six years from the date it was filed (whichever is soonest).
Fortunately, as your credit history is constantly being updated, you have opportunity to take the right steps in establishing a good payment history – the combination of a strong payment history and time are the main keys to a good credit score. People who have trouble making payments, experience debt collections or judgments, and even file for personal bankruptcy can and do move on to establish a fresh credit history sufficient for new mortgages, vehicle financing, credit cards, etc. often within a quicker timeframe than they thought possible.
Consumer Proposal VS. Credit Counselling – Understand the Key Differences
Tips to Improve Your Credit Score
To create a positive payment and credit history that will grow your credit score, aim for the following, and remember to give yourself time:
- Build an account history with consistently positive credit use:
- Make your full payments as required on time – every single time – even if your account is in dispute.
- Reach out to your lender right away if you think you’re going to have trouble making your required payment.
- Don’t have too many credit accounts and use less than half (under a third is even better!) of the credit limit you have available on your accounts.
- Limit your hard credit checks to only what is necessary (i.e. rather than applying for many credit products, do deep research and apply only for the products that suit you best).
- Establish a consistent employment history.
- Accumulate some savings.
- Request a copy of your credit report from each credit bureau and check them for errors and fraudulent activity once a year.
- If you find any errors or fraud, take the steps to have these issues flagged and corrected.
For many people focused on establishing a positive credit history and score, the single best thing you can do is get your debt paid off as soon as possible. Once your debt is cleared you can a) reset your debt-income balance and b) focus on establishing a new, positive credit history that is manageable and not costing you interest.
Consumers should understand there is no way to ‘fast track’ repairing your credit history. Companies that advertise such services are likely a scam, seriously misrepresenting their abilities, or trying to sell you a service or even financing that is unnecessary and/or very expensive. Watch out for anyone who:
- Makes promises or guarantees about what they can do for your credit score.
- Tries to pressure you into purchasing services or high-interest financing.
- Asks for upfront fees for their services, or who wants to charge you a referral or administrative fee to connect you with another professional.
Unqualified Debt Advisors – What Consumers Need to Know
The Number One Way to Improve Your Credit – Focus on Paying Off Your Debt
If your current debt repayment plan would require more than five years for you to pay off your non-mortgage debts, connect with a local Licensed Insolvency Trustee for some free advice.
- You can get professional insights and advice into solutions to help you get debt under control so you can move forward and bring your other financial goals into focus.
- There is no cost to talk confidentially to learn about your options, and no referral required.
How Can a Licensed Insolvency Trustee Help?
Licensed Insolvency Trustees are Canada’s only officially designated professionals dedicated to helping people solve debt problems, and we can support you in this in a few different ways, including (but not limited to):
- Assessing your financial situation and exploring your options to deal with your debt, including refinancing, focused do-it-yourself payment plans, credit counselling, Consumer Proposals and more.
- Helping you understand your rights and remedies with regards to a debt or creditor, as well as resources and legislation that can aid you in your specific situation.
- Working together on a debt solution such as a Consumer Proposal.
- Formal debt solutions allow many people to get their debts paid off and establish a solid credit score faster than if they were to continue trying to pay down their debt at their current pace. What’s more, you can potentially save thousands of dollars in interest charges.
Pay Off Debt Faster with a Consumer Proposal
A Consumer Proposal for example, can be used to consolidate virtually all your debt (everything from consumer credit cards, payday loans, lines of credit, etc. to government debts like CERB overpayments, tax balances and more) and cut the amount of debt you need to repay down to an amount that is affordable for you.
You’ll have up to five years to pay this reduced balance off, which is often as little as 20% of your balance, with zero interest or added fees. This can offer you advantage in several ways, short and long-term, allowing you to:
- Improve your cashflow and household budget immediately by significantly reducing your debt payment to one consolidated monthly payment that you can afford.
- With a reduced debt payment, what else could use your financial attention? Savings, retirement, or simply more breathing room to meet your day-to-day living costs?
- Stop ongoing interest charges and/or penalties.
- Ease financial anxiety and debt-stress.
- Gain peace of mind by having a clear plan to pay off your debt and a definite debt-free date.
- Consider what goals you have – or could have – once you’re debt-free!
In less than an hour a Licensed Insolvency Trustee can help you assess your situation and put together a customized debt-free plan, solutions, and resources to help you better manage your debt so you can move forward with your life. Your debt-free future could be closer than you think!
Take charge of your debt – book your free, non-judgmental debt consultation with a local Sands & Associates debt help expert now.