How to rebuild your credit in Canada

To learn all about making sense of your credit report, check out part one, 9 things to know about your credit score.

Financial Wellness Podcast Transcript

Tera:

Hello, and welcome to the BDO Financial Wellness Podcast. I’m your host Tera Beljo, and this is the second episode of our two-part series about credit. A couple of weeks ago, I had a fantastic conversation with BDO Licensed Insolvency Trustees, Michael Comrie and Ilan Kibel. We talked about the differences between a credit score and credit rating, what’s in your credit file, and what happens can hurt and help your credit score. And well, we covered a lot, too much to fit into one episode, really. So, this is the second part of our series, which focuses on something that is on a lot of people’s minds these days, how to rebuild your credit. Let’s face it, many Canadian households are overextended and relying on credit to get from paycheck to paycheck. Maybe you’ve been consistently paying your bills after they’re due, or you’ve been missing a few payments. You might be in a debt management program, filed a consumer proposal, or declared bankruptcy. All of these things will appear on your credit report. And they can negatively affect your credit score and your credit rating. But there are steps you can take to rebuild your credit. So, let’s dive in to hear what Michael and Ilan had to say about it.

1. Get a secured credit card to rebuild credit after a consumer proposal or bankruptcy

Now, as you guys know, I manage our social media accounts as well. And, sorry, I see a lot of people talking about how consumer proposals and bankruptcies destroy your credit. And we know that’s not the case. So, Mike, can you tell me a little bit about how you rebuild your credit? Let’s start first from this perspective of you filed a bankruptcy, or a consumer proposal. So how would you advise someone to best rebuild their credit?

Michael Comrie:

So, first thing I tell everybody is there’s no quick fix. And the reason I say that is because there are loads of service providers, let’s call them, that are advertising quick fixes to repair your credit. And the bottom line is you just simply can’t because information stays on your credit for a certain amount of time. And that’s based on the way Equifax and TransUnion report it, which ultimately all reflects back to piece of legislation that tells them how they have to do that. So really there’s no quick fix and everyone should be aware of that. However, there are tried and tested methods that you can take to improve your credit.

It should be said, if you are doing a consumer proposal or a bankruptcy, have a discussion with your trustee or administrator, because there are some rules about, for example, in a bankruptcy, when you can borrow and how you disclose your undischarged bankruptcy status. But aside from that, generally speaking, the easiest simplest way to start rebuilding your credit is to get a secured credit card.

So, in general, before you look at getting credit, you’ll have to make sure that your habits are in place. A lot of people end up in this position because they’ve excessively borrowed, for some it’s because of circumstances that are out of their control, but if you know yourself to be the type of person who has habits that are problematic when it comes to spending, you need to get those under control first, otherwise you’re going to get that card and the same old habits are going to repeat. But once you get those under control, there is really a good way to start reestablishing your credit, which is to get new credit. It’s just as simple as that. And the only way to do that, typically when you are coming off of bankruptcy, or even within a bankruptcy, or proposal, is to get a secured credit card. And that is a particular credit card where you put up some money and an institution will give you a credit card that operates just like a traditional credit card.

And again, just to be clear, it is not prepaid, it is secured. But really that’s the only thing you can do other than making sure there’s no inaccuracies. You get new credit and you manage it effectively. You make your payments on time. You don’t carry a balance, and if you do, you carry the balance below 30 per cent of its limit.

2. Hold onto your oldest credit cards

Tera:

And Ilan, what if you’ve reviewed your credit file and your credit score is lower than you’d like, what now? What steps do people need to take that want to higher their credit score, or want a higher credit score?

Ilan Kibel:

So, it’s basically, as we’ve been saying, it’s being diligent on your credit and making sure you’re managing it properly. You’re paying your cards off. There are things that will affect the credit score. Some people look and say, I got too many credit cards. I’m going to go and close credit cards. So those things are actually going to impact you if you’ll end up closing your oldest credit card, as Mike said earlier. And we were discussing earlier is credit history is important. And most probably one of the highest factors in calculating your credit score.

So, if you sit there with a credit card that you’ve got a credit limit on it, but it’s one of your oldest, and say, well, I’m tired of using credit cards and you close this card. You’ve actually just eliminated a whole 10, 20 years, however long you’ve been building credit history, right? You’ve just literally wiped it off the map. So now you’ve got to restart from square one. So, there are the number of factors that you could help. We speak a lot about consumer proposal, people that have gone through bankruptcy. They’re also the people that may have been living off the grid, who’ve never had credit, younger people coming through things. They’ve never had credit. So, they’re not a factor, so when they go now to rent an apartment, they have no history. So, there are other ways that they could look at that.

