5 Steps to Rebuild Your Credit

Rebuild Your Credit

5 Steps to Rebuild Your Credit

1) Check your credit:

Most people simply assume they have bad credit. Or even worse, they have no idea where they stand at all in terms of creditworthiness. “A lot of people come in here and are surprised by what’s on their credit, but people need to take responsibility for knowing what might be out there affecting their credit score,” Bannink says.

To find out where you stand, get a free credit report from Equifax or TransUnion, Canada’s two credit bureaus. Individuals can also request a credit score, which may involve a fee. Often referred to as a Beacon score, it can range from 300 (poor credit) to more than 760 (excellent credit). Bannink says lenders use the Beacon to assess risk for borrowers. “For prime lending rates, you need to be around 700-plus,” he says. “Anything less means you’re likely to fall into the subprime category and consequently you will pay a higher interest rate.”

2) Pay on time, every time:

Even if it’s just the minimum payment on your credit card, a payment is a payment. It shows creditors you’re at least capable of paying the bills. When you miss one, it negatively affects your credit score. Yet many people miss payments all the same. “They do so because they think it’s a small amount of money that isn’t going to do much to reduce the debt — so why bother, right?” Bannink says. But it is worth the bother because every missed payment makes it harder to negotiate better terms, he adds. “To avoid this from happening, have the payment automatically come out of your bank account.”

3) Add more balance to your balance:

Don’t despair just because you can’t pay off your credit card balance in full. The fact is carrying a balance isn’t a deal-breaker when applying for a loan, Bannink says. Still, lenders do like to see a little breathing room when it comes to credit limits. A good rule of thumb is getting the balance down to at least 60 per cent of the limit. “For example, if you have a credit card with a $1,000-limit, try to get it to $600 or less for the simple fact the banks are always looking at your debt- service ratios,” Bannink says. “Once you have your balance under 60 per cent, your credit score will actually go up.”

4) Shop around — just not too much:

It’s a never a bad thing to seek out the best deal available, but when shopping for a loan, less is often more. “Don’t inquire for credit until you have to because what people don’t know is every time a lender pulls your credit, it can lower your Beacon score by as much as five points,” Bannink says. The more you seek credit, the more red flags it raises with other lenders. “They see it as an indication of potential trouble,” he says. “If you go to 10 places in three days, for example, it shows that maybe you could be trying to take out multiple loans.”

5) Don’t count yourself out:

When you’re drowning in debt, it’s often tempting to give up. And many people do; they throw up their hands in frustration and stop paying the bills. But it’s important to keep fighting. And the fact is most people — even with terrible credit scores — can qualify for a loan at a lower interest rate than they’re currently paying, Bannink says. “It’s very rare that someone can’t qualify,” he says. “You just might not qualify for the best rates if your score isn’t good.” Instead, it’s likely you will qualify for subprime rates. But even if you are a subprime borrower, many lenders have devised innovative methods to provide loans with lower interest rates than those traditionally associated in the past with the subprime loans. Bannink says don’t be surprised, for example, if a lender can now help consolidate multiple debts at a lower interest rate, in one monthly payment that is less than all the minimum payments you’re currently paying combined. “Knowledge is power when it comes to borrowing,” Bannink says. “That’s why it’s so important to do your homework and know where you stand before you sit across the desk from a lender.”

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