How to Fix Bad Credit
Dec 21, 2020 • 9 min read
If you have a bad credit score, life can be more challenging. You may find it harder to qualify for a loan, a credit card, or a mortgage. If you do get approved for one of these products, you may find that the interest rates are high and not competitive. You should also know that employers, landlords, and even insurance brokers look at your credit score when reviewing your applications. You could miss out on a job or an apartment because of your bad credit score. Don’t worry though: If you have bad credit, you can repair it!
Fixing bad credit involves learning some new habits. These habits may take time to develop, and it could take a few months of consistency to notice any effects are taking place. To fix bad credit, you'll need to improve your payment history, reduce your credit balances, learn to budget, and get familiar with your credit report. It’s a process that takes time, but if you follow the steps below and stay consistent, you'll eventually find yourself with a better credit score and access to some of the best financial offers in the country.
Avoid Missed Payments: Pay Bills on Time, Always, No Matter What
Your payment history makes up 35% of your credit score and is the most important factor that impacts your credit score. You probably know that late payments on credit cards can trigger penalties, like increased interest charges or late fees. You should also know that late payments on credit cards, loans, utilities, and other bills will cause your credit score to drop. Even one late payment can damage your payment history and decrease your credit score. Because of that, it’s important to pay your bills on time.
The easiest way to avoid missed payments is to set up automatic billing. You can either set up an automatic withdrawal from your chequing account or automatically charge the bill to your credit card. Alternatively, you could try recording your statement due dates in your calendar and manually paying your bills once per week. If this sounds like a lot of work, that’s because it is. There are tools like Borrowell’s free bill tracking that automatically alert you when your upcoming bills are due so that you never miss a bill payment.
Suppose you can't pay the total amount of your bill, then what? You should always make the minimum payment on your bills instead of ignoring them altogether.
If you can't pay off your entire credit card balance, you should make the minimum payment instead of skipping it. If your bill doesn't have a minimum payment option (for example, a heating bill), you should call your provider and arrange a payment plan. Unpaid utility bills can hurt your credit score if your utility provider sends your unpaid bills to a collection agency. For this reason, you should reach out to your provider sooner than later to figure out a payment plan.
Taking the steps above will preserve your payment history, maintain your credit score, and help you avoid penalties.
Keep Your Credit Utilization Ratio in Check
Your credit utilization makes up 35% of your credit score and is another important factor to be aware of. Your credit utilization ratio is how much credit you’ve used out of your total credit limit. For example, if you have a credit card with a balance of $3,000 and a total credit limit of $10,000, your credit utilization ratio is 30%. Your credit utilization ratio also applies to personal lines of credit and any other revolving credit tool.
To improve your credit score, you should keep your credit utilization ratio under 30% across all revolving credit types. A low credit utilization ratio signals to credit reporting agencies that you can use your credit responsibly. If you currently have any credit tool, like a credit card, with a credit utilization ratio above 30%, you should prioritize paying that off to lower the ratio as quickly as possible.
Create Healthy Financial Habits: Create a Budget & Stick to It
Paying your bills on time and keeping your credit utilization ratio under 30% will be easiest if you create a budget and stick to it. Creating a budget will help you direct your dollars so that you'll have money every month for your bills. Budgeting will also help stop you from overspending and accumulating additional debt. If you budget effectively, you could even have enough money left over at the end of every month to start paying off your debt and getting ahead financially.
You can create your budget by adding up your income and then subtracting your monthly expenses. Your budget should be organized into 4 clear sections:
Income: Primary career, freelance work, passive income, etc.
Fixed expenses: Rent, car payments, utility bills, etc.
Variable expenses: Groceries, shopping, entertainment, leisure, etc.
Financial goals: Savings, debt repayment, etc.
Once your budget is complete, track your spending to make sure you stick to it. You can track your spending the old-fashioned way via pen and paper, by using software like excel, or with convenient online apps that import and categorize your transactions automatically.
Avoid Hard Credit Inquiries: Don't Apply for Too Much Credit at Once
When you apply for a loan or credit card, your lender will check your credit score. This check is called a hard credit inquiry with Canada’s credit bureaus and will temporarily decrease your credit score. If you apply for many different credit accounts at once, your credit report will show several hard inquiries, which is a red flag to lenders and will drop your credit score significantly. You can avoid this consequence by limiting the amount of credit you apply for at once and avoiding applying for credit tools you won't use, like department store credit cards.
