It’s happened to many people and now the deed is done. You’ve missed a few payments, you’ve overdrawn an account or two, you’ve maxed out your credit and are hiding like an ostrich with its head in the sand. Now What?
If any of the above situaltions hs ever happened to you then here are some helpful tips to get you back on track so you can improve your credit score and ensure you get the best mortgage options available.
Obviously, you do not want to be in this position, but do not fear. There are steps to take to repair your credit, and they’re easy, 10 to 15 minutes a month is all it takes. Good credit is so important. It’s almost impossible to buy a car, a home or even furniture without it, not to mention the increased interest fees and charges for those with brusied credit. Rebuilding your credit can take a long time, but even worse you may not even know if the changes you made are having an impact right away. So, it’s important to follow this short guide and seek out additional help if you need to.
STEP 1: CALM THE FIRE
The first step and the most important is to begin to make all of your minimum payments on all of your debt. You can’t start rebuilding your credit until you start making your payments, even missing one payment can take you so far back that it will feel like you are starting over again.
Also, remember this is step 1, don’t worry about making extra payments at this point, just the minimums. We are trying to calm the fire first, if your credit card says the minimum is $10.00, send them $10.00. Its also better to spread the wealth here, don’t get caught making large payments on a single card trying to pay them off one at a time, to rebuild your credit you going to have to work on all of them at the same time.
- CREDIT TIP 1 – Set an automatic payment for the minimum payment to be sent to your credit cards or lines of credit 3-5 days in advance of the actual due date. It can take that much time for your credit company to receive the payment. If you pay your credit card on the date it is due, and the bank doesn’t receive it for a few days they will mark that payment late; it may not show up on credit bureau but it will affect your relationship with that bank,
ACTION STEP 1 – Make the minimum payments on all your credit cards!
STEP 1.5: PUT OUT THE FIRE
Bring all the balances on each card credit and line of credit to under your available credit.
I included this in Step 1.5 because some credit cards and line of credits will insist that any amount you are over on a credit card or credit line is paid as part of your minimum payment. Ok, so here is what you are going to put out the fire.
ORDER OF PRIORITIES
- Make all Minimum Payments.
- Catch Up on any missed Loan Payments.
- Reduce the balance owing on all Credit Card, Lines of Credits to below Limits.
- Clear up any amount owing in collections.
Make all or as many minimum payments as possible. If you don’t have enough money to pay all your minimum payments, start with the smallest debt first and work your way up. You would rather have three small credit cards in good standing, and one large account with a missed payment. When it comes to calculating your score, it’s better to have 1 card with a missed payment than it is to have 3 cards with a missed payment.
So the fewer cards with missed payments the better!
Once you have done these 4 things, the fire is officially out, and you ready to start rebuilding your credit. You don’t need to pay everything off to increase your score, you just need to make your payments as originally agreed upon.
STEP 2: REBUILD YOUR CREDIT
So you’re caught up on all your minimum payments, now it’s time to start rebuilding your credit.
YOUR FIRST GOAL
Your first goal is to bring all of your credit cards to under 50% of the current available limit.
If your credit card’s limit is $2,500.00, bring your balance down to $1,250.
This goes for all revolving trade lines like personal lines of credit, credit card, and yes even store shopping cards that have 0% interest. The reason for this revolves around a credit term called “Utilization”, but all you really need to know is that the bank wants you to have some credit ‘available’ to show that you can have credit under your name without using it. Those with good credit can control their temptations, and don’t ever really max out their available credit.
With that said, it is better to have two $5,000.00 credit products with balances of $2,000.00 each than to have one credit product with a limit of $5,000.00 and a balance of $4,000.00. I know it doesn’t make sense, and I would have to write a whole other post to explain this concept alone, but for now, just trust me, do your very best to keep the amount that you owe under 50% of your limit.
I won’t sugar coat this step, it’s a hard one because it means paying back some of your debt. Paying down your debt to get below this 50% threshold will take time, and early on you may not be even close. So keep this threshold in your mind as a goal, and early on feel free to completely ignore this rule and jungle around debt to take advantage of low rate offers on other cards you may have.
PLEASE NOTE – don’t worry about the threshold if you can put all your debt onto a single low rate line of credit or consolidate your debt into a low rate credit card option. Your priority will always get the lowest rate possible than optimize how you are carrying your debt.
YOUR SECOND GOAL
TWO TRADE LINES WITH A MINIMUM OF $5,000.00 LIMIT
The goal is to have two trade lines at a minimum of $5,000.00 each with no missed payments 12 – 24 months.
When applying for a mortgage, the minimum timeframe with out a missed payment or collection is 12 months. If you have recently filled for a bankruptcy or a consumer proposal you need at least 24 months of no missed payments after you have been discharged.
These are the minimums, you could still be declined depending on other factors, but at least you have a target now.
- DEFINITION: TRADELINES: Trade lines are any type of credit line that will go on your credit report. Car loans, credit cards, personal lines of credit and mortgages all count as trade lines.