3. Consider a credit-building savings loan

So, Mike mentioned the secured credit card, which is definitely a great option, and most probably one of the easiest for a lot of people to get into. You’ve got the ability to get what we called secured loan. So, if you’ve got an asset, you can finance get that loan and then pay that off. There’s some credit building saving loan. So, you’re not really getting a loan from a bank, but you’re putting money into an account. They reporting it to your credit bureau and that’s helping you rebuild your credit from their point of view. Co-signing, it’s a very big thing. You can have a family member or friend, someone who’s willing to sign on that debt with you. So, you’re able to rebuild. You just got to keep in mind, if you ever default in a loan, you leaving them high and dry, and now they responsible, which could impact more than just your credit and their credit, your relationship.

The final thing I want to add to rebuilding your credit and helping you, whether you knew or not you is, I think it’s Equifax who have done a program with the landlords that they could report to the credit bureau, your rent, which can help you rebuild your credit. Others on the opposite side, if you don’t pay your rent, that’s going to impact your credit. So, you’ve got to keep those in mind.

A lot of questions we have is I’m never going to be able to rent again. I want to move into an apartment. I’m doing a proposal or bankruptcy. My credit’s terrible. I’m never going to be able to rent. That may be the case because your credit, when they do Equifax, a credit report looks negative or it’s down, the numbers are down. However, if you speak to your landlord or the new potential landlord, and you’re able to get them a credit history, or credit payment from the previous landlord who can attest that, no, you were very good with your payments. You never defaulted. You may have defaulted on a credit card or something else, but you know the roof of your head is important. They may be able to give you a credit history payment, which may help the next landlord to basics, okay. Even though we see your report shows negative scores, we’re willing to rent you, because we know this is important. And that’s one way of also starting to… And then hopefully that landlord will report your credit bureau, which can help you start rebuilding your credit.

 4. An insolvency filing can actually help you rebuild your credit

Tera:

Mike, you had something to add?

Michael Comrie:

Yeah. So Ilan mentioned a good point, which is the positive versus negative information. So, Equifax will tell you themselves, positive information will hang around on your Equifax report for 10 years. TransUnion, 20 years. So, it’s very important. A lot of people think, “Oh, I paid it off. I’ll close it.” It’s kind of like a milestone moment. Especially if they’ve been working to pay it down but can do much more damage than good.

And then just to add to the discussion about; how do you rebuild, post-consumer proposal? Something to keep in mind is that, and we may get into this later, but a lot of individuals who do visit a trustee looking to do a proposal or bankruptcy, they’re already dealing with a compromised, we can call it credit score, where they’re debts are likely high to their limits, or their credit utilization is not good. They may or may not have actually begun to default, especially in these trying times. And there may or may not be collection items. So, a lot of people who are coming to a trustee are already dealing with credit issues. And really the problem for them is eliminating their debt. And by doing so, it creates a new, fresh landscape, where they can actually then seek to rebuild. An analogy I often use is I describe their backyard as being full of weeds. And you have to pull out those weeds to plant new flowers. And that’s often how you can look at an insolvency filing when it comes to rebuilding your credit.

5. Catch up on missing credit payments before they go to collections

Tera:

Now, what about when it comes to building or getting a higher credit score? What about delinquent accounts or ways to bypass consistent late payments? What can someone do to deal with that to help bring their credit score up?

Ilan Kibel:

Go Mike.

Michael Comrie:

Yeah. I mean, simply put, if you’ve got a delinquent account, you got to catch up the missed payments.

Tera:

And that will help?

Michael Comrie:

Yeah. It will help. Again, there’s two different ways to look at this. So, there’s a delinquent account where you are behind on a payment and your rating may reflect it. And it’s not yet gone to collections. So those you catch up on the payments, and then your rating will go back to good, for that individual item. Now, if you’ve got a debt that’s gone so delinquent, it’s now gone to collections, who you would find on your public records. That’s there. It’s going to go away based on Equifax’s and TransUnion’s reporting periods, which is typically six years from, they either say date of last payment or date of first delinquency. For that, there’s nothing you can do to remove the delinquent account. However, if you pay it off, either by paying it in full or settling with that collection agency, the balance will go to zero. And that will help.

Again, these are all little things you can do to improve your overall credit score, and just to get your credit report looking better. But keep in mind, those are technically two different types of delinquent accounts. And then I think you were asking about if you have consistently payments. So, a very easy way to deal with that is just to set up automatic payments with your financial institution. So that way each month payments get made, you don’t need to worry about it, as in, you’re not moving money from one account to the next, and it’s automatic as the type of payment implies. And so, every month it gets paid and you don’t have to worry about having consistently payments.

