How 5 Strategies Can Fix or Re-Establish Your Credit Score in Canada at No Cost

1.  Determine the underlying causes of your credit issues

Obtaining a copy of your credit report, along with your credit score, can provide valuable insight into whether you have poor credit. However, simply knowing that you have bad credit is insufficient; it is crucial to understand the reasons behind it.

For many individuals, circumstances beyond their control, such as illness, injury, unemployment, reduced income, or separation/divorce, may have contributed to their credit problems. If you find yourself in this situation, you can skip to the next point. However, if you are unsure about the causes of your credit problems, continue reading.

Certain individuals tend to opt for “easy” credit solutions like declaring bankruptcy without taking the time to analyze how they ended up in a financial mess. Unfortunately, they often find themselves on the verge of a second or third bankruptcy before realizing the importance of understanding their mistakes and avoiding repetition.

If you cannot determine the root cause of your financial or credit problems, seek assistance from someone who can help. Consider consulting with a family member, credit counsellor, financial planner, or a trusted friend.

2. Develop a budgeting strategy

One of the primary reasons why many individuals face credit issues and low credit scores is due to their failure to create a spending plan, or even if they have, their inability to adhere to it. A spending plan is also known as a budget, and if you truly wish to improve your credit and maintain good credit in the future, you must have a spending plan or a budget in place. Without one, you will likely spend more than what you earn and eventually find yourself in financial trouble.

One crucial aspect of a budget that most people tend to overlook is the allocation of funds toward a separate savings account. This should be done even if you are currently struggling with debt. If you do not have any savings, what will you do when unforeseen expenses arise? Will you resort to using your credit card? Unexpected expenses are a part of life, and if you do not have any savings, it will be extremely difficult for you to get out of debt.

To initiate your savings, start by setting aside a few hundred dollars and gradually increase it to $500 and eventually $1,000. If this seems like a significant amount to keep in savings, consider the cost of emergency car repairs or home repairs. How much would it cost you to travel for an emergency visit to an ill family member? It is imperative to have some savings in hand to stay within your budget and get out of debt.

3.  Tackle your financial obligation

Paying Your Debts

After establishing a solid spending plan or budget, it’s time to address your debt. To effectively deal with debt that is negatively affecting your credit, the best approach is to start paying it off. Discover effective strategies for accelerated debt repayment by clicking here. If you find yourself utilizing 75% or more of your credit card or line of credit limits, it’s crucial to prioritize reducing your debt as quickly as possible. Going over this limit has a detrimental impact on your credit score. By paying down your credit card balances to below 50% of their limits, you can significantly improve your credit score. This approach not only benefits your credit but also aids in managing your budget as it reduces the amount of interest you’ll be paying.

Getting Back on Track with Late Payments

If you’ve fallen behind on any payments, make every effort to catch up. Failure to do so will result in these late payments continuing to be reported on your credit report as overdue. Over time, this will worsen your credit report. If you’re unable to make up for the missed payments, reach out to your creditors and explore the possibility of working together to rectify the situation. In cases where catching up seems impossible or creditors are uncooperative, consider seeking assistance from a reputable non-profit credit counselling service. These organizations offer debt repayment programs that facilitate paying off your debts through affordable monthly payments. Upon completing the program, you’ll have the opportunity to rebuild your credit rating from scratch. While this option may not be suitable for everyone, it has proven to help numerous individuals restore their credit more rapidly than other alternatives. According to Equifax, individuals who successfully complete non-profit debt repayment programs tend to have higher credit scores than the average Canadian.

Bankruptcy: A Last Resort for Credit Repair

If you’ve exhausted all other options and a reputable Credit Counselor has determined that bankruptcy is your only choice, it is possible to utilize bankruptcy as a means to fix your credit. However, it’s essential to note that many individuals choose this option without consulting a Credit Counselor and regret their decision. Bankruptcy should always be considered a last resort as it is the slowest method for rebuilding your credit. The entire bankruptcy process can negatively impact you for 8 to 10 years and may not address all of your debts.