WHAT CREDIT OPTIONS ARE AVAILABLE?
If you have bad credit it’s hard to apply for credit, right?
I know, you need 2 tradelines but when your credit is so bad no one will give you more credit. While that may be true for the majority of credit card companies and Big Banks, but there are exceptions:
- Capital One
- People’s Trust
- Home Trust
Credit Cards and Lines of Credit
Now, these companies are likely not going to just give you a new credit card or line of credit on the spot without some sort of security. So be prepared to have to put down $250.00 – $1,000.00 as deposits for these cards. The bank will keep your maximum balance at the amount of money you put down (similar to a debit card) but each month they will report to the credit bureau, which will improve your credit rating.
Big Banks traditionally decline these types of applications, even with security unless you are new to Canada or have no prior credit history. So feel free to start the application process at a major bank first, and then try the list above once you have been declined.
If your credit is OK, but you are just needing an extra tradeline, you may want to consider an investment loan. Buying an investment (for example, a GIC) at the institution that you borrowing the money from, can increase your chances of approval. This is not the ideal path for repairing credit but should be seen as a last resort. If are you stuck, this might be an option to consider. Basically, you have a forced savings plan while still earning interest.
You pay the bank some interest for the loan, yes, but are also rebuild your credit at the same time.
Auto loans can also be a good way to build credit, but don’t get caught up in the purchasing process and buy a vehicle that you can’t afford. A lot of times as well they will get you excited about the vehicle and the interest rate will be extremely high.
I recommend that you try to find a vehicle with a payment that you can afford to pay off with in 18 months. This will ensure that you have recent credit when you apply for your mortgage for you new house, and will allow you to get pre-approved for more money as the payment will no longer exist.
How Often Should I apply for Credit?
Building credit is important, you want to do it quickly, but not too.
Try to apply for a new tradeline every 60 days, until you get 3-4 tradelines than stop. By waiting 60 days between applications you shouldn’t have any impact to credit, you may have heard that too many credit check can damage your credit. 60 days is more than enough time between checks to avoid this problem.
Remember you only need 2 tradelines, but by having 3-4 helps with balancing out utilization and shows maturity. Some of my past clients have had 15-20 open tradelines with limits exceeding $20,000 on each of them, and all with zero dollars owing on them.
STEP 3: MAINTAIN
Now that you have the right amount of tradelines, your balance’s are getting smaller and you can see your available credit start creeping up. Stay Focused! Let your credit history grow as your debt declines. The waiting game may be the hardest step if you’ve suffered from bad credit in the past. It will be tempting to go back to earlier spending habits once you see the available credit on your cards.
Question: How long can I expect to have bad credit for?
It is possible, but bouncing back from a credit history horror story does take a time and requires commitment. The worse your credit trouble has been, the longer for it to bounce back. 12-24 months is standard for a credit ‘refresh’. Remember that poor credit performance in the past will not follow you forever.
Here are a few extra tips to help you along the way.
Tip 1: Do not close credit accounts!
A closed credit account will still show up when your report is pulled up. You will have to explain to the bank why it was closed. Try to keep paid of cards open. Each month whether you use them or not credit cards report to your Credit Bereau and if they have a $0.00 outstanding balance, they look really good. Change them to a zero annual fee and just let them sit there and help you boast your score, and as a bet of a PS, if you have 10 credit lines in the future, and you do make a genuine mistake, it will have less of an impact on your score than say you only have 1 credit card with a missed payment.
I recommend only closing them it the annual fee is too high, or if you really know that you will end up spending the money again.
Tip 2: Check your credit report
This might be a scary process that you don’t want to do. We understand this.
Who wants to see their credit report if you know it is bad news? Yes, it is easier to avoid, but it won’t help you fix the problem. Looking at your credit report is a good step towards improving it, so next time you look at it, you don’t have to be afraid.
Tip 3: Only apply for credit that you need
When you are applying for credit, banks will pull up your report. This will cause your score to go down if you apply many times in a short period of time. This is different than never closing an account, you really don’t want to be applying for credit just for the sack of applying. There is a special rule that applies to people who apply for credit too frequently, they are called “Credit Seekers”. Apply for 3-4 loans/lines of credit/credit cards in a month and you could be stuck with this label.
It will disappear as soon as you stop applying for credit, but why even worry about it, slow and steady wins this race. Keep the before mentioned 60 day rule in mind and slowly build your credit over time.
Remember: Good credit is the key to financial freedom.
Everything you want to do in the future is made easier with good credit, and it comes quicker. You just have to buckle down and make sure you have a vision or dream of want you are working towards. Grab a picture of that house you want to buy, tap it over your credit card, or even through them in a glass jar and put them in the freezer. Both tactics will remind you to think twice and evaluate whats more important, this purchase I am considering now, or that goal that I have in mind.
From the enitre Benchmark Mortgages team, we would like to wish you good luck, but that would be leaving this process to chance, so instead, we re wishing that you can find the dedication, focus and commitment to move towards your goals, and to a secure financial future.