When you file a bankruptcy or consumer proposal your credit score may initially drop, but the good news is that the lower your credit score, the easier and faster it is to increase your credit score. Your credit score will show the largest improvement after you are discharged, so your first goal should be to complete your bankruptcy or consumer proposal as quickly as possible. We then recommend the following 10 step approach:
1 Save Money. Before you worry about improving your credit, you must have some savings. If you get laid off, or have an unexpected expense, cash in the bank can cover that expense, and prevent the need to resort to a high interest payday loan or other borrowing that can kill your credit score. Those savings can be used towards your security deposit if you apply for a secured credit card or a car loan, so savings are the most important first step in improving your credit score.
2 Don’t be late. This is the most important credit rebuilding tip. According to Equifax, 35% of your credit score is based on your payment history, so this is the most important factor that impacts your credit score. A late payment can easily reduce your credit score by 50 or more points, so being one day late on your cellphone bill payment can significantly hurt your credit score. To avoid a late payment:
- Review all of your bills, and set an alert in your cellphone or on a calendar for two days before all due dates so that you don’t miss a payment;
- Consider setting up your payments on auto pay;
- If you prefer to review your bills before you pay them, set up an auto pay just for the minimum payment amount so that you don’t have a late payment;
- Pay every bill every payday. If you get paid twice a month, pay half of your cellphone bill every payday so you are always ahead (learn more about no budget budgeting from this short video).
NOTE: Cellphones do report to the credit bureaus, but they are not considered a major form of credit (because the monthly balance is relatively small), so paying your cellphone bill on time will not improve your credit score. Many monthly expenses to not appear on your credit report, including rent, utilities, taxes, debit cards, visa debt cards, and most bank overdraft accounts. However, late payments on cellphones, utilities, rent and other bills will hurt your credit score, so don’t be late!
3 Pay your balance in full each month. Some “experts” believe you should carry a small balance on your credit report to show that you can handle credit. That’s ridiculous, because there is no evidence that carrying a balance will improve your credit score, and you are paying interest, so it costs you money! According to Equifax, 30% of your credit score is based on your credit utilization, so this is the second most important factor in your credit score. If you have a $1,000 limit on your credit card, and you are always at your limit, you are using 100% of your credit limit, so your utilization is 100%, and that’s not good, because it shows you are “maxed out”. The lower the utilization the better, which is why you want to pay your balance in full each month (on your credit card; obviously you won’t pay your mortgage or car loan or other term loan off in full each month).
You do not need to carry a balance on your credit card to improve your credit score. You could pay your Netflix bill each month on your credit card, and set up an automatic payment from your bank account to your credit card the same day, so you are never late.
BONUS TIP: Pay off your credit card every payday. If you get paid bi-weekly, pay your credit card every two weeks. The “experts” will disagree, because most credit cards have a 21 day no-interest grace period, so why would you pay early? By paying early you are never behind, but that also ensures that a lower balance is reported to the credit bureaus each month. You don’t know what day of the month your credit card reports to the credit bureau. It may be the 15th of the month, so if your statement says your payment is due on the 25th of the month, and you pay on the 25th, you are not late, so that’s good, but it also means that your higher balance on the 15th was reported to the credit bureau, which may impact your credit score. By paying your balance in full every payday, you keep your outstanding balance low, and your credit score high.
4 Age matters. Older is better. According to Equifax, 15% of your credit score is based on your credit history, so history is the third most important factor in determining your credit score, because it shows stability. This means that a credit card that you have had for two years will be better for your credit score than a brand new card. That’s why getting a small secured credit card before your consumer proposal or bankruptcy is finished “starts the clock” on your credit rebuilding (although there may be other reasons why rushing to get a credit card too soon is not a good idea).
Start with a low limit, and increase it later when you need it, because age is more important (for this tip) than the dollar amount. So get a secured credit card with a $1,000 limit now, and a few months before you are financing a car or a house, increase the limits, because it doesn’t matter how long you have had a high limit, just how long you have had the card.
NOTE: Only active credit accounts contribute significantly to your credit score. For example, if you had a car loan a few years ago and paid it off, it no longer impacts your credit score. If a car loan is your only active account and you pay it off, your credit score may drop by 100 points, but if you have two other active accounts your credit score will likely only drop by less than 30 points when you pay off a car loan (see the “2 and 3 minimum” tip below).
If you do get a new credit card (see tip 5 and 6 below), using the card each month (and paying it off) is better for your credit score that having a credit card that you never use.
Also, when you upgrade a credit card, it may show as a new credit card. For example, if you have a basic credit card from your bank, and you upgrade to a “gold” card or a new card with better bonus points, the bank may close your old card and open a new one. That’s not good for your credit score, because age matters, and you just lost your old card. So, if you do upgrade, ask the bank to keep your old account active so you don’t lose that past history.
5 “2 and 3” is the minimum. To fully re-establish your credit, you must have two “trade lines” with credit limits of at least $3,000. A “trade line” is a line on your credit report, and would include a credit card, line of credit, car loan, car lease, loan or mortgage. You don’t need to have two $3,000 credit cards immediately; your goal is to have them a few months before you apply for a major financing (such as a car loan or a house mortgage). Start with a small secured credit card, then when you qualify get an unsecured credit card, and then as your credit improves increase your credit limits so that you are at “2 and 3” before you apply for major financing.
