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How to Rebuild Your Credit in Canada

Adrian Zee

Apr 11, 2022 10 min read

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    Rebuilding your credit score in Canada depends on how your score got damaged in the first place. For example, you may have low credit because of an error on your credit report. In this case, speaking with the credit bureau to resolve the mistake could revive your score in weeks. 

    But a low credit score can also result from past financial mistakes. Building healthy financial habits, like on-time bill payments and reduced borrowing, could be the solution here. 

    Your credit score will be hit particularly hard if your debt ends up going to collections. Such debt acts as a red flag on your credit report, and paying off this debt is often your best shot at repairing your credit score. 

    This article lays out 13 steps to rebuilding your credit score in Canada. It also provides the factors that affect your credit score, how long rebuilding your score might take, and why a good credit score is important in Canada.

    13 Steps to Rebuild Credit in Canada

    Settle collections and debts

    Debts that are sent to collections or arranged through a consumer proposal negatively impact your credit score. That’s why it's important to avoid missing your monthly payments. Missed credit card statements, utility and cable bills, and even parking tickets can end up in collections, and you may see a big drop in your credit score as a result.

    Credit bureaus report your collections debt on the public records portion of your credit report. You may also see a prior bankruptcy on this record. Lenders, landlords, and other institutions who see your public record may note any bankruptcy, consumer proposal, or debt in collections as a red flag. 

    Paying collections and requesting they remove the debt from your public records lifts a burden in your credit-rebuilding journey, and it's often one of the first steps to rebuilding your credit in Canada. 

    Check your credit report

    Report repayment behaviour

    You can view your credit report for free through Borrowell. This document includes your personal information like name, address, and social insurance number. 

    It also lists your credit history, the institutions you have credit with, public records (like bankruptcy, consumer proposals, or debts sent to collections), and past inquiries made to your credit information. 

    The details on your credit report dictate your credit score. That's why you need to ensure everything on your report is accurate. 

    Viewing your report also shows how you can improve your credit score. For example, your report might reveal several missed payments or a high credit utilization ratio. You can then focus on creating a history of on-time payments or reducing your credit utilization ratio to improve your score more efficiently. 

    Dispute any errors on your report

    You might find that your low credit rating is due to an error on your credit report. For example, your credit card company might report you missed a payment last year, but you have the records to show you paid every statement on time. Calling the credit bureau and resolving this error could quickly raise your credit score. 

    Get a secured card

    previous financial challenges

    Getting a credit card and making your payments on time is a great way to rebuild your credit, but sometimes it's hard to get approved for a credit card if your score is poor or you don’t have any credit history. 

    A secured credit card functions much like a traditional, unsecured credit card but requires you to provide a deposit. This deposit is an assurance that you can repay any used credit. If you don't, the secured credit card issuer can close your account and use the deposit to offset unpaid bills. 

    The minimum required deposit can range from around $100 to $2000 depending on your personal situation and the card issuer’s criteria.

    You can purchase products and services with a secured credit card just like an unsecured credit card, and will be required to make a payment on a monthly basis.

    These payments are usually reported on your credit report as on-time payments (assuming you make them on time) and will boost your credit score. It's good to double-check with your secured card issuer that they report payments to a credit bureau before signing up, otherwise, all your hard work won’t have much of an impact on your credit score. 

    Sign up for a credit building program

    A credit building program is a cross between a savings program and a loan, so you’re saving up money while building your credit score. Your loan payments get reported to the credit bureaus, helping to build a positive history of on-time payments, which will signal to lenders that you can be trusted with credit. 

    Once you’re happy with your credit score, you can then withdraw the cash you’ve contributed. 

    Make on-time payments

    New secured credit card

    Making your payments on time is one of the most important factors that make up a good credit score. In fact, your payment history accounts for 35% of your score! Missing just one payment can set back your hard work significantly.

    Ensure you never forget a payment by setting reminders on your phone or calendar. You can also enroll in automatic bill payments, so that your credit card statement will be paid off every month without you having to worry about it. 

    If you can't afford a bill payment, it's important to make at least the minimum payment. But of course, paying your balance off in full is always the most ideal route to boosting your credit score. 

    Pay more than the minimum

    Some people believe that making your minimum payments on credit cards is enough. But this is incorrect. You should pay off your credit card in full whenever possible. 

    You might get into trouble if you only make minimum payments. The remainder begins to build up on your credit card, plus you’ll be charged interest on this amount.

    This accumulation of debt and interest makes repaying your credit card increasingly difficult. This can lead to further missed and late payments, and eventually even debts that are sent to collections. This process ultimately hurts your credit rating.

    Paying more than the minimum, ideally your full balance, stops this vicious cycle from occurring before it begins. 

    Have rent payments reported to credit bureaus

    Debt Service Ratio

    If you’re a renter, ask your landlord if they would consider reporting your rent payments to a credit bureau. You have to pay your rent anyway, so if you can have these payments form part of your credit report, this will help you build up a positive credit history, in the same way as using a credit card would.

    Apply for a cell phone contract

    Applying for a cell phone contract can also help develop your credit. Sometimes, your phone company will report your payments to the credit bureaus, creating another source of on-time payment history and helping you to diversify your credit mix.