6. Adopt good financial habits: set up auto payments and create a budget

Tera:

Ilan?

Ilan Kibel:

Yeah. So, as Mike was saying, you’ve got these possible notches on your credit where you’ve missed payments, it’s recorded. You’ve got to do whatever you can to correct that. But if you step back and say, I’ve got these things, and they keep reoccurring is now, do I prepare a budget? Do I take a full financial health check on myself and prepare a budget? Now budgets are easy to prepare. We all can go back through our bank statements and say, I spent X amount here, Y amount there. It’s the tracking that becomes the tough thing for people to do.

And I always say to individuals, if you track three, four months going forward… So, you set your budget, you track three, four months going forward, you’re going to become familiar with what you are spending money on, what your regular payments are, where you’re overspending on the wants versus needs. And that’s where you’ll start being able to become a little bit more conscious and dealing with your budget to be able to do what Mike was saying, and paying down those accounts you’ve missed, or payments you’ve missed.

Auto pays as Mike said, it’s beautiful, because you obviously need to check the statements. Don’t just let auto pays go through, and all of a sudden you get a 407ETR bill for $50,000. You don’t know how it got there, but you got to make sure that you checking that, but auto pays are good from paying bills, and from saving, if you’re able to save, right? Because I had a thing where I transferred some funds from one investment to another. Didn’t realize they never closed the other investment. And they kept taking money on my account, completely unbeknown to me.  And when I went to look, I said, okay. I’ve got this money sitting there. I didn’t even know it was there. So, that becomes important. Out of sight, out of mind on the saving point of view, but on what you spending and paying on, be conscious, review it every now and again. And once you’ve done a few months of budgeting, I think your awareness of where you spend your money is going to be fantastic. And then it hopefully opens up the ability to set for your goals, right? Future goals. Short-term, I want to buy a car to long-term, I want to go on a good vacation to even longer term, have a family, buy a house. Basically, once again, coming back to your financial health equal to your physical health. How do you look after yourself from that point of view?

Tera:

It’s so important that financial health does play a role in your physical and mental health. And we need to concentrate on it. So, we’ve already talked a little bit about how rebuilding your credit after an insolvency, but I also want to talk about some of the myths around this subject. So Ilan, can you share some of the insolvency myths? Can we do a quick debunking right now on some of the insolvency credit myths. What do you got for me?

Ilan Kibel:

So, the general thing, I think we’ve mentioned some of these is that I’m never going to get a loan. I’m never going to be approved. My credit’s going to be bad forever. It’s going to be there. I’m never going to get away. It’s going to impact my spouse’s credit. It’s going to impact my kids or my parents. Those are all myths. The program specially of doing an insolvency and bankruptcy in the Bankruptcy and Insolvency Act, were specifically put in place to help the honest, but unfortunate debtor to, what I call, hit the reset button on their financial situation. They’ve put the program out there. It’s going to deal with that.

And banks are in the business of lending money. So, if you have to say, the number of insolvencies or people in financial trouble are going up. So, if you just have the mindset that I’m never going to get approved for another loan, again, the banks are not in that business. Everybody’s on a case-by-case basis when you’ve dealt with your debt, either through a proposal or a bankruptcy, you come out of it at the other end, and now you’re earning some good money and you’ve got no debts. You’re actually less credit risky. Even though the number may say you are when you turn your record, on a business point of view from a bank or a lenders point of view, you’re actually better off to lend money to somebody who’s got this available cash flow, provided you done the budgeting we spoke about, and you’re monitoring that properly, to the banks you’re actually pretty good to lend money to.

And everybody’s on a case-by-case basis. So, you can’t take it as my friend said he never got credit. There may be reasons why he doesn’t get credit. You’re on a case-by-case, you’re an individual, and the bank has to look at the person and your circumstances at that point in time. Not what the history was, but what you’re currently doing right now. So, there are many ways. And as we spoke about the secured versus prepaid credit cards, you’ve got to understand those where a Licensed Insolvency Trustee can help you and educate you through the counseling sessions we provide in helping people understand their options down the line, and how to deal with us and debunk all these myths out there.

The internet’s a great source, but it can also be an overwhelming source. So, you’re better off chatting to people that know and can answer these questions rather than diagnosing your own problems and not really knowing 50 different options, but none of them really may be true.

7. Keep at it and you’ll see positive results on your credit report

Tera:

Mike, what would you like to debunk?

