How to repair bad credit in Canada

Your credit score is an important financial barometer for life in the 21st century.

A good one can unlock low rates for mortgages and auto loans, and access to the best credit cards.

You’ll notice your journey through adulthood will be smoother, and you’ll get less side-eye at the bank counter.

A bad one can make it harder to get ahead in many aspects. Many apartment rentals even require high credit scores — especially in hot markets like Toronto or Vancouver.

Bad credit can be caused by a number of things, including having a lot of debt, falling behind on payments, or simply not having much of a credit history for lenders to interpret.

Luckily, a bad credit score can be repaired.

Negative items in your credit report will disappear after about six or seven years — and in the meantime, there are many steps you can take to beef up your credit score for free.

It will take time and (a bit of) effort, but you too can convince the banks that you’re the top-tier borrower you know you are.

What is a credit report?

A credit report is a full list of your credit history, including your past addresses, social insurance number, date of birth, employers, bank and credit accounts, payment history, bankruptcies, whether any of your debts are in collections, outstanding judgements made against you, and any “hard inquiries” on your credit report.

Your credit score is just one part of your credit report.

Equifax and TransUnion are Canada’s two major credit bureaus. They each calculate your credit score using their own internal math.

How do I get my credit report?

You can get your credit report for free from either of the bureaus mentioned above. You can access it online, by mail, or in person. Check out this link for how to access your report.

You can also sign up for paid services through Equifax and TransUnion that will alert you when there’s a change to your credit score. This is called credit monitoring.

What kind of errors should I look for?

Human error can cause mistakes in your credit report that can hurt your credit score.

Unfamiliar information in your report could also be a sign that someone is fraudulently using your identity, which is a serious issue that you should look into and fix right away.

Make sure you recognize all the information inside, including your name, addresses, account information and payment history.

If there’s something fishy, you can file a dispute with the credit bureau to get the information changed. This may also bump up your credit score in the process.

Credit bureaus take fraud and errors very seriously, so it shouldn’t be a difficult process to get it fixed.

How can I repair my credit score?

There are lots of ways to repair your credit score. They all require a little bit of effort, but most are very simple.

Make a plan

It’s important to create a plan and stick to it. Discipline is key here.

What that plan looks like is up to you. For many people starting on the road to good credit, it could be good to start with a list of debts and how much you can reasonably set aside each month to pay them off.

You might also want to start a budget if you haven’t already. More on that later.

But before you can start thinking of what you can do, you have to know what you should stop doing.

Stop hitting yourself

There are some things you might be doing that are dragging down your credit score without you knowing.

Here are some first steps and rules to follow so you don’t accidentally sabotage your journey toward good credit:

• Don’t apply for too many credit cards

• Don’t carry a balance on your credit card

• Don’t open unnecessary bank accounts

• Don’t overdraft your bank account (or use overdraft protection)

• Don’t default on loans

• Don’t write bad cheques

Now that you know what not to do, let’s talk about what kinds of things you can do to rebuild your credit.

Prioritize your debts and pay them down

Some debts are fine — like mortgages, which ding your credit score when you first take them out, but normalize once you prove an ability to pay them back.

The same goes for other “normal” large debts, like auto loans and student loans. Applying for these types of loans will hurt your score a bit at first due to the “hard pull” the lender performs on your credit score.

But once the lender sees that you can pay back the agreed-upon amount every period, having these types of debts will steadily repair your credit score. That’s because you’re proving that you can be trusted with debt.

The same cannot be said for other types of debt, like credit cards and payday loans. Any debts that are actively hurting your bottom line need to be paid off as soon as possible. Every day they exist hurts your score.

When prioritizing debts to pay back, start with the highest-interest ones.

If you’re carrying a balance on your credit card, try to pay off as much as you can each month. And try calling your provider to see if they can set up a payment plan to help you (more on that later).

Be aware that “good” debts can turn bad if you miss payments. Once a lender sees that you don’t always pay your mortgage, or student loan, or child support, they’ll be less confident in you, and your score will go down.

Set up auto-pay for regular bills

If you struggle to remember to pay your bills each month, try setting up an auto-pay feature.

You can usually set up automatic payments for utility bills, credit cards and everything else with regular payments

With KOHO (and most other banks) you can set up automatic withdrawals and pre-authorized debits from your account.

Some may require more effort than others, though. For instance, I know from personal experience that setting up auto-pay for American Express cards only takes a few clicks — while TD requires you to fill out a paper form and mail or fax it.