    Don't open/apply for too many credit accounts

    Rebuilding Credit

    Every time you apply for a credit account, the lender will usually make a hard inquiry on your credit report. Every hard inquiry can provide your score with a minor and temporary decline. 

    Applying to one or two credit accounts won't severely hurt your score, but applying to more in a short space of time could have a more significant negative effect, as it will signal to lenders that you’re desperately seeking credit and therefore you might be less able to make your payments. 

    Keep your credit utilization under 30%

    Your credit utilization ratio is the amount of credit you’re using compared to the total amount of credit available to you, across all your credit accounts. For example, suppose you have $10,000 credit across all your credit accounts. If you regularly use $2,000 of credit per month, your credit utilization rate would be 20%.

    Your credit utilization rate accounts for 30% of your credit score. Generally, keeping the ratio under 30% should have a positive effect on your credit score, as it tells lenders that you can use your credit sparingly and responsibly. Lenders might consider someone with a credit utilization rate over 30% as risky because they are relying more heavily on credit. 

    Have a diverse credit mix

    Late Payment

    Having a mix of different credit types makes up about 10% of your credit score. This refers to having various different types of credit accounts on your report. 

    For example, a person who has a credit card, car loan, mortgage, and line of credit has a better credit mix than someone who only has credit cards. This credit mix shows lenders you have experience with and can manage different forms of loans and credit accounts. 

    Just remember not to apply to too many of these accounts at once, as doing so could cause a dip in your credit score. 

    Develop Healthy Financial Habits

    Healthy financial habits are key to a good credit score. This includes spending within your means, setting (and sticking to) a budget, and paying your bills on time. Healthy habits should ensure you won't fall behind on credit card payments or have outstanding debt at risk of going to collections.

    What is Considered Good Credit in Canada?

    A credit score of 713 to 740 is generally considered good in Canada. An excellent score ranges between 741 and 900. 

    Credit scores otherwise fall between 300 and 900, and most Canadians have a score between 600 and 750. We break down the five categories of credit scores below: 

    • Excellent: 741-900

    • Good: 713-740

    • Fair: 660-712

    • Below Average: 575-659

    • Poor: 300-574

    What Factors Determine My Credit Score?

    Minimum Payment

    Your credit score primarily comprises your payment history, credit utilization, credit history, credit mix, and credit inquiries. 

    • Payment history (35%): Shows whether you’ve consistently made your credit payments on time.

    • Credit utilization (30%): The amount of credit you use versus the total credit available to you across all your credit accounts. The lower your credit utilization, the better.

    • Credit history (15%): The length of time you've had your credit accounts open. A good score often results from credit accounts with a long history. 

    • Credit mix (10%): This means having a variety of different credit accounts, such as a credit card, a line of credit, a mortgage and a car loan. 

    • Credit inquiries (10%): Recent credit inquiries from opening new credit accounts may temporarily reduce your credit score. 

    How to Get Approved for a Credit Card With Bad Credit?

    It's challenging to get a credit card with bad credit. As a result, you could consider a secured credit card, which cater specifically to those with a low credit score or no credit history. 

    Credit card companies are open to issuing people a secured credit card to people with bad credit because they require a security deposit (hence the name). If you can't make a credit card payment, the issuer can close your account and use the security deposit to pay off the balance. 

    A secured card can help you rebuild credit or build it from scratch. Once you've shown a history of on-time payments, many secured credit card companies will upgrade you to a traditional, unsecured credit card. 

    How Fast Can I Rebuild My Credit Score?

    Mortgage Payments

    The speed at which you can rebuild your credit score depends on the issues with your score. Sometimes, the problem is an error on your credit report. In this case, rebuilding your credit score may take three to six weeks after getting the error rectified. 

    Poor credit scores resulting from missed payments or debts in collections may need at least six months to begin to repair. But, this still depends on numerous factors, for example where your credit score currently sits and whether you're making on-time payments. 

    If you remain unable to make your payments on time or you’re carrying a high credit utilization rate, it might take a while before your credit score recovers. 

    Why is Having a Good Credit Score Important?

    A good credit score opens many doors in Canada. It lets you get approved for loan applications, mortgages, and higher credit limits easily and with a lower interest rate. 

    Prospective landlords may check your credit score to affirm that you can make on-time rent payments. As a result, a low credit score can make it difficult for you to rent a living space. 

    Utility companies or even potential employers might also check your credit score, using it as a measure of your trustworthiness and reliability. Similar to landlords, a utility company depends on your on-time payments. If they see your credit score is less than stellar, they might ask you for a deposit to mitigate the risk that you can't make a payment later. 

    The Bottom Line

    Rebuilding your credit score in Canada involves a lot of hard work. You should start by checking your credit report to determine whether there are any errors, and to get an idea of how you can improve your score. You can also consider tools like a secured credit card or credit-builder program so you can build a history of on-time payments.

    The key is to maintain consistent, healthy financial habits. This includes making bill payments on time, reducing your credit utilization, paying more than the minimum balance on credit cards, having a diverse credit mix, and keeping on top of your spending.

    Adrian Zee
    Adrian Zee

    Adrian is a judicial law clerk and personal finance writer who breaks down complex personal finance topics into easy-to-consume articles. His work has been featured in the National Post and Apollo Magazine, along with other publications.

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