20-year financial veteran Paul Murphy shows how to rebuild your credit in Canada, the mechanics of how credit ratings are calculated, and why missing a payment or two isn’t as large a factor in credit ratings as you might think.
Today, I want to answer one of the biggest questions we get: how to rebuild my credit in Canada?
Or more specifically, our clients want to know how can we rebuild our credit fast! Give us your super fast credit rebuilding secret tips!
But while there are ways to build up your credit rating faster (which I’ll share in the resource), it’s important to remember the point of a credit rating. It’s a history and profile of you and your potential risk to creditors. As a result, it requires a few different inputs and some time to give credits the confidence to lend to you.
Many Canadians think that if they file a consumer proposal or miss payments or default on a loan, they’ll forever have a terrible credit score. But while credit ratings look at your past behavior, what they’re actually interested in is using your credit rating to predict your future behavior. It’s trying to come up with a number that shows the likelihood that you’ll repay the money you borrow.
Just because you have blemishes in the past, there are steps you can take to rebuild your credit rating in Canada. And if you made mistakes in the past does not mean you won’t be able to get great loans, mortgages, and other credit in the future.
This guide was written for:
- People thinking about a consumer proposal and are wondering how long it will take to rebuild their credit rating in Canada.
- Canadian families who went through a consumer proposal or filed for bankruptcy and now are looking to rebuild their credit.
- Families who lapsed on mortgage payments, lost income, and experienced hardship. You know that your credit took a hit and now want to boost your rating.
By the end, you’ll understand:
- How your credit score is calculated
- 11 steps that will show you how to rebuild your credit rating in Canada
- Mistakes to avoid that automatically raises warning signs to creditors
More of an audio learner? I recently did a podcast on how to rebuild your credit in Canada, breaking down how your credit score is calculated. Listen in your favorite podcast app here.
What’s a good credit rating in Canada?
Credit ratings are one of the most important impacts on our financial life. Our credit rating is reviewed by banks, cell phone companies, landlords, and even employers and the government (for some passport applications). So understanding how your credit score is calculated is key to controlling your financial future.
The first thing to understand is what a good credit rating means.
In Canada, each credit reporting agency views the score a little differently. Here is a summary of the ranges. If interested, you can dig deeper into the differences with this article by the Financial Consumer Agency of Canada.
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600
Poor credit rating—This is the score you’ll find with young people starting their adult life with no credit history or if you have damaged your credit rating from previous financial difficulties.
Fair credit rating—A score of 650+ will usually mean you qualify for mainstream lending products and make it easy for you to get loans as long as you meet other criteria set by the lender, such as debt service ratio.
A score below 650 makes it hard to get new credit.
If you don’t want to pay to check your credit rating, this tool gives you an estimated rating.
Here are a few examples of credit reports and credit scores in Canada.
- Sample credit report from Equifax Canada
- Sample credit report from TransUnion Canada
- Sample credit score from TransUnion Canada
How is your credit rating calculated in Canada?
These are the major factors that providers use to calculate your credit rating.
Balance-to-Limit Ratio. Generally, balances above 50 percent of your credit limits will impact your credit rating. Aim for balances under 30 percent.
Multiple requests to obtain credit. If you suddenly apply to multiple credit cards, apply for a loan, and apply to increase your line of credit, this signals to creditors that you may be experiencing financial difficulties. Try to avoid applying for multiple credit cards and loans in a short period of time.
Hard versus soft inquiries. A “hard inquiry” involves an application for new credit. This lowers your score. A “soft inquiry” involves checking your own credit rating or a credit card checking on your file for updates (such as you recently took out a new car loan) before offering you a credit limit increase. “Soft inquiries” do not impact your credit rating or appear on your file.
On-time payment history. TransUnion says: “A good record of on-time payments will help boost your credit score.”
Collection Agencies. If your account is sent to a collection agency, this impacts your credit rating.
Level of delinquency. There are different levels of delinquency. For example, if multiple creditors send your file to a collection agency or you have a history of missing payments on a number of accounts.
How to rebuild your credit rating in Canada:
If your credit rating has dropped, you can still get credit. Here are the best ways to rebuild your credit score.
First, let’s assess where you are.
Can you still get credit? Or are you starting from scratch after a bankruptcy or financial crisis?