Michael Comrie:

Well, just that when somebody’s situation is such that they sat down, they developed a budget, their debt loads are just so large, they’re at the point where they can’t pay them. They know they can’t. They’re considering speaking with a Licensed Insolvency Trustee about doing a consumer proposal or a bankruptcy, they’re often concerned about their credit. So, the first thing I remind them of is that nothing on your credit report is permanent. Everything by its very nature on your credit report is impermanent. So obviously some things, like your identifying information, employment, et cetera, will always be updated and be there, but as we’ve mentioned, negative information stays around only for so long. Even positive information stays around only for so long. So, you have to understand eventually that will fall off. And then the question is, what have you done in the meantime to re-establish your credit such that when the negative or derogatory information falls away, which it will inevitably do, what will then be left in its stead? What will your new picture look like?

And that’s what a trustee can help you by talking to you as we have done here today on how you can rebuild your credit after insolvency. Because it is doable. It is regularly done. And Ilan’s point, if you consider the number in a hundred thousand plus people every year who are entering a state of insolvency, if the banks just outright and financial institutions decide, we’re never going to lend to those types of individuals there, they’re cutting off huge swaths of the population that one day will be able to borrow based on that new case-by-case basis.

Tera:

And Mike, sorry, can you answer this one for me too. Because I know this has come up as a comment online. After an insolvency, typically how long until a mortgage is possible?

Michael Comrie:

Yeah. So, there is lots of information out there on this. Everybody should understand the information I’ll provide is kind of general rule of thumb.

Tera:

As Ilan says, it depends on the individuals, right?

Michael Comrie:

Correct. Because when you’re applying for a mortgage, your credit is a part of the battle, right? But there’s your income, there’s your down payment, there’s the state of the market, et cetera. So, there are all these various other factors. However, what I’ve generally found through research is that lenders who are providing mortgages are looking for about a two-year timeline after discharge, or in the case of a proposal, full completion. And it’s been two years and you’ve reestablished your credit. To get particular, couple of websites that I’ve visited and brokers that I’ve spoken with, the lenders who I have provided information on this, tell me, they’re looking for also two or more credit facilities. So that would be a credit card or loan, and approximately $2,500 or so in established new credit.

And again, general rule of thumb, you can’t walk into a mortgage provider and say, “Hey, I listened to a podcast, and I was told, you’re going to lend to me after two years, one day.” But that’s generally what they’re looking for. And I’ve had that repeatedly confirmed. So, I feel fairly confident. But the biggest thing they tell me is your down payment, which has little to do with your credit. But if you’re working towards that post-insolvency, it should be the length of time that you’ve reestablished your credit. How much new credit you have, don’t go overboard, and how you’ve managed it. And what your down payment is.

Tera:

That’s awesome. Ilan?

Ilan Kibel:

Can I add?

Tera:

Yeah, of course.

Ilan Kibel:

Yes. So, I wanted to add to that also. People that need to be aware that there’s a difference between I’ll never get credit, or I’ll never get the mortgage, I’ll never get the loan to you get it, but you’re not going to get the favorable interest rates. You’re not going to get the favorable payment. And I equate it to… I mean, I had a call yesterday with a lady. And you got to be careful what you read out there because it’s not a one thing fits all from a proposal or bankruptcy to your credit and the interest you get. So, we keep hearing and Mike, I think can attest to this is, “Well, I’ve been told I can get rid of 80 per cent of my debt.” We say, no, no, that’s on a case-by-case basis. The same thing with your credit, what size house are you buying? Are you going to get the 5 per cent interest rate or the 10 per cent interest rate?

So, you can get it. You can qualify, but it may be unaffordable for you. So, those are just the things, you may get it sooner than two years, but you got to be paying a lot more if the financial institution… And we keep saying financial institution, on mortgages, people need to be aware. There’s not just financial institutions out there. You may be better off and served better by a mortgage broker than a financial institution. Especially when you’re coming out of a proposal and/or bankruptcy, they may be able to shop around and get you a little bit more of a favorable rate. And actually, get you qualified. So, you’re down the line. You’re actually able to get back into that favorable rate. So, it’s all talking.

The one other thing I want to add is we’ve spoken a lot about credit report, credit bureaus. And I think anybody who’s actually looked at a credit report, opens up this document looks and says, “I don’t know what I’m reading.” Puts it down and moves on. So, if you have that credit report, always contact a Licensed Insolvency Trustee. We can review that with you. We happy to go through and go through that with you. BDO Debt Solutions, we also have the ability with your consent, written consent, with the verification of who you are, to actually pull a credit report for you, and review that with you. So, there’s those options.

