Have you recently completed bankruptcy or considered the process to eliminate your debts? If so, you may have concerns about the damage to your credit, and more importantly, how to rebuild your credit after bankruptcy in Canada.
With a tarnished credit history and low credit score, qualifying for new loans will become more challenging. That means you’ll need to put time and effort into restoring your credit to where it was before your debt problems dragged it down.
As Licensed Insolvency Trustees, we understand that rebuilding your credit after bankruptcy can be daunting. In this guide, we’ll show you step-by-step how to reach this goal and do it sooner rather than later.
The seven-step plan for fixing your credit
There is no absolute strategy for rebuilding credit post-bankruptcy. However, the seven-step plan below can be helpful when deciding your approach.
Step 1: Review your credit report and credit score
Before taking action to revitalize your credit, you must know where you currently stand. That way, you’ll have an idea of how much work you need to do. You’ll also understand the factors that led to you filing for bankruptcy and what you can do to avoid doing so in the future. And the way to do that is to review your credit report.
Luckily, obtaining a copy of your credit report is easy and won’t cost you anything. You can order a free copy from one of Equifax and TransUnion, two of Canada’s largest credit bureaus.
Carefully examine each section of your report for accuracy. Take note of mistakes in your personal information, account details, payment history, etc. Disputing errors can give your credit score an immediate boost. So, if you spot any, it’s worth reporting them to the credit bureaus.
In addition, you’ll want to look up your current credit score, which you can access through Equifax and TransUnion. As you improve your credit history, your credit score will gradually rise. So, knowing your starting point is valuable for tracking your progress over time.
Step 2: Create a credit-rebuilding budget
Now that you’ve become acquainted with your credit report, it’s time to build a budget suitable for rebuilding your credit.
Falling deep into debt is the last thing you want after emerging from bankruptcy. But it’s a distinct possibility if you spend more money than you earn. A detailed, well-structured budget will keep your spending in check, so you don’t have to rely on debt to cover expenses. It also helps you pay your bills on time and manage your cash flow wisely.
Determine how much you can spend each month while staying current with your debts. At a minimum, ensure you can meet your minimum payment requirements. Remember to include expenses related to credit-building tools and services, such as interest charges and reporting fees.
Tip: Set up an emergency fund to cover unexpected expenses. Dipping into loans to handle emergency bills can hamper your credit-rebuilding efforts, especially if you fail to repay the money you borrow on time. Start by setting a modest goal for your emergency fund, even if all you can spare is $10 a week. Over time, your financial safety net will grow.
Step 3: Pay your bills and debts on time and every time
Paying your bills and debts on time is one of the most effective ways to improve your credit. Your payment history accounts for a staggering 35% of your credit score, the most of any factor the credit bureaus use to calculate this crucial number.
Lenders like to see a consistent history of timely payments when they review credit reports. So aim to pay on time above all else. Late payments can severely impact your credit, especially following bankruptcy, so do everything you can to avoid missing your deadlines.
Consider setting up automatic payments or notifications so you never miss a due date. If you make a late payment, contact your lender to see if they can report the transaction as being on time.
Step 4: Apply for secured credit products
Secured credit products, such as a secured credit card, are practical tools for recovering your credit after bankruptcy. They’re also more accessible than standard loans, which you won’t likely qualify for following your bankruptcy discharge.
Secured credit products require you to register an asset as collateral before using the account. This condition protects the lender should you default on your payments. By repaying a secured loan on time over an extended period, you demonstrate to lenders that you’re a responsible borrower.
Here are some examples of secured credit products:
Secured credit card. With a secured credit card, you deposit a certain amount of money with the lender, which acts as your credit limit. To increase your borrowing power, you must deposit more funds into your account.
Credit-builder loan. A credit-builder loan works differently from a traditional loan. Instead of directly borrowing money and repaying the balance, the lender sets aside the principal in a savings account. Then, you make fixed payments over a set term. Once the term ends, you receive the entire principal. You may have to pay interest or fees depending on which credit-builder loan program you use.
A Canadian company that offers credit-builder loans is Koho, which offers the service alongside its prepaid debit card. Other companies that provide a similar service include Refresh Financial and Spring Financial. Before enrolling in a credit-builder program, research to ensure it aligns with your goals and budget and is legitimate.
