Q: I’ve recently turned 25 and have been doing a lot of thinking about my finances and the steps I need to take to improve my overall financial situation. With some help from my mom I’ve set up a budget to help me start saving money and paying down the debt I’ve accumulated over the last few years. My goal is to pay off my debt, save up some money and go back to school and become certified in a trade where I can make a good living. I also want to improve my credit rating as I’ve had some problems in the past. I got stuck with some old utility bills that I refused to pay when I was renting a place with someone else and I’m also over the limit and behind on my credit card payment. I’ve looked online for help and there are lots of services that promise to repair your credit for a fee. I called one but wasn’t comfortable with the person I spoke to. What’s the best way to fix your credit fast? ~Daryl
A: Congratulations for taking some big steps to improve your overall financial well-being and preparing yourself for a new career; it will make a huge difference in your future. I can appreciate your desire to fix your credit rating quickly but what most people don’t understand is that there’s no such thing as a quick fix unless the information on your credit report isn’t accurate. The other thing you need to know is that what the credit repair companies do for a fee, you can do for yourself for free.
What determines your credit rating?
Before outlining some ways to help you achieve your goal of improving your credit score and your credit rating, it’s important to understand how your credit rating is determined. In Canada, there are two credit bureaus: Equifax Canada and TransUnion of Canada. These companies collect and maintain an up-to-date record of your past and current credit obligations like credit cards, loans and lines of credit.
Your credit report will outline the credit limit for each loan, overdraft or credit account in your name, your current balance and the current status of each account; paid as agreed or past due, and how long each account has been open. Your credit report will reflect government student loans and your status for each; whether you are still in the grace period and not making payment, or if payments are required and how you are managing them.
Your credit report will also contain public records and outstanding collection items that may or may not have been assigned to a collection agency.
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What will lower your credit rating?
The things that can negatively impact your credit rating the most are late and missed payments; maxing out credit cards and other forms of revolving credit, e.g. credit lines; outstanding collections or judgments; and applying for new credit too often.
When you apply for credit, a creditor will typically obtain a copy of your credit report and your credit score and use this information as part of the process in determining if your request will be approved, how much credit you qualify for and at what interest rate. The steps you take to improve your overall credit rating will also improve your credit score. While it is frustrating to have negative information on your credit report, the good news is that the steps you take going forward will lead to a better credit rating in the future.
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How long does information stay on a credit report?
There are two other things to keep in mind as you start on the path to repair your credit rating; the sooner you address the problems, the sooner your credit rating will start to improve; and there are time limits as to how long information stays on your credit record. Each province has a Statute of Limitations Act and in most provinces, the time limit to report credit information is six years from the date of last activity. When outstanding collections are paid, the items are updated on your report to reflect that they are paid and will subsequently be removed sooner from your report; normally in three years.
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Six steps to take to repair and improve your credit rating
With an understanding of what information is recorded on your credit report and how long the information is reportable, I want to outline the six steps you can take to repair your credit report and improve your credit score.
1. Obtain a copy of your credit report for free
You can obtain a free copy of your credit report and I encourage you to do so from both credit bureaus. While the information is generally the same, there are sometimes differences on the reports. Your first step is ensuring the information is correct. In most cases the information will accurately reflect your current financial situation, but if it doesn’t you will need to contact the credit bureaus, provide information to support your claim and ask them to update their records, because outdated or inaccurate information can negatively impact your credit rating.
2. Payment history – always pay on time
Going forward, make all of your payments on time and as required. No exceptions. This is the single most important piece of advice I can give you. In your situation, you need to bring your payments up-to-date and get your balance below your credit limit. Review your budget and then determine what short-term changes you can make to achieve this. A future record of paying your credit card on time each month will help you improve your credit rating.
Keep in mind that future payments on your credit card must be received on or before the due date on your statement to remain in good standing with your credit card company and improve your credit rating. It’s a good practice to remit your payment a week before it’s due to ensure your payment is processed on time.
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3. Communicate with your creditors if you are behind on your payments
Once you have determined what you can do to resolve your situation, contact your creditors and gain their approval to bring your accounts in good standing and/or pay them in full. Communicating with your creditors is critical because once an account is past due, you run the risk of having your account assigned to a collection company, which will negatively impact your credit rating.
Take a balanced approach, recognizing that your credit card company and the companies where you have outstanding utility accounts will both want the same thing: to resolve your situation quickly. By communicating your situation and outlining a plan that you can manage, you will improve the odds of gaining your creditors’ acceptance.
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4. Check your credit report to ensure it reflects your outstanding accounts are paid in full
Generally speaking, paid collection and other outstanding accounts on your credit report are updated every 30 days. Once you have paid your utility accounts in full and have received a statement validating this, confirm with them when they will update their records with the credit bureaus. Allow at least a month past this date before checking your credit report to ensure this has been done. Once it has been updated, there is nothing more for you to do but check back in three years to confirm the paid accounts have been removed from your credit report.
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5. Keep well below your credit limit
A person’s credit rating will start to be negatively impacted if they utilize more than 50 per cent of their available credit limits. In the eyes of a lender, maxing out all available credit speaks volumes. By looking at the type of credit a person uses, e.g. credit cards or loans and how they use them, lenders see a picture of how a person manages their money and debt.
To improve your credit rating, it’s crucial to develop a plan to pay off your debt in a reasonable period of time. It’s fine to use a credit card again once the balance has been paid in full, but only for safety and convenience and not with the intent of carrying a balance. The interest rates on most credit cards are simply too high to justify staying in debt month after month.
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6. Applying for new credit
In the future when your credit rating is in good standing, be careful before applying for new credit. Only apply for credit that you need and can afford to repay and be careful about applying for credit too often. When you apply for credit, your credit score is affected because what you already owe (your current credit obligations) impacts your ability to afford additional payments (the new loan you’ve applied for).
When you’re in debt or trying to fix your credit rating, it might seem like applying for new credit to pay off what you owe or to get a fresh start is a good idea. More credit just equals more debt, and a fresh start doesn’t erase what needs to be fixed.
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The bottom line on fixing your credit rating
A realistic plan, consistent action and time are the three things that will help you repair and improve your credit rating. Keep in mind that it takes time to get into debt and it will take time to get out of debt and sort out your debt problems. Developing a repayment plan based upon a realistic budget and following through on your plan are the most important things you can do to regain a good credit rating; the rest is left up to the passing of time. The more time that elapses after you resolve your situation, the more your credit rating will improve to the point when only positive information remains. Going forward never forget that it takes years to build or rebuild a good credit rating and only months to damage it. Credit is a tool that needs to be used wisely.
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Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email, check www.nomoredebts.org or call 1-888-527-8999.