Establishing a New and Better Credit History

Bankruptcy or a consumer proposal eliminates the high unsecured debt you were carrying, which was one barrier to getting good credit. Now you are ready to rebuild a better credit profile for lenders to see when you apply for new credit. While, there are no ‘quick fixes’ to rebuild your credit, it is possible to get new loans and credit cards after a bankruptcy or proposal. And you can begin the process right away.

NOTE: We are NOT encouraging you to get credit.  If you can live without a credit card or loan, great!  However, we understand that you may want a credit card for travelling, job requirements, or to make on-line purchases, so we provide advice below only for those who believe they require a credit card.

Step 1: Consider a secured credit card.

After completion of your bankruptcy or after your proposal is accepted by your creditors, you can apply for a secured credit card (where you put down cash as security; for example, you give the credit card company $1,000, and they keep the $1,000 and give you a credit card with a $1,000 credit limit, and you pay the card in full each month, just like any other credit card). Major banks don’t like the hassle of collecting security deposits for credit cards, so they don’t advertise this service, so you can ask your bank, but it’s difficult to get a secured card from your bank.  Fortunately there are two other secured credit card providers in Ontario, Home Trust and Capital One.

The Home Trust and Capital one secured credit cards report to both Equifax and TransUnion so they can improve your credit score, but they do charge high interest on outstanding balances, so you should pay your balance in full each month (which saves you interest, and improves your credit score).  They both have various fees (monthly fees, annual fees, and fees for NSFs), so be aware that there is a cost to these products.

Home Trust Visa

The minimum security deposit is $500, and there are various fees.   To apply, use the online application for the Home Trust Secured Visa Card. (You can qualify while in a consumer proposal, but you will not qualify until you are discharged from bankruptcy).  Once approved, you will receive an email with a 7 digit account number; you will use that number to add Home Trust Visa as a bill payee on your online banking to pay the $500 security deposit.  Once the deposit is received, a permanent account number and Visa card will be issued.  The approval process takes approximately one month.

Capital One Mastercard

If you didn’t owe money to Capital One when you filed your bankruptcy or consumer proposal, you may qualify for a Capital One secured Mastercard. There is an annual fee of $59 (which may change at any time), but the online approval process is fast, and they may give you a card with a credit limit higher than your security deposit (so you may get a $1,000 limit with only a $500 security deposit).

Using a secured credit card regularly combined with making payments in full, and on time, will start the process of re-establishing a positive pattern of credit management. Paying on time provides a good payment history while using then paying off your balance creates a good credit utilization rate.

Step 2: Apply for an unsecured credit card.

After a period of six months to a year, you can apply for an unsecured credit card. Limit your applications as too many applications and too many credit cards will lower your credit score. Set your limit low to avoid the temptation of racking up new credit card debt. If you didn’t owe money to Capital One when you filed your bankruptcy or consumer proposal, you may qualify for a Capital One unsecured Mastercard. Again, use this card wisely and pay all balances in full each month.

Step 3: Apply for a small term loan.

One you have established a good payment history on your credit cards (again this will take 6-12 months or more), consider applying for a small term loan. This can be a bank loan, RRSP loan or even a car loan.

If you are unable to qualify for a new loan on your own, you can ask someone to co-sign your application. Be aware however that if you default, you will be risking the credit profile of your co-signer and they will be held liable for payments you don’t make.

Some tips:

  • Don’t take on more debt than you can repay. Risking late payments or missed payments will set back your efforts to re-establish your credit.
  • Confirm with your lender that this loan will be reported to the credit bureaus.
  • Don’t apply too often. If you are turned down, wait another 6 months or more.

Step 4: Consider changing cell phone companies.

Not all cellphone companies report to the credit bureaus. Check your credit report to see if your cell phone provider appears there. If it does not, and it makes financial sense (you will save money), consider switching to a low cost provider who does report to credit bureaus.

Step 5: Set aside money for a down payment

If you need to apply for a larger loan (a car loan or mortgage for example) start saving money for a down payment. While savings do not affect your credit score, a lower loan balance relative to your income will. In addition, the larger your down payment the more likely you will be approved, the lower your monthly payment will be and you may also be able to negotiate a lower interest rate.