It’s easy to get dejected if your credit score isn’t where you want it to be. But just because you have a low score today, it certainly doesn’t mean that you’re stuck with it for life. Even if you have faced a bankruptcy or consumer proposal, or have accounts in collections, there are measures you can take to improve your score. In this guide, I explain what you need to know about rebuilding your credit after you have filed bankruptcy or a consumer proposal or if you have bad credit due to past mistakes in handling your credit history.
Table of Contents
How much credit do you need?
I don’t advise that anyone, after completing a consumer proposal or bankruptcy, jump right in and start borrowing again. If you can live without debt, that’s great. However, in today’s modern economy you might need or want access to credit.
The first thing you should do is figure out why you want to improve your credit score. Begin by writing down your expected credit and financial goals.
Credit goals to consider:
- Qualifying for a car loan
- Getting a mortgage
- Getting a credit card
- Qualifying for a line of credit
- Getting a student loan to go back to school
In addition to determining your future credit needs, it’s important to consider what financial or savings goals will help you qualify for new credit.
Savings goals relating to access to credit might include:
- Setting aside money for a secured credit card
- Saving a deposit for a car loan
- Saving for a down payment to purchase a home
These savings goals need to be balanced with other financial goals like saving money for your child’s education or your retirement, so you don’t need to rely on credit in the future.
A credit score is simply a three-digit number between 300 and 900. The higher your score, the more credit options you will have and at lower interest rates. With Equifax:
- 729 to 559 is very good
- 660 to 724 is good
- 560 to 659 is fair
- Anything below 560 is poor
If all you need is a credit card for bill payments or emergencies, you can generally qualify for a secured credit card with a credit score around 650. Even someone in an active consumer proposal or bankruptcy can get an unsecured credit card from certain credit card issuers as long as they don’t have a history of bankruptcy with that provider.
However, if your goal is to take out an auto loan or apply for a mortgage, you will need better credit.
But you need more than just a good score if you are thinking of getting a mortgage or low-interest car loan. To qualify for a larger loan from a regular lender, like a mortgage, your credit will be considered re-established when:
- Two years have passed since you finished your bankruptcy or proposal
- You have two accounts active or established after your completion date, and
- Each account has a credit limit of $3,000 or higher.
One final word on credit scores. Your credit score is for the bank’s benefit, not for your benefit. Credit scores are designed to help the bank decide if they should lend to you. They are there for the bank’s benefit, not yours. Your credit score is only important if you want to borrow in the future. Never chase a credit score for vanity’s sake.
DIY Credit Repair
Repairing credit on your own is possible; it’s not complicated and it is often the fastest and cheapest way to rebuilding your credit. To rebuild credit you need to create a reputation as someone who can handle credit wisely.
Here are the five steps to take to repair credit on your own.
Step 1 – Get a copy of your credit report
Your credit score is only as good as the information that is on your credit report. Credit bureaus get their information from your creditors, and mistakes happen. It’s up to you to ensure that the information on your report is accurate and presents a good image of how you manage credit.
The first step in rebuilding credit is to get a copy of your credit report. The best source is directly from TransUnion, Equifax or your bank if they offer you that service for free in their app or online banking platform. You can request a free copy of your credit report online, by mail or by phone. We’ve provided links and instructions in our article on how to get a copy of your credit report for free.
If you are rebuilding credit after filing a bankruptcy or proposal, we recommend waiting at least two weeks after your discharge or completion before requesting a copy of your report. You want to wait long enough for the government to report your completion date to the credit bureaus, and this is done weekly.
Step 2 – Fix all errors on your report
Now that you are armed with a copy of your credit report, the next step is to look at all the information and see what needs fixing.
There are several areas on your credit report to review.
Be sure that your name, mailing address, social insurance number, birth date, and employment information are correct.
List of accounts
Review the accounts or creditors listed on your report. Regularly checking that these are companies you owe money to is a good way to monitor for fraud and identity theft.
Balances and credit limits
This information is used to calculate your utilization rate, which has a big impact on your credit score, so you want to be sure it’s correct. Accounts included in your bankruptcy or proposal should show a zero balance upon completion of your program.
Next to each account will be a comment or narrative. If you filed a proposal, any debts included should be marked as ‘included in proposal’. Debts included in your bankruptcy will be marked ‘included in bankruptcy”. If this description is wrong, highlight it as something to be fixed.
Each account will also have a two-part code next to it – a letter and a number.
The letter shows the type of account – R for revolving like a credit card or line of credit, I for installment loan like a car loan, O for open accounts such as an internet or cell phone bill, and M for mortgage are the most common.
After the letter is a payment code.
- 0 means the account is new or approved, but you haven’t used it yet.
- 1 means it was paid on time. That’s what you are aiming for.
- 2 to 5 means there was a late payment on the account. The higher the number, the longer you were late. 2 means you were a month late, 3 means two months late, and so on.
