How to rebuild credit

If you’re reading this, you’ve likely had some restless nights worrying about your credit score.

Past mistakes and missteps are usually to blame for a poor credit score. Maybe you’ve had a lot of late loan payments, maybe you’ve regularly failed to make the minimum payments on your credit card. Or maybe you’ve failed on a loan or a mortgage.

Whatever the reason, you need to rebuild your damaged credit to show lenders you’re safe to lend money to.

Here’s two pieces of good news: 1. you can rebuild your credit, and 2. you’ve come to the right place to learn how.

Understanding your credit score

First, we need to understand credit scores, what they mean, how they work, and what impacts them.

Your credit score is a three-digit number that represents your credit history, which is a record of how reliable you are at borrowing and paying back money. Credit scores range from 300-900 (300 being the worst and 900 being the best). In Canada, a score in the 300-659 range is considered poor, between 660-759 is considered good to very good, and between 760-900 is considered excellent.

Your scores are calculated and logged in Canada by two main consumer credit bureaus, Equifax and TransUnion. Lenders submit information about your borrowing to the credit bureaus – such as missed or late payments, the balance on your credit cards, and how much money you’ve borrowed – and the credit bureaus use this information, as well as other public information, to assign you a credit score. Your credit score is updated regularly as new information is submitted.

When you apply for a financial product like a loan, credit card, or mortgage, lenders will then ask the credit bureaus for your current score. Your score at that time will determine if they decide to lend to you, and what interest rate to offer. If your score is good, you will receive the best loans and rates.

What contributes to your score

If your score has taken a dive in the past, it’s important you understand why, so you know how to avoid the same mistakes.

Payment history

Credit bureaus (as well as lenders, obviously) really care about how reliable you are. They record how well you repay your debts, including how often you’re late or miss payments, for debts such as mortgages, loans, credit cards, and lines of credit. This criteria is worth about one-third of your credit score.

Amount owed

How much money you owe also matters. This criteria is also worth about one-third of your credit score. Credit bureaus look at how much you owe to all lenders, with a particular focus on your credit utilization – basically, the percentage of available credit to you versus how much of that credit you’ve spent. If you have a credit card with a $1000 limit and you owe $500 on it, you’ve utilized 50% of that credit. The bureaus like a credit utilization under 30%. Owing more than 75% of available credit can have a bad impact on your score until you pay it down.

Length of credit history

If you’ve borrowed credit for a long time and paid it back responsibly, you’ll have a good (and long) credit history. If you’ve only recently started borrowing credit, the bureaus don’t yet know how trustworthy you are. Similarly, if you have a history of unreliable payments, they won’t know if they can trust you and your score will reflect that.

Credit mix

Credit bureaus like to see that you’ve borrowed money in different forms (and that you repay it). A good mix might include credit cards, loans, lines of credit, and mortgages.

Applications for credit

When you apply for a new form of credit – a new credit card, mortgage, car loan – the lenders ask the bureaus to check your score and find out if you’re trustworthy. Each time these “hard inquiries'' happen, your score takes a hit. Asking for lots of different credit in a short window can be a red flag to the credit bureaus because it can look like you’re in financial trouble.

Bankruptcy and debt collections

It probably goes with saying, but when you fail on a loan and you’re reported to a collections agency or, worse yet, declare bankruptcy, your credit score is going to tank. This is why it’s so important to manage your finances and repay your debts on time.

How to check your score

So, where do you stand? Credit reports outline your credit standing and can help you understand where you went wrong. Did you miss a bunch of payments? Is your credit utilization too high? If your score is poor, with a credit report you’ll be able to see what happened and learn from your past mistakes.

You can get a credit report directly from Equifax and from TransUnion. You can also access your score from online fintech companies Borrowell, Intuit Credit Karma, and Mogo.

How do you rebuild your credit?

There are a number of ways to rebuild your credit. These are your steps in the right direction.

Pay down your debt

You need to get your accounts in order. This has to be your first step. Start by paying back the outstanding debt you owe, beginning with the loans that are in the direst situation.

If you’re struggling, it may help to consolidate your debts. With a debt consolidation loan, you have all your debt combined into one loan with a single monthly payment. This means you have less to keep tabs on and you can save on interest (a consolidated personal loan, for example, would have a much lower interest rate than a credit cards).

Pay on time

As your payment history is one of the two most important criteria in how your credit score is calculated, this is critical. You need to get into, and remain, in the habit of paying your loan repayments on time. You need to ensure, at minimum, you’re making your minimum payments.

Build credit with credit

The more you use credit responsibly – the “responsibly” part is important – the more credit bureaus will trust you and the faster you’ll build back your credit score. It’s all about demonstrating that you can be trusted with borrowed money.

Credit cards are a great way to build credit history. With regular purchases and regular on-time repayments (and not over-utilizing the available credit) you can build credit in no time. Spend, repay, repeat.

Secured credit cards

Secured credit cards might be the best option for those with poor or limited credit history. They work like regular (unsecured) credit cards, but you need to put down a cash deposit to be approved. The bank then holds that cash as collateral against your borrowing. Using a secured credit card responsibly will allow you to upgrade to an unsecured credit card over time, at which point you would get your cash deposit back.

Rebuild with help

You may need help to rebuild your credit. It could all be a little overwhelming, you don’t trust yourself, you don’t know what to do next, or you need technology to aid you. Luckily, you’ve got options.

Credit building tools

You can look around for organizations that offer credit building tools. That’s actually one of the things KOHO is known for. KOHO’s Credit Building tool – which is interest free and has guaranteed approval – is set up to help you build credit fast. With a Credit Building line of credit, you simply make small monthly payments and in just six months you can build your credit score.

Help from professionals

Credit counsellors help you take stock of your debts, set budgets for you, and walk you through options. There are non-profit organizations that can help you, like the Credit Counselling Society and Credit Canada.

Help from friends and family

One workaround to building credit is an exercise in trust. Becoming an authorized user on someone else’s credit card requires them to trust you with a credit card in their name, because any spending you do, and any debt you accrue, goes on their record. You’re issued a credit card in their name but you don’t need to use it – you benefit from their credit behaviour. As long as they’re building credit, you’re building credit too.

How long will it take to rebuild your credit?

The good news is you can absolutely rebuild your credit score. The bad news is it takes time.

If you’re doing the right things, you can begin to see positive change to your score in as little as six months or, sometimes, even less. However, to build up from a poor to a good score can take several years.

Credit building is different for everyone. Negative information can stay on your report for seven years, so the more good information you add will eventually outweigh the bad over time and your score will go up.

Rebuilding your credit takes patience and dedication. It’s a slow process built on good habits. You need to make the right financial decisions over and over again. And as long as you make good decisions, your score will grow.