6 Credit cards matter. Because credit cards are “revolving” credit (the amount you owe goes up and down throughout the month as you make purchases and payments) credit cards have the most impact on your credit score. So, the fastest way to improve your credit score is to get two new credit cards, and gradually increase the credit limits until they are each at $3,000 or more (if you are trying to improve your credit score so you can finance a car or a house; if you don’t need a high credit score, don’t worry about it). Here’s the standard credit card progression, from easiest to hardest to get:
- Start with a secured credit card. These are easy to qualify because you are providing security to the credit card company in the form of a deposit. You deposit $1,000, they give you a credit card with a $1,000 limit, secured by your deposit. There is no risk to the credit card company, so even if you are in a consumer proposal or bankruptcy you will likely qualify. You must have a security deposit, which is why saving money is very important. This can be done while you are in your bankruptcy or consumer proposal.
- Apply for an unsecured credit card. Once you have a secured credit card, your credit score starts to improve, so an unsecured credit card (where you don’t put up a security deposit) becomes easier to qualify for (although many companies won’t approve your application for an unsecured credit card until after you have completed your bankruptcy or consumer proposal; it will depend on your credit score).
- Each case is different, but in our experience the easiest credit cards to qualify for to rebuild your credit after your proposal or bankruptcy is finished are:
- Capital One has an unsecured card that is designed for credit rebuilding (and if you are a member of Costco, their Costco Mastercard is relatively easy to qualify for)
- Canadian Tire, now called Triangle credit card, is relatively easy to qualify for, but you must already have a credit score (so getting a secured card first will help), and they probably won’t qualify you for a card if they were a creditor in your proposal or bankruptcy
- PC Financial is also relatively easy to qualify for
- Once you have re-established credit (with a secured card, and perhaps a Capital One or Triangle card), wait a few months for your credit score to stabilize, and then you can consider applying at your bank. TD Bank tends to be the easiest bank to qualify with after discharge, CIBC is also relatively accommodating. NOTE: We don’t recommend applying for a credit card from a company that you owed money to when you filed your proposal or bankruptcy; you are less likely to qualify. If you do apply to them, wait at least a year after your bankruptcy or consumer proposal starts, to ensure that they are not “reactivating” your old card where you owed money.
- We find that Scotiabank tends to be the most difficult bank to qualify with after filing, and even Walmart and Home Depot are relatively hard to qualify for.
7 Get a copy of your credit report WELL BEFORE you plan to apply for credit. There are two main credit bureaus – Equifax and TransUnion. They may have different information, so it is a good idea to check both. Follow this link for more information on how to get a free copy of your credit report.
Check your report to ensure that:
- all debts that were included in your bankruptcy or proposal are correctly coded
- your name and address and personal information are correct
- there are no writs (rare)
- creditors listed are debts in your name
- the information in the public records/legal section is correct
Be aware that some lenders may not know how to properly read a credit report. You may need to direct them to the legal/public records section of the report that correctly shows the type of proceeding you filed.
If there is inaccurate information, file a dispute resolution with both credit bureaus. There is a dispute resolution form that is usually included with your credit bureau report (often the last page). Note that correct information cannot be changed. Complete the form as accurately as possible, stating the specifics of the error, and then send it in. You will want to wait one to two months to check your credit report again to confirm that the errors have been corrected. Send your dispute resolution by mail and attach a note requesting a written reply for your records.
8 Minimize hard hits. When you apply for credit, the lender will do a credit check on you by pulling a copy of your credit report. This is called a “hard hit” and shows up on your credit report in the credit inquiries section, and a hard hit may lower your credit score by 3 to 10 points. Too many hard hits is not good, because it may appear that you are being turned down for credit, so you are applying at many different places, so do not apply for credit more than needed, and don’t apply for credit four months before applying for major financing (a car loan or mortgage).
NOTE: It is common to “shop around” when financing a new car, so if you have a lot of hard hits from car lenders in a short period of time (within 45 days for Equifax, or within 14 days for TransUnion) it will only count as one hard hit, so if you are “shopping around”, do it all at once; don’t spread it out over many months.
(A “soft hit” is a credit inquiry done by an existing lender. Many credit card companies and banks will check your credit every few months, so that they can be aware of any major changes to your credit. Since you do not apply for new credit, these soft hits do not have any impact on your credit score).
9 Review your credit report regularly. The credit reporting agencies are required to give you a free copy of your credit report once per year, so a good strategy is to get a free copy of your Equifax report, review it and correct any errors, and then in six months get your credit report from TransUnion, and review and correct as necessary. Then in six months get your Equifax report. By alternating you get a copy of your credit report every six months, for free.
Currently Royal Bank and Scotiabank offer free credit reports to their customers, so check your on-line banking if you bank at one of those two banks (and then you only need to get your credit report once a year from the credit reporting agency that your bank doesn’t use).
There are services that will give you your credit report and your credit score for free (Credit Karma, Borrowell, Mogo). We do NOT recommend them because:
- the information is often incomplete, inaccurate or out of date (which is why it’s free), and
- once you sign up for these services they know everything about you (because they have your credit report) so they will attempt to sell you many different products (that’s how they can offer a free credit report; they make it up with sales commissions) so not only is that a potential security issue but you also run the risk of applying for high cost credit that you don’t need.
For most people your free credit report every six months is sufficient.
You can buy your credit report and credit score directly from Equifax and TransUnion, but unless you really want to see your credit score (perhaps before applying for major financing like a car loan or mortgage) we don’t recommend it because:
- it costs money (around $20 per report), and
- your lender doesn’t use the exact report you see (they create their own reports based on information from the credit bureaus and other sources) so there is no guarantee that what you paid for is what your lender will use when making a credit granting decision.
10 Remember your credit report is only one factor a creditor looks at when thinking about lending you money. Make sure you also take a look to improve other areas such as stability, savings, job security and income that also impact your ability to get credit.