Credit Repair

Credit Repair

Maintaining a sound credit score is an integral part of a stable life and household in modern-day Canada. Good credit allows you to access financial products such as unsecured and secured loans, mortgages, credit cards, automobile loans, and many other consumer credit products. You may require a strong credit score to determine your eligibility for a stock trading account. Or, you made need it to gauge your suitability for specific jobs requiring a security clearance. Therefore, it is paramount to treat your credit just like your own health – with a proactive approach that focuses on credit maintenance and intervention before credit repair might be necessary.

Understanding Your Credit Report and Score

In Canada, two main credit bureaus compile, store, and track information about how you use your credit. These two institutions are Equifax® and TransUnion®, and they work directly with creditors (e.g., financial institutions, private lenders, etc.) to collect various segments of information about your credit capacity and utilization and assign you a three-digit credit score between 300 and 900. As a best practice, you should check your credit score frequently. Several websites will allow you to do this for free, including Creditpicks through its partnership with TransUnion®.

A good credit score is generally 660+ while an excellent credit score is broadly considered 750+. While it is challenging to maintain a score above 800, it is achievable with patience and reasonable financial responsibility and maturity. If you have a credit score under 660, it is still possible to obtain new credit if you have a good debt-to-income ratio. However, if your credit is below 560, you can expect that you will need a co-signer for new credit. You may also be subject to a high Annualized Percentage Rate (APR) and/or lender fees. Your application may even be rejected if it does not meet the lender’s lending parameters.

Good Credit, Bad Credit, and Credit Repair

While you may be at a disadvantage if you have less-than-perfect or even bad credit, the good news is that it is reversible. The first step is to check your credit score for free and set up credit monitoring on your account. You can know when your credit bureau scores change with regular alerts enabled. These websites will also notify you of new inquiries (individual credit checks) on your account. They will also provide you with detailed month-to-month data regarding the debt you carry. If you are heavily in debt, the first time you visit these sites may be an unpleasant surprise. However, you will be able to see all of the times your credit has been checked, how much debt you have outstanding, any late payments or non-payments.

Now breathe and congratulate yourself; this is the first step of credit repair. You can only move onward and upward from here!

To understand how to improve your credit score, it is essential to know what goes into calculating the credit score.

5 Key Components of Your Credit Score

Payment History (~35%)

Without a doubt, your history of on-time payments is the most crucial aspect of your credit score. Prospective lenders want to know the likelihood of you paying back your borrowed obligations to them. This payment history encapsulates all payments made on consumer debts such as credit cards, other revolving credit, and term loans. It also shows how many past due payments you currently have outstanding, any debt in collections, and/or any other negative information such as declared bankruptcies.

Used vs. Available Credit (~30%)

The cumulative total of your outstanding debt is also an important factor in your credit score. If you have a credit card or revolving line of credit that has historically been close to maxed out, that represents a higher risk for lenders (e.g., a lower credit score). For example, consider two people who each charge about $4,000 every month on their credit card. However, one person has a $5,000 credit limit while the other has a $10,000 credit limit. In this scenario, the person with a $5,000 limit represents a higher credit risk than the person with the $10,000 limit, as any unexpected reduction in income may hamper repayment abilities.

Length of Credit History (~15%)

This component provides clarity on how long your credit accounts have been active. A short timeline of credit usage is typically not enough to determine the responsibility of a borrower. An extended credit history allows for greater visibility on repayment histories and the overall level of responsibility the borrower demonstrates. It is important to note that if you have been involved in a bankruptcy, consumer proposal, or debt management program, your credit history will restart once the program is complete. Program time will not count the months or years before the event. You’ll also likely need to focus on advanced credit repair techniques.

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New Inquiries (~10%)

Lenders have to conduct a credit check every time a borrower requests a loan. If a borrower is repeatedly applying for new credit, this may indicate that the borrower is facing financial challenges. Therefore, this component of your credit score tracks the number of times your credit has been checked in the last five years, the number of credit accounts recently opened, and the time since your most recent credit inquiries.

Public Records (~10%)

Individuals with a previous history of bankruptcy or collections issues will find that these events drag their credit score.

Types of Credit

Credit bureaus also take into consideration the type of credit used. For example, a consolidation loan may indicate that you have had trouble paying off debts in the past. On the other hand, a simple term loan with fixed repayment schedules demonstrates a lower risk profile.

Now that you know what goes into your credit score, let’s discuss what you can do to elevate and repair it.

Credit Repair and How to Elevate Your Credit Score

Develop a Clear Financial Plan

The best way to do this is by creating a monthly spreadsheet that lists all your debts, expenses, and income in one place. This allows you to see your inflows and outflows and budget accordingly to prioritize the repayments of debts. Unfortunately, most consumers who operate without a budget find that they drastically underestimate their expenses each month. This underestimation leaves them in an unfavourable position when planning leftover funds to pay down credit cards and other debt balances.

Discipline

The most financially stable borrowers are not necessarily those that earn the highest income. Instead, they are the ones who are the most disciplined with their spending. For example, if you pay down a credit card by $250 one month, try not to spend $250 in the same month or be right back at square one. Instead, the best thing to do is wait another month, pay down another $250, and reward yourself with $100 in discretionary spending. You have now paid down a net amount of $400. Doing this consistently pulls you further out of debt and, as you may have guessed, positively impacts your credit score.

Hard vs. Soft Inquiries

Hard inquiries are generally required when lenders review your whole credit history to determine eligibility for a new loan. Soft inquiries are more of a “surface-level” look at your credit history. When shopping around for credit options, it is crucial to ensure that only soft inquiries are used. When you find the product you are looking for, any hard inquiries will dampen your overall score. If you review your credit score and see credit inquiries over two years old, you can contact the responsible credit bureau to have them removed. The removals might not happen overnight; the process to remove an aged credit inquiry takes 6-8 weeks. But all credit bureaus have emails, forms, and support dedicated to this action.

Don’t Cancel Your Oldest Credit Card

If you realize that you have too many credit cards on hand, it is worth cancelling the cards you do not use, but keeping your oldest card on hand is beneficial to establishing a longer credit history.

Contact a Company Specializing In Credit Repair

Over the past few years, businesses specializing in helping consumers address negative credit impacts have become more prevalent. While you may have to pay for this service, these businesses have in-depth knowledge of each credit bureau and its processes. They can contact them on your behalf to remove aged credit inquiries, address aged non-payment or late payment issues, and provide documented evidence of your payment on certain debts that might still show an outstanding balance. However, it is vital that you research and work with the best credit repair Canada has to offer. Credit repair ads can be very misleading, so be certain to perform your own due diligence before hiring an advanced credit repair service.

Credit Tips!

We cannot stress how important it is to protect your credit. While it may be tempting to associate the shiny American Express Platinum Card (with no pre-set spending limit) with riches, it is important to remember that the majority of these cardholders are not “rich.” They have maintained a strong credit record, allowing them the prestige and security of having a card with a high spending limit and great benefits. There are no shortcuts.

Ensure that any credit check for preapproval is a soft inquiry. This includes credit checks for a furniture package you might be looking to buy, or the credit check for the latest iPhone you are thinking of getting from your telecom provider. In the worst-case scenario, you decide against the purchase, but you are still stuck with a credit inquiry. In this case, you just lost credit score points for nothing.

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