Check your Credit Score Before Applying for Credit
If you aren't sure whether you have bad credit, you should sign up for a credit monitoring tool. A credit monitoring tool will tell you your current credit score and send you periodic updates, so you can track whether your score increases or decreases according to the actions you take. In general your credit score will update every 30 days.
There are several tools available online that provide credit monitoring services, including Borrowell. Borrowell's credit monitoring tool automatically checks your credit score from Equifax and sends you regular email updates on your score's status. These credit checks are called soft inquiries or "soft checks". Unlike hard inquiries when you apply for credit cards, soft inquiries don't impact your credit score.
On top of the credit monitoring service, Borrowell also offers financial products tailored to your credit score, so you can be assured that you have a good chance of being approved if you apply for any of these credit cards or personal loans.
Use a Secured Credit Card
If your credit score is low enough, you may not qualify for a standard unsecured credit card. In this case, a secured credit card is a great way to begin credit repair. A secured credit card requires a deposit equal to the credit limit to qualify for the credit card. So, if you wanted a secured credit card with a credit limit of $1,000, you would need to deposit $1,000 with the lender to "secure" the card.
Since a secured credit card requires a deposit, almost anyone can qualify for one, even if you are in the process of credit repair. Secured cards are great credit builder cards for individuals looking to repair their bad credit score. Obtaining a secured credit card, using it regularly, and paying off the balance each month is an excellent way to begin fixing your credit score, especially if you don't qualify for other forms of credit.
A great product to start with is Refresh Financial's Secured Card, which doesn't require a credit check. You can use secured card to make regular purchases and responsibly repay your outstanding balance each month. Refresh will report your regular monthly payments to Canada's credit bureaus (Equifax and TransUnion), and these payments will get recorded to your credit report. By using this secured card, you can build your payment history and could see your bad credit score improve over time.
Use and Manage Loans Responsibly
Taking out new credit cards isn't the only way to build credit. There are effective ways to build credit without a credit card. Taking out a personal loan and making payments on time can help you build credit history and increase your credit score over time. Making car loan payments can also help you build your credit, as these payments are recorded on your credit report.
Use a Credit Building Loan
Having trouble finding a loan that will help you fix your credit? There are credit builder loans that are geared towards individuals with bad credit. Rather than providing additional money, these loans are intended to help you increase your credit score with money you already have.
When you get a credit builder loan, you'll use your own money to make regular payments to your lender. They will set aside that money into a secured account and report your payments to Canada's credit bureaus. This will help you build your credit history and increase your score. At the end of the loan period, you’ll get access to all the money you paid out.
Some credit builder loans allow you to earn interest on your money kept in the secured account. You'll increase your credit score, build money-saving habits, and gain extra cash in the process. Credit builder programs are an effective way to fix bad credit or build your credit from scratch.
Look for Errors on Your Credit Report
Finally, if you access your free credit score through Borrowell and the number is lower than you anticipated, you should obtain your credit report. Your credit report is available through the two major credit bureaus in Canada: Equifax and TransUnion.
Your credit report outlines all credit accounts you currently have on file with these agencies. Your credit score is generated based on the information that appears on your credit report, so it's important that your credit report is accurate. Verify that the information shown on your credit report reflects your accounts and that there aren't any outliers that you don't recognize. With Borrowell, you can access and print your Equifax credit report for free.
If anything appears incorrect, you can dispute false information on your credit report by submitting a request to have your credit report amended.
How to Keep your Repaired Credit in Good Shape
Your credit score impacts many aspects of your daily life, beyond simply whether you'll qualify for a personal loan or not. If you're serious about credit repair, you should take the steps listed above. You can take some of the steps right away, for example, pulling your credit report, setting your bills to auto-pay, creating a budget, and applying for a secured credit card. Others may take months to complete, like paying down debt to bring your credit utilization ratio under 30%. You could see your credit score start improving in a couple of months after taking the right steps. This all depends on how low your credit score is, what financial incidents you're recovering from, and what steps you take to repair your credit.
That said, it's crucial to make these tasks part of your regular financial management and track your progress each month through a website like Borrowell. Once your credit score is 575 or above, you'll be able to qualify for more credit cards and personal loans at low interest rates. Remember, the higher your credit score, the better financial deals you can expect on interest rates, insurance quotes, even rental costs, so a bit of financial legwork now can set you up to save thousands of dollars in interest charges in the future.
Jordann Brown is a personal finance expert who writes on topics such as debt management, homeownership and budgeting. She is based in Halifax and has written for publications including The Globe and Mail, Toronto Star, and CBC. Jordann is the founder of the popular personal finance blog, My Alternate Life.