Some of our readers have declared bankruptcy or filed a consumer proposal and won’t be approved for a credit card.
So, let’s begin assuming you have zero or poor credit history and need to rebuild. I’ll then give actions for people who have bad credit and are looking for ways to boost their rating.
Before you start make sure all your personal information is reporting correctly on your credit report. Just request a free credit report from each of the two credit reporting agencies, Equifax and TransUnion.
You get a free credit report once a year for no charge. You can call them as well to request a copy of your credit report by mail:
- Equifax – 1-800-465-7166 (Automated Telephone Service)
- TransUnion – 1-800-663-9980 (Automated Telephone Service)
Here are 11 things you can do to quickly rebuild your credit in Canada after bankruptcy, a consumer proposal, or a financial crisis where you had to stop paying bills and know your credit rating took a big hit.
These are based on my experience in the financial industry (20+ years) which includes showing thousands of clients how to rebuild their credit ratings in Canada.
ACTION #1: Get collections and bad debts settled
First, you must make sure there are no unpaid debts or items in collections that have not been settled.
If you have unpaid bad debts these need to be dealt with prior to starting any credit rebuilding.
We have lots of information on our site about dealing with large amounts of debt. You can read about our credit rebuilding program here.
ACTION #2: Get your rent positively reporting
If you are a renter, you can now apply to have your rent payments reported to Equifax to help improve your credit score. Tenants rarely receive an extra benefit for paying rent on time, taking care of the place, and just being a good tenant.
By having your on-time rent payments reported to credit bureaus, you can increase your credit score, help minimize the impacts of previous financial challenges and improve poor credit history. In addition, tenants benefit from a good tenant history and preferred tenant status.
When we work with our clients, we help them build credit by simply paying their rent with the Landlord Credit Bureau. This is a simple way to help you rebuild your credit, sending valuable signals to the credit reporting agencies like Equifax.
ACTION #3: Open a secured credit card account
If you have no credit history or need to start developing a positive payment history, open a secured credit card account.
This requires you to pay a deposit (such as $500) and this is the limit of your credit. The secured credit card provider reports your payment habits to credit bureaus, which helps you start gaining points.
Tip: when opening a secure credit card, make sure you ask whether they report repayment behavior to TransUnion, Experian, or Equifax. Not all secured credit cards will do this, which defeats the purpose. Pre-paid cards don’t usually report at all.
Remember: the goal of this card is to build your credit rating. So don’t fall behind with payments. Instead, use the card for regular planned purchases such as buying gas twice a month. Then pay the bill immediately after it arrives.
ACTION #4: Get a cell phone with a contract
I know—it’s cheaper to buy your own phone or go with the low-cost mobile providers like Koodo or Wind. But applying for a cell phone on a contract is a great way to start rebuilding your credit history.
You can often offer phone companies a deposit (such as $300 on your account) if they deny you based on your credit history.
Major phone companies report your payment habits to the credit bureaus.
Tip: pay your bill every month. Set-up automatic payments with your bank if this helps. Paying your bills on time every month will dramatically help to improve your credit rating. This means on the day they are due. All the reporting is automatic, so even three days late makes a difference. Pay your bills a few days earlier if possible.
ACTION #5: Don’t switch plans, open new cards, or apply for pre-approved promotions
Let’s say you are doing well with your secured credit card. You also signed up for a cell phone that is reporting positively to Telus.
Then you check the mail—Koodo has a new deal, a new secured credit card offers you a better rate, and a pre-approved credit card offer comes through.
If you have good credit, it pays to switch vendors or accept introductory offers. But creditors like to see an established credit history and building a history of positive payments is critical.
If you frequently close down credit cards (to get new reward points) then you will never develop a long-term credit history and this will impact how quickly your score improves. Keep one credit card open for a long time and establish a history of on-time payments.
Also, ‘pre-approved’ doesn’t mean you will qualify but it does guarantee if you complete the application form they will check your credit and it will show as a hard inquiry. You don’t want hard inquiries on your credit file right now.
The good thing is, if you are getting “pre-approved” mail then your score is moving in the right direction.
Tip: don’t be tempted by new offers. Stick with your current providers and build a long history of regular payments. Stay strong!