The Duration of Negative Information on Your Credit Report

If bankruptcy is not pursued, most negative information can remain on your credit report for 6 to 7 years, depending on your province of residence. Bankruptcies stay on record for 6 to 7 years after discharge, while judgments can be renewed for up to 10 years if someone has obtained a judgment against you. For instance, if you had a series of late payments on a credit card but subsequently started making timely payments six years after the 6/7 year mark, all records of those late payments should be from your credit report. As far as anyone reviewing your credit report is concerned, those late payments never occurred. If these late payments continue to appear after the designated time frame, contact the credit bureau responsible for reporting the outdated information and request that they cease reporting it. They are obligated to investigate the matter and take action if they are reporting derogatory information that is more than 6/7 years old.

What If Bankruptcy Is Not an Option?

In situations where bankruptcy is the best course of action but you cannot afford it, two scenarios arise: those who cannot cover the $1,800 bankruptcy fee and those who earn too much or possess too many assets to qualify for bankruptcy. If you fall into either category, consult with a Credit Counselor to devise a repayment plan that satisfies your creditors. If the bankruptcy fee is unaffordable, you can essentially achieve similar results by doing nothing. By refraining from making any payments on your debts for a full six years, your debts will no longer be collectible by law. Essentially, you will be relieved of them. However, this option should only be considered by individuals in dire financial circumstances who cannot afford to repay their debts. Creditors will not allow individuals with jobs or assets to evade their obligations. They can take legal action and seek a judgment against you. If granted by a judge, this judgment remains valid for 10 years and can be renewed for an additional decade. Therefore, if you’re seeking an effortless way out, this is not a viable solution.

4. Ensure that you fulfill your payment obligations according to the agreed terms.

After ensuring that you have cleared your overdue payments and are now making timely payments, it is crucial to maintain this practice if you wish to improve your credit score. The easiest way to do this is by making payments as agreed upon and on time. Ensure you pay your bills on time every month and focus on reducing your outstanding balances. By doing so, you will be on the right track to restoring and maintaining a good credit score. It is as simple as that.

It is important to note that your payments are tracked by computers and not by individuals. Therefore, there is no room for excuses if you fail to make timely payments. Computers are precise and unforgiving in their tracking, and there is no arguing with them. To avoid any delays in your creditor receiving your payment, it is advisable to make your payments two or three days before the due date. Remember, maintaining a good credit score is vital in securing future loans and financial stability.

5. Rebuilding your credit. Learn the steps to take…

When it comes to repairing your credit, it’s important not to wait until all the negative information on your credit report disappears before you start rebuilding your credit. Some individuals find themselves in a situation where they have no active credit accounts, only debts that have been paid off. If you’ve paid off all your debts and none of your past negative information is being reported, you won’t have a credit score (or it may be negative) unless you have at least one active credit account being reported. Without an active credit account, the credit scoring systems cannot generate a positive credit score for you because they can’t assess how you currently utilize credit. That’s why it’s beneficial to have at least one credit account, such as a credit card, line of credit, or overdraft, that you responsibly maintain at all times, enabling the credit system to generate a positive credit score for you.

If you’re in the process of repairing your credit by making timely payments on your credit cards and waiting for time to pass, it may be wise to obtain a credit card or overdraft account that can be reported to your credit bureau. This way, when the negative information is removed from your credit report, there will be a history of positive information that can instantly boost your credit score once the negative items are gone.

Thomas Edison, a renowned inventor, once famously said, “Tomorrow is my exam, but I am not worried because one test does not define me.”

While exams and credit reports are undoubtedly significant, Mr. Edison had the right mindset that we can all learn from. Don’t allow a piece of paper to dictate your future. Find a way to achieve your financial goals regardless of what the paper says.

If you still have negative information on your credit report, you will likely need to apply for a secured credit card or secured overdraft account. With a secure card or overdraft, your financial institution will hold your money as collateral for your credit limit. This means that if you fail to make payments, they will simply close your account and use the money they are holding to pay off the outstanding balance. If you’re interested in exploring this option, check with your bank, credit union, or major credit card companies to see if they offer such products. We provide more detailed information about this option on our “Establishing Credit” page.

Another way to rebuild your credit is by addressing your credit issues and having someone co-sign a loan, credit card, or overdraft for you. Of course, this person must qualify for additional credit on their own. If you have someone willing to do this, it can be an option to consider. However, it’s essential to be aware of the risks associated with co-signing.