Tips on repairing credit after debt problems, or establishing credit as a newcomer
Published Monday, April 8, 2019 6:00AM EDT
Photo: CafeCredit / flickr (CC BY 2.0)
A credit score is more than just a number tucked away in some credit agency's files. Poor credit can hinder car loans, mortgages and school options, ratchet up interest rates and push life goals out of reach.
Experts recommend a number of steps to improve your credit score, whether you're struggling with debt or you're a new Canadian on the hunt for employment.
In either case, step one is to check your credit report by contacting a credit bureau -- either Equifax Canada or TransUnion Canada -- identify any errors in your borrowing history and work to correct them, as they can drag down your score.
If you're dealing with out-of-control debt, step two is to evaluate your accounts and develop a repayment plan -- especially collection items -- possibly closing some credit accounts, says Jacqui Allard, who oversees personal financing products at the Royal Bank of Canada.
"Outstanding debt payments are one of the biggest drivers of a poor credit score. If you're able, pay your bills to bring your accounts up to date. If you can't, speak with your creditors to let them know you want to pay your obligations and set up a repayment plan," she said.
"Pay down the debt with the highest interest rate first. Make at least the minimum payments on all of your cards or loans, but put the largest amount of available cash on your most expensive debt."
Paying a collection agency debt in full will remove the negative effect on your credit report in about three years. Settling with a credit agency for less than the amount owed will also put you in the clear, but will stain your report for its full six- or seven-year tracking period, according to Scott Hannah, chief executive of the Credit Counselling Society, based in the Vancouver area.
For new Canadians, the first move is to open a Canadian bank account and start building credit history after speaking with an adviser free of cost.
"I can't overstate the value of managing your bank account properly," Hannah said.
Regular deposits into a savings account along with a chequing account that stays in the black will add to your credibility.
Instalment loans or a secured credit card offer a gateway to credibility with a low barrier to entry. Secured credit cards work like regular ones, but require a security deposit equal to the credit limit, and work as a stepping stone to an unsecured credit card.
Maintaining a low outstanding balance in relation to the borrowing cap on a credit card or line of credit will bolster your rating, Hannah said.
"Any time you owe approximately 50 per cent or more of your credit limit, it starts to have a negative impact on your credit score. So pay down your credit," he said.
That's why credit card owners should accept higher borrowing ceilings when offered -- assuming they trust their self-restraint -- he added. Other fast-track credit-building tactics include getting a loan with a co-signer or borrowing money and swiftly paying it.
Punctual payments, whether on loans or cellphone bills, are a must, as payment history factors in to credit scores.
Multiple credit applications within one year work to your detriment, notes Simon Prefontaine, a financial planner with Lafond Financial Services.
For home hunters with checkered borrowing histories, he suggests going to a mortgage broker who will check their score only once, rather than making the rounds at individual banks.
Car loans may be easier to get secure than mortgages, but both can come with hefty interest rates, Prefontaine warned.
"If you're getting a mortgage, then it's pretty much yes or no. If it's no, then you're stuck with the B lenders with a higher interest rate," he explained.
"With the car loan industry, your credit score can actually go pretty low," he said. Prefontaine explained that dealerships have higher interest rates because the risk is higher due to the possibility of default and to asset depreciation.
Hannah stressed "living within your means."
"More often it's individuals who are in such a hurry to get re-established and take on more credit who find themselves in trouble later on, because problems come up they didn't expect," he said.
"Being patient pays off in the long term."