- A repossessed vehicle is coded as an 8.
An account included in a consumer proposal should appear as a 7. If your account is in collection or you filed bankruptcy, you will see the code 9. It is not uncommon for creditors to report an account included in a consumer proposal as a 9 until it is completed. Credit bureaus may not update this to a 7 until your proposal is finished. What you do want to be sure though, is that the narrative is correct, as this is what lenders look at.
If you decided to keep a financed vehicle when you filed and are maintaining your payments, make sure there is no narrative beside this debt. Secured debts are not included in your bankruptcy or proposal unless you gave the vehicle back. And as I mentioned before, make sure to make payments on time on accounts that remain after you filed, as this will help you improve your credit score.
Check the date of last payment or activity and the number of late payments reported. If you have filed a bankruptcy or consumer proposal, the date of last payment should be frozen at the date you filed insolvency. Creditors, in particular Canada Student Loans, may continue to report late payments during your bankruptcy or proposal. Again, make a note of this but know that credit bureaus likely won’t correct this until after you have been discharged or your proposal is finished. When they do, they should backdate the correction and remove any late payments to the date you filed.
Public records section
If you have filed a bankruptcy or consumer proposal, review the Public Records Section of your credit report. This is where information about the type of proceeding, the date you filed, and the date of discharge or completion will appear.
Check for any closed accounts still marked as open.
Look for duplicate records – the same debt reported twice under different names, or a bankruptcy or proposal reported twice.
Watch for old accounts being re-reported by collection agencies with updated payment dates or the reinsertion of information you previously had corrected.
Once you have identified everything that needs correcting, visit our article on how to correct errors on your credit report to get the necessary links to the dispute resolution form and information on how to dispute errors with both Equifax and TransUnion.
Step 3 – Pay your bills on time
Your payment history has the largest impact and makes up about 35% of your credit score. Late payments are the worst thing you can do for your credit score. If you have a credit score over 800, one late payment could make your credit score fall 30 points. To rebuild your credit, you must always pay your bills on time.
During your bankruptcy or proposal, make sure you keep up with your internet, cell phone bill, car loan payment, or any other active account that remains after you file. Missed payments will affect your chances to rebuild.
Most major cell phone providers report to the credit bureaus today. Paying your cell phone bill on time during your bankruptcy or proposal is very important. While it does not help your score increase because the payment is small, paying late will hurt your score a lot.
Step 4 – Establish new trade lines
The most important type of credit for credit rebuilding is credit cards. Mortgages and car loans and other forms of credit help, but credit cards have the most dramatic impact on your credit score. A credit card is revolving credit, meaning you control how much you use and repay each month. That makes a credit card the best tool to show you know how to manage credit wisely. And that is the goal of building a good credit history. Credit cards do not have a defined term like a car loan and as we know, the longer you have credit the better your score. Closing an old credit card account can lower your score drastically.
The downside is that high credit card limits can tempt you into borrowing. Only charge what you can pay in full each month.
If you really need a credit card during your bankruptcy or proposal, you can try getting a secured credit card. A secured credit card is backed by a deposit you leave with the credit card company. They will use this deposit if you stop making payments which is why they are willing to lend to more risky borrowers, like someone in a consumer proposal. Getting a secured credit card can help you jump-start your credit rebuilding enough to help you qualify for a regular card after your bankruptcy or proposal is finished. Be prepared though, not everyone who filed a bankruptcy will be approved while still in an active bankruptcy. Talk to your trustee or credit counsellor to see if applying for a secured card while bankrupt is a good idea in your situation.
Start by requesting a small credit limit, say $300 to $1000, depending on how much you can save for the deposit. Our experience shows that Capital One is best for active bankrupts, while Capital One or Home Trust Visa may approve your application during a proposal. The Capital One card comes with an annual fee. Both charge high interest rates, so be sure to pay your balance in full each month.
After your bankruptcy or proposal is complete, and you have corrected items on your credit report, apply for a regular credit card. Certain lenders are more willing to lend to someone with low credit, like Capital One or Canadian Tire (or what’s called Triangle now). If you don’t have good enough credit to qualify for an unsecured card, try a secured card if you haven’t already done so.
After six months of making payments on time on your first new card, you have an increased likelihood of being approved for a second credit card. Credit card providers like MBNA, TD, CIBC, and PC Financial, in that order, are good options assuming these creditors were not included in your bankruptcy or proposal.
If you already have a car loan, you may already have a decent credit score, so you may not need a second regular credit card. As long as you are making your car payments on time, this loan already shows you can manage a healthy mix of credit.
Increase your limits slowly. Asking for a higher limit is asking for more credit, which may mean a hit on your credit report. If your credit card provider offers you a limit increase without you asking, then take it if it brings your unsecured limit up to $3,000 or higher.