And reviewing that’s important because it is overwhelming. There’s so many numbers, so many things, people don’t know how to read the columns property. So, it’s important to make sure you getting in contact with the right people in order to do that and get the best information for your own personal decision-making.

Tera:

Now, before I let you both go, I want each of you to give me one tip for somebody, a client… Just one tip you’d give a client of yours to stay motivated in building their credit history after they’ve left your office and signed a consumer proposal, or a bankruptcy with you. Mike, go first.

Michael Comrie:

Yeah. So that’s never easy obviously. And obviously a lot of people are very tuned into when will I be able to borrow again? So, first thing really, I remind them is, well, it’s good to work towards having good credit so you can borrow again and be approved for those important purchases in your life, a car, or a mortgage, or renting, et cetera. But I remind them of how long it took them in the first place to establish their credit. Over how many months and years they worked to create that good credit, so they are able to borrow in the first place. And I remind them that because nothing on their credit is permanent, it will all fall off, and they will be able to do it again. If you’ve done it once you can do it again. And now, especially you have learned how not to let it get out of control. Had you had that right information, or possibly education in the first place, you likely would have been able to manage it such that it never occurred. Now you have that, plus the knowledge of how to build it in the first place to borrow again. So now the vision for the future is brighter than it’s ever been.

Tera:

Thanks. That’s a good one. Ilan, what do you got?

Ilan Kibel:

So, as Mike says, there’s no sort of cookie cutter answer to it, but the perception of bad credit, and who’s going to know about it, and that is really in your mind. Because you’re not walking when you all leave our office. When you leave work, you’re not walking around the street with a sign above your head says, my credit score is, right? You only know that the credit card companies know that. And to the credit card companies, it’s business, it’s not personal. That’s how they make their money. So, it’s really more a mental thing. So, you’ve got to understand, there is an answer to those issues. You can move it along, and you can deal with rebuilding your credit. And once again, as I said, what you do not check, cannot be fixed. So, what you do not deal with cannot be resolved. So, there are options for people out there to really deal with it. And it’s not a public forum where it gets publicized. It’s really something people need to get out of the head that everybody’s going to know what’s going on with their lives.

Tera:

I know this is a hot topic. So, Mike, you want one more thing to say, I’m going to give it to you.

Michael Comrie:

The thing that I say that I find helps people just with the feeling of having to go through insolvency. And the emotions vary, so I won’t go through those. It’s just to remember that there are many people, thousands, hundreds of thousands, tens of thousands, et cetera, of individuals who are having to deal with insolvency. Some that have circumstances that are outside of their control. So, they’re not the only one they’re not alone. And they will recover from that.

Tera:

That’s awesome. What do you got, Ilan?

8. Ask about deferred payments that won’t affect your credit score

Ilan Kibel:

One of the last things I just wanted, and might be sort of going back in the conversation a little bit, that we never really discussed about affecting your credit and your credit score, given the environment we in COVID-19 and that stuff. So there has been a program and the credit bureaus TransUnion has made it very clear that as long as you have a deferred or special payment arrangement with your credit card company, and that agreement still in place, it’s actually not going to affect your credit score. So, if you’ve deferred in most payments, it’s not going to change your credit score rating from a one to a two or three. They’re going to keep it at, say the one, as long as that arrangement is in place.

So, it’s very important that individuals are out there, making sure they speak into their credit card companies and creating these arrangements to help them to not be impacted. Obviously when those arrangements end, you’re going to have to stop making the payment. But I think given that we’re in COVID-19, there’s still so much uncertainty. We don’t know, we might be going to another lockdown, who knows?

Tera:

God please no.

Ilan Kibel:

You should be talking and making sure that this is not impacting you when you have the opportunity to fix that or deal with it.

Tera:

And that is an awesome add on. I’m glad you touched on that. And with that, I am going to say thank you, because I think we can speak about this for a whole another hour. So, thank you so much, both of you for doing this with me.

Ilan Kibel:

Thanks.

Tera:

And I can’t wait to do it again with you guys.

Michael Comrie:

Bye.

Tera:

Thanks. Bye. Thanks to my guests in this two-part series, that’s all about credit, BDO Licensed Insolvency Trustees, Michael Comrie, and Ilan Kibel. And if you haven’t already, we encourage you to check out part one on our website, debtsolution.bdo.ca, where you will also find more Financial Wellness Podcast episodes, videos, debt management resources, and tools. And remember, we are here to help you turn the page on debt. Your next chapter is waiting.

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