Step 5: Get a co-signed loan or become an authorized user
Do you have a trusted family member or friend with a spotless credit history? If so, consider asking them if they’d be willing to co-sign a loan with you or add you as an authorized user on their credit card.
After bankruptcy, you won’t qualify for a loan at an affordable interest rate, at least not for a while. However, a co-signed loan will allow you to leverage someone else’s good credit standing when applying for one. As a result, getting approved for financing will be easier. And once you do, your on-time payments will reflect positively on your credit report.
Similarly, being an authorized user on someone else’s credit card account will give you access to their borrowing power. You can charge purchases to their card as needed and make timely payments to rebuild your credibility as a borrower.
Step 6: Apply for small amounts of credit on your own
As you regain confidence in managing debt and your credit improves, you start applying for traditional loans without a co-signer.
Apply for a credit card, line of credit, or personal loan with a modest limit to avoid overextending yourself. And remember to practice sound debt management by:
- Keeping your balance low
- Making timely payments
- Minimizing your interest by contributing more than the minimum each month
Step 7: Stay consistent and monitor your credit over time
Rebuilding credit is a marathon. It can take months or years to get the results you’re after. So be patient and inspect your credit report periodically to see how you’re doing. Aim to review it at least once a year. However, let’s say you’re planning a major purchase, such as a home or car, that requires financing. In that case, you’ll want to check it more frequently, maybe every quarter.
Luckily, some lenders provide free credit score tracking, and you’re entitled to at least one free credit report from Equifax and TransUnion annually. You can track your progress without incurring an additional expense.
Consistency is key when taking your credit from “poor” to “excellent.” Stick to your plan and celebrate the small wins. The rewards will come in time.
Extra credit-building tips
Below are some credit-building hacks that go beyond the typical advice. Use all or some of these to reach your ideal credit score faster.
Borrow to fund your RRSP. Ask your financial institution for a modest loan and deposit the funds into your RRSP. Then, repay the debt as per your agreement. This tactic will allow you to add a slew of on-time payments to your credit report while investing in your future. As a bonus, the RRSP contribution will help lower your taxable income.
Open a new credit account, but don’t use it. Believe it or not, opening a new credit card account while keeping the balance zero can increase your credit score. The reason is that your credit utilization ratio decreases. And since utilization makes up about 30% of your credit score, the impact can be substantial. Open an account with little or no maintenance fees to minimize your expenses.
Avoid applying for too many loans at once. Avoid applying for more than one credit product at a time. Each time a lender performs a hard inquiry on your credit report, your credit score will temporarily dip. So, space out your applications to minimize the impact of too many hard inquiries. If you fail to qualify for a loan, wait six months before applying for a new one.
Participate in a rent-reporting program. If you’re a renter, consider enrolling in a rent-reporting program. These programs allow you (or your landlord) to submit your on-time rent payments to credit bureaus, adding a positive payment history to your credit report. This tactic can be valuable for building up your credit score if you have a sparse credit history or want to minimize your reliance on debt.
Join a lending circle. A lending circle is a community-based program where people lend and borrow money from one another, usually at no cost. Each member contributes a set amount to a pool of funds, which one member receives each month to use as they wish. The cycle repeats until everyone has their turn accessing the funds. Like a traditional loan, payments are submitted to credit bureaus.
Leverage peer-to-peer lending platforms. Peer-to-peer (P2P) lending platforms like goPeer connect individual lenders with borrowers, including those with low credit scores. One advantage of using these platforms is the potential to get a competitive interest rate, thanks to the fierce competition between lenders and lower costs in setting up a loan.
The bottom line on rebuilding your credit after bankruptcy
It takes patience and discipline to restore your credit after bankruptcy. But with the right plan and consistency you can start making gains fast. The most important tips to remember from this article are to a) only take on debts that fit in your budget and b) always pay on time. Start by borrowing small sums of money, starting with secured loans if needed. Then, gradually work your way up. Make sure to track your progress by reviewing your credit report periodically.
Are you considering bankruptcy but aren’t sure it’s your best option? If so, contact us for a free, no-obligation consultation. We’re happy to review your financial situation, answer your questions about the bankruptcy process, and explore alternative solutions like filing a consumer proposal.
