How to Rebuild Your Credit
Understanding how to rebuild your credit is not a straightforward process. It may feel overwhelming to learn about credit and figure out how to improve your credit score.
Well don’t worry, you’re not alone.
In a report published in September 2021, Equifax highlighted the extent to which many Canadians are confused about credit. In an online survey, 1500 Canadians were asked whether or not they agreed with a series of true or false statements.
Interestingly, 49% of adults between the ages of 18 – 34 agreed with the false statement “If you have a good credit score, you always get approved for a loan” and 50% agreed with the false statement “you only have one credit score”.
So if Canadians are this confused about credit generally, then how confused are we about how to rebuild credit or to even get approved for credit?
Well, not to worry, in this blog post, we’re going to do a deep dive into the confusing world of credit. We’ll start with five ways you can improve your credit score, before moving on to talk about the five Cs of credit.
Ready? OK, let’s dive in. Here are five things to know so you can improve your credit score:
- What is a credit score?
- Credit utilization: maintain good credit
- Make payments on time
- Ensure all forms of credit are up to date
- Clean up any collections
The first step to improving your credit score is to understand what a credit score is and to make sure you know your credit score. A credit score is a kind of rating or grade between 300 and 900 that you receive from the two credit reporting agencies in Canada – Equifax and Transunion – based on your history of bill payment.
So before you set out on a plan to rebuild your credit, find out what your score is. There are a number of ways you can do this. Many modern banking apps will allow you to check your credit right within the app, or you can request a credit score check from Equifax or Transunion.
Credit utilization means that you should maintain good credit and only use an appropriate amount of your credit. There is some debate about exactly what the best range is. Generally speaking, using over 30% of your limit tends to affect your credit score. Some experts now suggest that you should aim to use around 10% of your credit limit if you want to build an excellent credit score.
This is an important one. If you have regular bills going directly onto any line of credit or credit card, ensure you make those payments on time and, if possible, in full. One late payment or delinquency can make a difference in your overall score.
If this means contacting your bill collectors, banks or beyond to make sure that they know you are in good standing, go for it! Don’t be afraid to negotiate for reduced interest rates to make payments quicker. The worst they can say is no.
If you have any past bills or loans that have gone to collections, is it very important you settle these. Once settled, you can request that these are removed from the public records section by the credit bureau.
Overall, your credit score is only going to be as good as your financial health. If you always make your payments, stay within your limits and take care of any unsecured debts, you should be in wonderful standing. However, that doesn’t mean you don’t need to keep a watchful eye on your credit score.
It is recommended you check your score at least once a year to monitor for any fraudulent activity and ensure you are staying on top of your monetary game.
So, there we have five ways of improving your credit score. But as we saw earlier with the false statement “if I have a good credit score I’ll always be approved for a loan”, it’s not only your credit score that is taken into account.
Well, what else is there? Let’s talk about the Five Cs of credit.
The Five C’s of Credit
The following is an excerpt from our FREE online credit course, Credit Cross Training:
Creditors use the “5 C’s of Credit” when taking time to consider granting you credit. The 5 C’s are:
- Capacity (income and ability to repay)
- Capital (net worth and assets)
- Collateral (pledging security)
- Character (stability and past relationship)
- Credit Rating (rating and score)
All of these are taken into consideration, however, your credit rating will account for about 85% of the approval process and your capacity (income) for the remaining 15%.
Your capital, collateral and character are examined more as a backup in the event your credit rating or capacity is questionable. This is why it is important to find a creditor that is willing to listen to you in person if possible.
Now, let’s spend a few minutes learning about the “5 C’s”.
- Capacity
- Capital
- Collateral
- Character
- Credit Rating
When a creditor looks at your capacity to maintain positive credit, they consider the following:
Stability of Income
Length of time on job – If you have changed positions but are still in the same field of work, ensure the creditor is aware of this
Type of job – Identify if you are in an occupation that is in high demand
Work history – If you are on contract ensure you have a history of past contracts to prove stable income
Proof that your contract will continue – provide a letter from your employer, outlining how long you have been with the company and whether your contract will be renewed or not
Historical proof of income – If you are self-employed ensure you have the financial records for the company for a minimum of 2 years
Level of Income
Your level of income demonstrates your ability to repay the debt/credit in question
Use your Net Worth Statement to show how much capital you have. This may include savings, a down payment, and assets.
Having a saving program or available cash that could be used as a down payment is very important. Note that often the larger the down payment, the better chances of obtaining a loan. Down payments are most common with car loans and mortgages.
Collateral refers to assets that can be pledged as security. Banks are most interested in vehicles, homes or investments. Note that RRSPs cannot be used as collateral.
It is important to remember that any assets you pledge as collateral can be seized if you do not repay the loan.
If you have dealt with a creditor in the past or are currently dealing with them and you have good credit with them, then you might have a better chance of obtaining new credit.
If you went bankrupt on a debt with a particular company, it is likely not a good choice of places to start applying for credit. If you have current credit that has been operating up-to-date with a positive credit rating, it will definitely help you.
Some leasing companies actually look at, or choose to see, your history prior to bankruptcy to see how you were doing.
Ensure that you explain any changes in employment or residence that could reflect negatively on your stability.
Credit ratings and credit reports were established because of the importance of credit history and your credit rating gives creditors a quick understanding of your lending credibility and if you are a credit risk. It is a vital component of the 5 C’S of credit.
Learn more about credit with a FREE online course
As mentioned, the above section on the Five Cs of credit came from our FREE online course, Credit Cross Training. The world of credit can be confusing at times, so the better you can equip yourself with up-to-date, valuable knowledge, the better position you’ll be in to get approved for credit.
Thanks for reading, we hope you found this post valuable and we wish you the best on your financial journey!