ACTION #6: Every week, do the work
Getting hit with NSF fees or overdrawing your account is a bad sign to creditors. Be alert. Check your bank balance every week and make sure you are living within your means.
TIP: Yes, there are lots of apps to help (Mint is the most popular). But a better plan is to schedule 20 minutes every Sunday to review your bank statement and stay alert. Keeping receipts and checking them off against your online banking will also increase awareness of how your money is being spent and highlight any spending habits you might want to change. Put the time in and work on your finances every week.
ACTION #7: Avoid shutting down accounts
Building on the previous point, keep accounts open rather than shutting them down.
For example, let’s say you spend too much on your secured credit card and it goes close to the limit and you feel like you are slipping back into old habits.
You declare a cash diet, cut up all your credit cards, and vow never to use them again.
This might prevent you from going into debt—but doesn’t help rebuild your credit rating.
A better solution is to leave your accounts open—for example, lock your credit card in a safe and then always ensure the minimum payment is made and look at your budget and see what changes can be made to quickly pay down the balance.
TIP: don’t cancel accounts, instead keep them open.
ACTION #8: Maintain a variety of accounts
TransUnion says: “A healthy credit profile has a balanced mix of credit accounts and loans.”
That means, having a mix of credit types such as a Future Shop credit card, a MasterCard, a car loan, and a line of credit will gain you more points on your file.
Of course—this must be done carefully and only apply when you know you will qualify and you know that any debt you take on can easily be repaid. Be careful!
Don’t carry too many accounts. Having too many credit accounts can be a warning sign for creditors.
TIP: Here is a good rule: never more than three credit cards, never more than two retail balances (such as a Future Shop card), and don’t take out multiple loans. Also, having multiple balances on each card will cause you to lose points.
ACTION #9: Check for errors on your credit report
At least once a year, you should pull your credit file and look for any errors.
It’s not uncommon for errors to appear on your credit file (such as a creditor reporting a missed payment when you actually paid it). If you find an error, you can ask the credit bureaus to correct it.
As I mentioned you can get a free credit report from each of the two credit reporting agencies, Equifax and TransUnion, once a year for no charge. You can also call them and request a file by mail: Equifax – 1-800-465-7166 (Automated Telephone Service) and TransUnion – 1-800-663-9980 (Automated Telephone Service).
TIP: check your credit report for possible errors and ask the credit bureaus to fix them.
ACTION #10: The best credit card balance ratio
If you are able to get a credit card, then you’ve probably heard about credit utilization.
This means the percentage of credit you use every month. For example, if you have a credit limit of $10,000 and carry a balance of 90 percent of that every month, even if you make the payment on time every month, this is a bad sign to creditors.
To rebuild your credit score, keep your usage of credit between 10 and 20 percent. A lot of blogs will recommend 30 percent but to keep it safe, keep it below 20 percent.
TIP: when you do get a credit card, only use 10 to 20 percent of your monthly limit. For example, if you have a $10,000 credit limit don’t carry a balance of more than $2,000.
ACTION #11: Catch late payments immediately
Life happens. People miss a payment every now and then. But if you have a late payment, it will be reported to your credit report. Catch up as soon as you can and always make that payment the priority.
If you are trying to rebuild your credit, a missed payment is a small step backward each month.
TIP: Computers track your payments so sometimes errors can happen (such as a payment on Friday not being entered in the system till Tuesday due to a holiday). You need a system for double-checking that all payments have been made. Use a simple spreadsheet and double-check at the end of the month.
ACTION #12: Enroll in a credit building program
Financial professionals can help you take the right steps to build your credit as fast as possible.
At 4 Pillars, we do things such as:
- Show families how to settle collection items
- Help them correct reporting errors
- Show them different financial products that can help rebuild their credit
- Explain how credit scores are calculated and analyze possible actions to take
Credit rebuilding isn’t one size fits all and every plan is different depending on your current situation and future credit needs.
If you’d like us to review your file and suggest some actions to take, email your local 4 Pillars office.
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If you want to know more about credit rebuilding in Canada and how we help families in debt, contact us here.
We have lots of free information we can send your way.
More resources to navigate debt
- Debt consolidation versus a consumer proposal
- 20+ alternatives to bankruptcy
- A guide to debt consolidation
- Bankruptcy in Ontario: how it works
- 60 Canadians tell their 4 Pillars debt story