If you are struggling with paying your bills and it’s affecting your credit score, you aren’t the only one whose debt is steadily outpacing your income. According to Statistics Canada, as of the second quarter of 2016 Canadian households hold more than $1.68 in debt for every dollar of annual disposable income.
If you’re struggling with debt and poor credit, how can you ensure that you can get out from under your debt – and with good credit in the end?
Avoid Over Spending
Your first step is to stop the bleeding. To do this, it’s important to identify your spending triggers. Are there typical times or places that you’re prone to impulse purchases? Are you too quick to pull out your credit card without thinking about whether you can afford to pay for what you are putting on credit? Find out what your triggers are and avoid them. Balance your inflows and outflows so that you are not spending more than you make. This will keep you from getting any further into debt.
Build Financial Stability
Now that you are not getting deeper in debt, it’s time to stabilize your finances.
Stop charging more to your credit cards until you can pay off your current balances.
Avoid using forms of credit such as payday loans. They seem like a temporary savior for your cash flow needs but the cost of these loans make it hard to balance your budget the following week.
Start paying your bills on time, and set money aside for those unforeseen expenses like car repairs so that you don’t back yourself into a corner forcing you to use credit again.
If your debts are too high to repay on your own, talk to a Licensed Insolvency Trustee about your debt relief options. While filing bankruptcy or a consumer proposal may temporarily impact your credit score, eliminating debt is the first step to rebuilding your credit down the road.
Check Your Credit Score
Check your credit bureau file to make sure that it’s accurately updated with your current information. It’s far easier to address errors before you apply for new credit. This means less surprises for creditors when they look you up. You can get a free copy of your credit report by mail by contacting one of the two Canadian credit reporting agencies: Equifax or TransUnion. TransUnion now also provides consumers with access to their credit report for free online. You just need to answer a few personal questions to confirm your identity.
See our infographic below to learn more about your credit report.
Once you pay down your balances or eliminate them through bankruptcy (improving your credit utilization score), you need to rebuild a history of borrowing money wisely and paying it back.
Secured Credit Cards
If you have filed a bankruptcy or consumer proposal there are certain products out there specifically designed to help you rebuild your credit. One such product is the secured credit card such as the Home Trust Visa. The term “secured” means you need to put up something of value to help offset the lender’s risk. If you want a secured credit card with a $1,000 limit, you need to provide the lender with a $1,000 security deposit.
A secured credit card is beneficial for you in two ways. 1) this shows that you can use a credit card and pay the bills on-time, which helps you rebuild and 2) depending on which bank you go with, they will invest your $1,000 security deposit so that it grows while you’re re-establishing your credit.
Let’s take a closer look:
This is a broad overview of your credit report. If it’s your first time looking at one, read our post on Credit Report 101.