A history of money mistakes can put a major strain on our credit score with correspondingly unsavory ramifications such as reducing our chances of qualifying for loans or getting good interest rates. Most of us have done considerable damage to our credit score without realizing it. Many seemingly inconsequential acts can have an undesirable effect on your credit score. Fortunately, poor credit score is absolutely restorable! Here are five proven steps you can adopt to rebuilding your credit.
Step 1: Check your credit report
Identifying areas that needs improvement is the foremost step to rebuilding credit and a copy of your report is very instrumental in this regard. Late or missed payments, high debt utilization, bankruptcy and other related financial transgressions can have a staggering impact on your credit score. Your credit report provides a clear-cut picture on where you went wrong, thereby making you better equipped to make informed decisions.
Checking for inconsistencies in reports and notifying creditors to make relevant adjustments is imperative as errors can cause scores to dwindle. You are entitled to a free copy of your report from each credit bureaus; Equifax and TransUnion, once a year. Getting a copy from both agencies is advisable, as they may have different information about your credit history.
Step 2: Make Arrangements to update your account and Pay Down Debts
Payment history has a profound impact on your credit score, so being behind on payments could stagnate or even aggravate your credit situation. When experiencing payment difficulties, contact your creditors and negotiate payment arrangement within the scope of your budget. If your creditors cannot work out an arrangement, an accredited, non-profit counselor may be able to help create a plan to bring your account up to date, and pay down debt. Paying down your debts is pivotal to rebuilding credit. The amount of debt you have owing in relation to the available credit you have; known as credit utilization, is the second most important factor in your credit score. Let’s say your available credit limit is $10,000 and you are using $7,500. Your credit utilization is at 75%.
Similarly, using up a significant part of your available credit could have a damaging impact on your credit score. It is important to pay down as much of your debt as you can. In ideal situations, people try to get their utilization down to 50%, conversely, 35% is preferable. For every debt you pay down, there would be a commensurate decrease of your credit utilization which would culminate into a boost to your overall credit.
Step 3: Rebuild Credit with a Secured Credit Card
An important part of building credit is developing a consistent payment history, demonstrating that you can pay back money borrowed and responsibly manage debt. One of the best ways to rebuild credit is with a secured credit card.
A secured credit card functions like any other unsecured credit card, in that you’ll have access to credit and your payment information will be reported to the credit bureau each month. However, unlike credit cards, you will need to provide a security deposit as a form of collateral before you can use the card. When you make purchases with a secured credit card, those purchases are not deducted from your security deposit. Instead, you’ll be expected to repay that amount to the credit card company, as you would with a regular unsecured credit card. How you use your secured credit card will affect your credit score as it communicates to your creditors whether you can handle credit responsibly.
After six months to a year of making steady payments and staying within your balance, you can ask for your secured credit card can be “upgraded” to an unsecured card. Credit card is a great tool to rebuilding credit; however, it’s important to realize that having any sort of credit card isn’t an excuse to indulge in extravagant and unrealistic spending.
Step 4: Endeavor to make Minimum Payment by the Due Date
As you take practical steps towards credit score building, it’s critical that you make your payments on time, and this is applicable to non-credit bills as well. It’s important that you establish a reliable payment history by paying at least the minimum payment on all bills by the due date. At the very least, you should make a conscious effort to avoid missing payments or repeatedly making late payments as it could be detrimental to credit score, to this effect, setting up reminders could be very instrumental.
Setting up automatic bill payments for your bills are paid automatically each month is very advantageous. There are, however, two potential downsides to automatic payments. Automatic payment setup on internet banking could result in missed payment if there is insufficient fund in your account. If the bank or someone else has setup the payment, it could overdraw your account if you don’t have enough funds on hand and result in an expensive NSF fee. However, if you have a line of credit on your account that’s not maxed out, this shouldn’t be a problem.
Step 5: Adopt Good Financial Habits
Frugality and exemplary saving culture are fundamentally crucial to rebuilding your credit score, and the most effective way to achieve this is to create a budget that accurately reflects your earnings and expenditure. Budget helps prioritize spending while focusing on the most important things. After a functional budget, setting up money reminders would help ensure you never make late payments. Good financial habits make it easier to attain and maintain new and better credit score.
Rebuilding Credit Takes Time and Patience
Bad credit could be very disturbing, counterproductive and restrictive in many ways. Sadly, there are no instantaneous solutions to rebuild credit in Canada. But the good news is that rebuilding your credit; even rebuilding credit after bankruptcy, can be done over time, with some patience and financial discipline. If you follow the five steps outlined here doggedly, you can expect to see consistent and noticeable improvements in your credit score and credit history.
If you want to get more information on how to rebuild credit, you can make a free appointment to meet with one of our accredited, non-profit Credit Counselors. They’ll help you go through your finances, set up a budget, and lay out all your options so you can get your finances back on track.