Rebuilding Your Credit After Years of Debt
Credit Card debt is at an all-time high here in Canada. According to the Financial Post, in 2019 Canadians racked up a whopping $100 billion in credit card debt, with an average balance of $4240. If you’ve been swimming in bills and have a credit score that’s a little lower than you’d like, the thought of rebuilding your credit can be nerve-wracking. It’s especially frightening when you think about how your credit score can determine whether or not you will qualify for a loan, a credit card, or a mortgage for your dream home. Fortunately, if you do have poor credit standing, there are steps you can take to help bring it back up. All it takes is some financial discipline and persistence.
Check your credit report
Starting down your journey of credit repair, the first step should be to check your credit score. If you are planning on making a promise to pay your debts and keep your financials in order, it would be wise to track your credit score to see your commitment to your bills pay off. Monitoring your credit score in this way can not only help you spot inaccuracies in your credit score, but it can also help give you the motivation to be financially responsible. It’s kind of like seeing results at the gym. Positive results often give rise to more motivation.
Get a secured credit card
If you want to improve your credit score and you have, for whatever reason, closed your credit accounts in the past, you will need a credit product to start. Some of the easiest credit products to qualify for and manage at first is the secured credit card.
Getting a secured credit card requires an upfront deposit, which functions as your credit limit. Using a secured credit card wisely can help you improve your credit score, but only if you use it correctly. By correctly, we mean paying your bills on time and keeping your credit utilization low — ideally under 30%. Your credit utilization ratio is defined as the percentage of credit you use, compared to what’s available to you. So for instance, if you have a limit of $5000, and use $1500 of it, your ratio would be 30%. Keep in mind that your credit utilization ratio is a metric that lenders can use to assess your creditworthiness. A high ratio can indicate financial instability or a high dependency on credit. Your ratio makes up 30% of your credit score’s calculation, so it should be a priority to keep it in check.
If getting a secured credit card is out of the picture, consider getting a co-signer to help you qualify for one. A co-signer is an individual who is responsible for your debt if you are not able to pay it back. This can be a decent option in some cases, but beware that if you can’t pay your bills, your co-signer will be on the hook.
Don’t Apply for Too Many Credit Cards at Once
When you apply for a credit card, the lender will oftentimes do a “hard pull” on your credit report. This hard pull, or hard inquiry, is the lender checking your credit to see if you are creditworthy. These hard pulls can negatively impact your credit score, so it’s best to spread them out over time. If too many of these inquiries happen at once, they can indicate to lenders that you’re struck out for cash – or financially irresponsible.
Pay bills on time and in full
The best way to rebuild your credit is by paying your bills (and existing lines of credit) on time. Your payment history accounts for approximately 35% of your credit score. Late payments are recorded on your credit report for as long as seven years. Therefore, making your payments on time is essential to improve your credit score and avoid getting back into debt. Ideally, pay your bills in full, but don’t worry if you can only pay the minimum. If you can’t manage the minimum, contact your credit provider to see if they may agree to a different short-term arrangement.
The Bottom Line
Building a healthy credit score doesn’t only take time, it takes discipline. As a number so important that it affects your ability to reach your financial goals, improving your credit score should hold priority in your financial life. Keep note that having the discipline it takes to improve a credit score is a win in itself. It means that you’re able to stick to a plan and be responsible. These are two skills that can definitely come in handy in any area of your life.
