How to rebuild poor credit

This article has been updated from a previous version.

If you’re reading this, you’ve likely gotten yourself into a bit of trouble, financially speaking. Although having a poor credit score can make certain aspects of your life challenging, it isn’t impossible to recover from. That said, rebuilding your credit takes time and the willingness to make some changes.

Order a copy of your credit report

The first step to rebuilding your credit is to order a credit report. Think of a credit report as a snapshot of all the various forms of credit you’ve held over the years (and are currently holding), including loans, credit cards, and even cell phone bills. Without knowing where you’ve gone wrong, it’s hard to correct your financial behaviour. On your credit report, you’ll see the good and the bad, including missed payments, overdue accounts, and accounts that have gone to collection agencies.

Check over the report for errors or fraud. Errors are tedious to have removed, but it’s in your best interest to have them wiped from your credit report. If you find evidence of fraud on your credit report, you might have bigger problems than poor credit. Investigate further and contact the police if you find that you are a victim of fraud.

Use credit to get credit

Once you’ve got a list of creditors, contact each one to verify the debt and balance owing. For credit products such as credit cards and lines of credit, your utilization ratio is important. You don’t want to owe an amount that’s close to your credit limit. Instead, focus on lowering your balances to below 30%.

Next, catch up on late payments. If you work out a payment plan with your creditor, stick to it. Remember, this creditor is reporting your behaviour to the credit bureaus. Don’t promise to pay every week and then unilaterally decide to change the agreement. Work with your creditors and keep your promises to rebuild poor credit.

Take out new forms of credit

It sounds counter-intuitive but getting new credit products is a great way to rebuild your credit. If your credit isn’t too bad, you might qualify for a small line of credit, or a credit card with a low limit. People with poor credit, though, should look into getting a secured credit card instead.

Secured credit cards work like this: you make a deposit on the card that matches your credit limit. You can use the secured card wherever credit cards are accepted, but you are responsible for paying your bill each month. The deposit acts as security for the lender. With a borrower having poor credit, the lender wants to be sure that the account can be paid if the monthly bill isn’t paid.

The reason you need a credit product is that the credit bureaus need to see activity being reported to produce a good credit score. Living only off cash is bad for your credit score, just like failing to pay your bills. By keeping good financial health with a credit product, the lender tells the credit bureaus that you’re responsible and your credit is being slowly repaired.

The good news is that the financial mistakes of your past won’t follow you around forever. According to the Financial Consumer Agency of Canada, you can expect negative information to stay on your credit report for six or seven years, depending on the province you live in. With a bit of financial discipline, a bit of money to make your accounts current, and a bit of time, anyone can rebuild their credit.