Still, even if it’s a hassle to set up, auto-pay is a must for my peace of mind. I sleep well knowing I haven’t accidentally dinged my credit score by forgetting a bill payment.

Have some scary talks

If you’re in debt, the thought of talking to your creditors — or, worse, collections agencies — likely fills you with dread.

But it can be a powerful tactic to reduce your debt burden and get you on the way to improving your credit score.

Call up your creditors and ask to negotiate a payment plan that works with your budget.

If that doesn’t work — or if you just want some backup — a professional may be able to help.

Reach out to a credit counsellor

Sending an email to an accredited, not-for-profit credit counselling agency like Credit Canada might give you the edge you need in talks with your creditor.

They can sit down with you, look over your credit report, and provide advice for your specific situation. And here’s the best part: it’s free.

Create a budget and stick to it

Starting on the path to rebuilding a bad credit score can feel daunting. If you haven’t been using a budget, that’s a very good place to start.

A simple budget will let you see how much you’re taking in and how much you’re spending each month. If those are out of whack, well, you know what to fix first.

It can also let you break down your debts and set aside money each month to pay them down.

There are endless budget styles to try. A good starting point is an “envelope budget.” At the beginning of each month, set aside a certain amount of money for each “envelope” of your expenses — like rent, utilities, debt payments, savings, etc.

If you know how much you’ll make that month, just make sure the total amount of money in the envelopes is less than that.

If you’re a freelancer or otherwise have varying income, this can be tricky. Just try your best to make the envelopes conservative. Then you can save the extra money if there is any, or put it toward paying debts.

You can also experiment with apps like You Need A Budget — which is essentially a very customizable envelope budget — or Mint, which logs your transactions automatically and sorts them into categories.

Personally, I use a Google Sheet that I can track across all my devices. It’s less pretty and less convenient than an app — but it keeps me honest by making me log all of my purchases manually.

For me, a Google Sheet makes the most sense because it makes me think about my purchases. And it makes sure I’m not surprised by anything at the end of the month.

You should experiment and see what works best for you.

How can I rebuild my credit score?

Now that you’ve got the ball rolling on some healthy financial habits, it’s time to start dipping into your credit to show that you can pay it back.

Lower your credit utilization

That’s a fancy term, but “credit utilization” just refers to how much of your available credit that you use.

Let’s say you have one credit card with a $10,000 limit. If you spend $9,000 a month, you’re using 90 per cent of your allotted credit.

Credit bureaus want to see that you can use credit and pay it back. But they don’t like it when your credit utilization is very high.

A credit utilization above 35 per cent is a warning flag to most creditors. Those with the best credit scores often keep it below 10 per cent.

Luckily, there’s an easy way to lower your credit utilization without changing your spending habits…

Ask for a higher credit limit

Get in touch with your credit issuer and ask for a higher ceiling.

If they say yes, boom — you’ve just lowered your credit utilization without changing anything.

You can also raise your credit allotment by getting another credit card and using it little or not at all.

But be warned: every credit card application hurts your credit score by a few points. Use this technique sparingly.

Become an “authorized user”

If you have someone in your life with good credit, see if they’ll let you become an authorized user of their credit card account.

Your credit should start to improve just by having your name on their account. You don’t have to use the account to reap the benefits.

And they don’t have to tell you their credit card information.

Use products designed to help rebuild credit

Secured credit cards are a good way to show the credit bureaus that you know how debt works.

They work just like normal credit cards — you can tap them at stores to make purchases the same way. But there’s one big difference: the person funding the “credit” is you, not a lender.

You put some of your own money into an account, then draw on that money using the credit card.

Eventually, this builds a history of on-time payments, which is what the credit bureaus look for in good credit users.

In addition to offering secured credit cards, KOHO has a program that doesn’t cost anything, and can help anyone rebuild their credit (or build it for the first time.

When you sign up for Credit Builder, KOHO opens a line of credit for you. Then, every month, you choose an amount to set aside from your line of credit.

KOHO will then report that amount as an on-time payment to Equifax. Bit by bit, those reports will add up into a picture of excellent credit history.

Mixing it up is good, too. Using a variety of different credit products will help your score.

How long does it take to rebuild credit?

Unfortunately, you can’t fix a bad credit score in a day or two. Banks need to see a long record of responsible credit usage to know that they can trust you with the good credit cards.

It’s not unheard of to see a credit score jump 30–50 points in a month if you pay off a large credit card balance all at once.

But a more realistic expectation is a 10- to 20-point gain to your credit score each month once you start following the principles of good credit-building.

The good news is, even small wins are wins. People with low credit scores can absolutely turn things around, with time and discipline.