How to Repair and Rebuild your Credit
As a mortgage broker I get asked this question regularly. In fact this book was written to help my clients that ask this question.
I found that the information is basically the same throughout Canada and the US so I wanted to share it and expand on it with this book and with our website www.fixmycreditinfo.com
We are bombarded with ads to help repair our credit every day from credit cards to car loans and Pay Day loans. No wonder we have so many folks in trouble, credit is too easy to get.
Rebuilding your credit will take time and effort on your part. So let’s get started:
Step One: Get your credit report
We have already reviewed how to do this in an earlier chapter. Hopefully by now you have ordered a copy of your credit report.
You need to review each account that is listed on your report to check what is correct and what may be in error.
Step Two: Report any errors and ask for an investigation
If you find errors you have the right to ask the credit agency to investigate the account and to ensure they correct the information.
The agency will begin an investigation. If the information on file is correct and correct they will leave it as it is. If the account has been updated and is paid this too will be updated on your file.
This first step can take a few weeks to complete so you need patience when rebuilding your credit.
There is no cost to dispute any mistakes on your report so it is in your best interest to make sure all information is correct.
Step Three: Report to your creditor
Tell your creditor in writing that you are disputing your account and offer any evidence you have to support your claims.
You want them to know you have notified the credit agency and want them to investigate your claim as well.
Step Four: Do not close any accounts that are still open.
You do not want to close your accounts even when they are fully paid. Closing accounts can hurt your overall credit score and drive your current score down.
IF you have fully paid your account just leave it alone. You don’t need to use it just put the card away or ignore the account. Eventually if not used the account will be closed without notation to your credit report and will disappear from your record. It the meantime having it open with a zero balance reflects well on your record.
Don’t close your old accounts just make sure they have a zero balance.
Step Five: Start making minimum payments on all open accounts
It is important that you ensure that from this moment on you will make every effort to make at least the minimum payment on each account that you still owe money one.
If you can make more than do so but you must make the minimum payment from now on, this is your monthly goal.
This simple step is the first step in repairing your credit. No more late payments and no missed payments. If you do this in one year your score will improve by adopting this single step.
Step Six: Pay down all balances on the accounts
The goal is to get to less than 50% of your credit limit for each account. You can start with getting them down to less than 75% of the total credit and aim for getting every account down to less than 50% of the credit limit.
Once each account is below this limit you can then focus on the account with the highest interest rates and pay them down to zero first all the time maintaining the minimum payment or more.
Doing this will help increase your overall credit score
Step Seven: Let’s say you don’t have any current account or open account
After collections, OPD’s or a bankruptcy you normally will not have any current credit or open accounts so you have limited abilities to rebuild your damaged credit. There are ways to do it though and I will list them below.
The first step will be to apply for a secured credit card. These are available in both Canada and the United States.
A secured credit card simply means that you will give the credit card company a deposit normally anywhere from $500 to $5000. They will deposit this amount into a secured savings account and will then issue you a credit card that has the same credit limit as the deposit you provided ex: you gave them a $1000 deposit and your new card has a $1000 credit limit.
You can use this card for any regular credit card purchase. You will than pay it off or down just like a normal credit card. Keep in mind you will always make the minimum payment and never be late.
It is a great idea to never go above 50% of your credit limit or in the case of a $1000 credit limit you want to stay at $500 or less.
If possible paying off the full balance each month is even better and will show well on your credit report.
It is advisable to get both a Visa card and MasterCard if possible.
This is a critical step in the rebuilding process and you want to get started on doing this as soon as possible. Once you are discharged from bankruptcy or have paid off your OPD. The sooner you start this the sooner your credit will bounce back.
You will need to keep the secured credit card for at least 18 to 24 months. After 18 months you can apply for a regular credit card. Once you get the new regular card you can close the secured card and collect any deposit that was not needed to pay off the account. You may even get a small amount of interest.
Step Eight: Try to get a secured bank loan
This step is a little more difficult but can be done you just need patience. The idea here is the same as the secured credit card.
You will go to your bank or credit union and ask for a secured loan. The money the bank will lend you will be used to buy a Guaranteed Income Certificate or Bond. This bond or GIC is then used as the security for the loan.
The bank or lending institution will break your loan into 12 or 24 equal payments and will being collecting these payments each month from you. You will set it up as an automated withdrawal to ensure you are never late.
You must ensure that the bank or lender promises to report your payments to the credit agency each month so that you can rebuild your credit. If they don’t report then move on and find another institution. You must use a lender that reports each month.
If you are in Canada you can ask that the GIC or Bond be registered as an RRSP investment or a 401 investment so you can take advantage of the tax breaks. Doing this provides benefits, a tax break and a savings account along with a better credit rating.
Step Nine: Each month set a time to pay the bills
Pick a day which is a few days before the actual due date for your monthly payments. One this day you will ensure that the bill is paid and will mark it on your calendar. Celebrate the day a little, pat yourself on the back. Treat yourself somehow but take time to recognize that you are working your system to rebuild your credit.
Do not apply for any other credit during this first year. Avoid allowing anyone to check your credit this is important as it helps your credit to recover faster.
Step Ten: Let time pass
This is the easy step, once you have your secured credit card and loan in place you now only need time to pass and to keep making your payments.
Within the first 12 months you should see your credit score jump over 600. Within 24 months your score should hover in the high 600 range.
You will also find credit offers being sent to you in the mail and by e-mail. It is important that you do not make any applications for more credit.
Protect your credit with vigor, allow no one to get access to it in this first 12 to 24 months. Each credit inquiry cost you points on your score so protect your score by not applying for any credit.
So there it is 10 easy steps to rebuilding your credit history, follow them and you will rebuild your credit in 12 to 24 months.