Always wait a few weeks, or a few months, between credit applications. New credit may temporarily lower your credit score, so you don’t want to apply for a second credit card right after you got your first.
As a reminder, the goal if you want good credit so you can qualify for a low-interest car loan or mortgage is to have two active established accounts, with authorized credit limits of $3,000 on each card, and maintain a good payment history for two years after your bankruptcy or proposal is complete. You might get credit faster, but it may not be prime credit. It will likely carry a high interest rate and may not look good on your credit report to future lenders.
Step 5 – Keep your utilization rate low
Managing your credit score is more than just paying your bills on time. You must also manage your balances.
Filing your consumer proposal or bankruptcy allowed you to start your credit repair process with no more debt. That’s good.
However, as you rebuild your credit, you will need to carefully manage your future credit balances. Carrying high balances on your new credit cards will hurt your credit score.
Wait, so I can charge one thousand dollars on my new secured or unsecured credit card, but if I wait to pay off that balance until it’s due, my credit score could drop?
Yes, it’s called credit utilization, and it accounts for 30% of your credit score. Credit utilization is simply the amount of money you borrow divided by your total credit limit. Credit bureaus assume that if you need to use most of your credit limit, you aren’t managing your credit well and so lending you more money might be risky for the next lender.
To have a good credit score, you want a low utilization rate on revolving credit like credit cards or a line of credit.
And here’s the key point: you want to keep this balance low throughout the month. You don’t know when your balance will be reported to the credit bureau. Your creditor might report your balance two days before your payment is due. If you have a high balance, it looks like you are carrying a lot of debt, even though you make all of your payments on time.
You want to prove to the credit bureau that you are responsibly using your credit card, and that you don’t need it, which is why you keep your utilization rate low.
So, what’s the right utilization rate?
If you are rebuilding, our experience shows that zero is better than 30%, and you should never go over 50%.
So, if you have a limit of $500, how are you supposed to keep your utilization rate at or close to zero?
Simple, pay your credit cards early. You don’t have to wait until the bill is due to make a payment. I recommend you choose a fixed cost bill, like your cell phone or internet. Set this account to be paid off automatically each month with your new credit card. Next, pay off this balance the same day. After you set this up, hide your card so you won’t be tempted to spend more than you should. Check your credit card statements every month to make sure this is working and that your balance is zero on the due date.
This will do two good things for your credit. You will have a history of payments, and your balances will be low. You are proving that you don’t need the money.
It’s possible to lower your utilization rate by getting another credit card or raising your limit. However, having a lot of credit is risky. You might be tempted to run up your balances, leaving you in trouble with debt again.
Also, if you have a lot of credit cards with high limits, even if your score is good, future lenders may not be willing to loan you more money because they think you have too much credit already.
You only need to worry about managing your credit utilization on revolving credit like credit cards and lines of credit. You can’t manage your utilization rate on your mortgage or car loan. These types of loans start with a 100% utilization when new, and you make fixed monthly payments. Over time the balance you owe falls until it reaches zero.
Build good financial habits, not your credit score
After your bankruptcy or proposal, while you may want to rebuild your credit, my last word of advice is don’t obsess over your credit score.
If all you need is a credit card for everyday use, a credit score in the mid- 600s is likely good enough.
If you take the steps I outlined to re-establish your credit, including two active trade lines with authorized limits of $3,000 each, you should be able to get a mortgage or car loan at a reasonable rate two years after your bankruptcy or proposal is finished.
But getting a loan, and affording a loan, are two different things. The larger your down payment, the better chance of approval since the amount of loan you are asking for will be lower.
Also, remember that more debt benefits the bank. The more you owe, the more interest you pay.
What you don’t want to do is go back to using credit to make ends meet.
That’s why I recommend you focus on building some savings while in your bankruptcy or proposal as you prepare to rebuild your credit.
Remember, credit is not your money. The trick while taking on new credit to rebuild is to find the right balance. You need to show you can use credit but do so responsibly and not get overextended. You want to take on the right amount of credit at the right time for the right reasons.
My normal advice is not to use credit cards to pay for everyday living expenses like groceries or gas. Yes, you can earn some points, but the balances can quickly grow past what you can pay. If you do use your card more often, make multiple payments throughout the month – for example, with each paycheque. It will reduce the risk that you will end up with a balance you can’t pay off at the end of the month.
And if you do apply for a larger loan, apply for only as much credit as you need, whether it’s a car or a house or anything else you might finance. Don’t take on more credit than you can afford to repay. Focus on building savings, not debt.
Your end goal is to be better off financially, not to have a better credit score and lots of credit.
- How Long Does It Take To Get My Credit Back After Bankruptcy or Proposal?
- What is Meant by Credit History and How Do You Influence It?
- How Long Does Negative Information Affect Your Credit Report?
- The First Step To Credit Rebuilding Is No More Debt
- 7 Facts About Your Credit Rating (What’s in your Credit Score?)