July 7, 2021
A bad credit affects your finances in many ways. Two Licensed Insolvency Trustees at BDO share their advice on improving your credit score and rating.
Have you ever received a higher interest rate than you anticipated or had a loan denied due to your credit history? Living with poor credit can be challenging, but it doesn’t have to be a permanent situation.
You have the power to rebuild your credit, but it does require patience and perseverance. Rebuilding credit is a process of steadily improving your credit score over time, and it’s entirely possible with the right approach. We spoke Michael Comrie and Ilan Kibel, Licensed Insolvency Trustees at BDO, to learn some of the most effective strategies for rebuilding credit.
“The simplest way to start rebuilding your credit is to get a secured credit card,” says Michael Comrie, a BDO Licensed Insolvency Trustee.
A secured credit card is much like a normal credit card, with one difference. It requires you to put down a deposit as collateral. This deposit acts as security for the credit card issuer, reducing their risk. If you deposit $500, then that is also your spending limit on the card.
Secured credit cards function like traditional credit cards. You can use them to make purchases, and they report your payments to credit bureaus, helping you build a positive credit history, something prepaid cards do not do.
Before you apply for a secured credit card, it’s crucial to address any problematic spending habits. Ensure you can manage your spending effectively, make payments on time, and keep your credit utilization low.
Once you have a secured credit card, use it responsibly. It’s a good idea to keep your balance below 30% of your credit limit. This demonstrates to creditors that you can manage credit effectively, which will gradually improve your credit score.
Your credit history is one of the most significant factors in calculating your credit score, and the length of that history plays a key role. Many people mistakenly believe that closing old credit cards can improve their credit score by reducing the number of open accounts. However, this action can have the opposite effect.
“People who have several credit cards are often tempted to close one of them. Before doing so, it is important to consider for how long you’ve had the card, so you don’t negatively impact your credit history.” says Ilan Kibel, Licensed Insolvency Trustee at BDO.
Closing a card that has a long credit history can result in a drop in your credit score as the average age of your remaining accounts decreases.
Instead of closing old accounts, keep them open and use them occasionally to maintain activity. Even if you don't use these cards frequently, having them in your credit portfolio helps to preserve the length of your credit history, which is beneficial for your overall credit score.
When you’re on a mission to rebuild your credit, paying down debt should be a top priority. One effective strategy for tackling debt is the avalanche method, which targets debts with the highest interest rates.
The avalanche method involves listing all your debts in order of interest rate, from highest to lowest. You continue making at least the minimum payments on all your debts, but any extra funds you have go toward paying off the debt with the highest interest rate first. Once that debt is paid off, you move on to the debt with the next highest interest rate, and so on.
By prioritizing high-interest debt, you reduce the amount of interest you’ll pay over time. This means more of your payments go toward reducing the principal balance, helping you pay off debt faster.
Additionally, lowering credit card balances relative to your credit limit can positively impact your credit score. Lenders view responsible debt management favourably, and reducing your debt load demonstrates that you are taking steps to improve your financial situation.
An insolvency filing can pave the way for credit rebuilding. Many individuals who turn to a trustee for a consumer proposal or bankruptcy are already grappling with compromised credit scores. Their debts may be nearing their limits, and their credit utilization may be unfavourable. Some may have even begun defaulting, especially in challenging times.
However, by addressing their debt through these processes, they essentially clear the slate for a fresh start.
“Filing for either a bankruptcy or consumer proposal creates a new, fresh landscape, where a person can actually then seek to rebuild their credit,” says Michael Comrie.
If you've fallen behind on a payment but haven’t reached the collections stage, catching up on payments can restore your credit rating for that specific item. However, once a debt has entered collections, it will remain on your credit report for up to six years, regardless of payment. While paying off or settling the balance can help, it won’t remove the delinquent account entirely.
Look at the bills you’ve fallen behind on the furthest and prioritize them, it will help you get back on track and by doing so, improve your credit score. You can also begin to set up a system of automatic payments to help ensure you do not fall behind on bills again. We’ll discuss this idea in further detail now.
“These are all little things you can do to improve your overall credit score, and just to get your credit report looking better,” says Michael.
Setting up automatic payments is a great strategy for managing your finances effectively and improving your credit score over time. Automatic payments involve setting up recurring payments for bills and debts, such as credit card bills, loan payments, and utility bills. By automating your payments, you ensure that your bills are paid on time every month, reducing the risk of late payments and associated fees.
Automatic payments can help you avoid the stress and hassle of remembering due dates and manually making payments. Moreover, automatic payments help you maintain a positive payment history, which is a crucial factor in determining your credit score.
Payment history accounts for a significant portion of your credit score, so consistently making on-time payments can have a positive impact on your creditworthiness.
Creating a budget is another effective strategy for managing your finances and improving your credit score. A budget helps you track your income and expenses, allowing you to allocate funds appropriately and prioritize debt repayment. By outlining your monthly expenses and setting spending limits for different categories, such as groceries, transportation, and entertainment, you gain better control over your finances and can avoid overspending.
“Once you’ve done a few months of budgeting, I think your awareness of where you spend your money is going to be fantastic. It then hopefully opens the ability to set for your goals,” says Ilan Kibel.
“When it comes to credit, nothing is permanent. You are always able to rebuild credit, no matter how bad it is,” Michael Comrie reminds us all.
If you have poor credit and feel overwhelmed by your financial situation, reaching out to a Licensed Insolvency Trustee can help turn your situation around. Licensed Insolvency Trustees, like Michael Comrie and Ilan Kibel at BDO, are federally regulated professionals who specialize in helping individuals navigate financial difficulties without judgment.
They can assess your financial situation and explain various solutions, along with the pros and cons of each, to you. The first consultation is completely free of charge.
July 7, 2021
A bad credit affects your finances in many ways. Two Licensed Insolvency Trustees at BDO share their advice on improving your credit score and rating.
