Where do I start? (A simple guide to re-creating your lost credit score)

I get asked this question ALL the time… “I’ve destroyed my credit rating, now what!?”

   Although the exact steps may vary a bit from situation to situation, the steps are essentially the same:

   First, you need to stop the bleeding. What I mean by that is you need to put an end to the negative credit use being reported on your record month after month. That means you either have to settle and pay off your outstanding debt (most of which are likely in collections at this point) OR you need to have the debt released by declaring bankruptcy. Both a Consumer Proposal and Bankruptcy Proceedings will stop any future reporting of bad credit while you are in the process.

   Second, you need to clean up the wound. This refers to the fact that you have a record that shows this outstanding debt and you now need to do what it takes to have that paid off or written off. This could take several years if you enter into a debt settlement option, or could take as little as nine months if you assign yourself into bankruptcy.

Third, you need to heal the wound. Bad marks on your credit file do not instantly disappear once you have settled the debt or had the debt written off. It takes time for the information to be removed from your file. As a general rule of thumb, you can expect the old stuff to hang around for about six years. Your task now is to get some good credit on your report to overshadow the bad credit. But where to start? Fortunately , there are many ways to obtain “secured credit” to enable you to do this. The banks will not likely be your best source in this regard, although it never hurts to ask your lender what they can do for you in this regard. You may, however, need to go to higher risk lenders (ie. Credit Card Companies that offer secured credit cards, Mortgage Brokers who have access to more lending institutions etc.)

The following are 5 steps to help you on your way to a healthier credit score:

1. Obtain a copy of your credit reports – both from Equifax and TransUnion (in Canada)

2. Ensure the information is accurate, that any debts settled or released reflect that fact and anything else is accurately reported as paid off, written off, etc.

3. Contact any creditors who have not updated their information accurately and request that they do so. You can also complete a form from the respective Credit reporting agency and send it in with any update requests. (These can be found on their website and will be provided to you with a copy of your report)

4. Once your files are up to date and accurate, consider obtaining some type of secured credit. You could contact a credit card company to inquire into obtaining a secured credit card, a vehicle financing company to inquire into obtaining a car loan or lease or a mortgage broker to talk about qualifying for a mortgage (you will likely be told by the last two that obtaining a secured credit card and paying on it for a year will improve your ability to get a car/home loan AND qualify for a better interest rate.

5. Give yourself some time for the scar of your past credit history to disappear  As you use your new credit responsibly  the effects of your past credit history will begin to fade. Generally you will see improvement in your score in 6-12 months time.

The formula for re-establishing credit is quite simple – you need to obtain new credit, use it responsibly, over time.

I wish you all the best in your financial future!