A bad credit score can happen to anyone. No one is immune to bad luck or financial mistakes. The good news: everyone can take steps to rebuild and improve their credit. Here's our expert advice on how you can do it without sacrificing your lifestyle.
Because your credit score (which is part of your credit report) allows lenders to assess the risk involved in a loan. This is one of the key elements that determine if you'll be able to take out a loan, and at what interest rate. It's like when you look at online reviews for a service or business you're interested in. Good reviews inspire more confidence.
Your credit score is a number between 300 and 900 that changes over time. That's normal. It's like a report card in school: the higher your score, the better. Your report card shows your parents if you're a good student. Similarly, your credit score shows lenders if you're a good credit risk. In general:
For more information, see our article What is a Credit Score?
A very important factor in rebuilding your credit: always make your payments on time, no matter what amount you owe. Late payments have a negative impact on your credit score, whether you owe $30 or $1,000. The more late payments you have, the more negative the impact will be.
How can you avoid forgetting your payments so you can rebuild your credit? Enter reminders in your calendar.
Even better: schedule automated payments for an amount of your choice, paid when you want.
Tip: You can also set up pre-authorized payments for your entire balance.
For extra security: Take out overdraft protection, like a line of credit linked to the account your payments are debited from. If a payment goes through but you don't have enough funds in your account, the line of credit will cover it. N.B.: This tip can help you avoid a bad credit score due to an unforeseen event.
Remember: To avoid affecting your credit score, you should pay your entire credit card balance before the due date.
Ask Equifax and TransUnion for a copy of your credit report once a year. You should request your report from both credit bureaus, since they may have different information. You can obtain your credit report for free from the Government of Canada website. However, you may have to pay a fee to consult it online.
Consulting your credit report allows you to:
What if something in your credit report doesn't add up? You can request a correction. Asking for your credit report has no impact on your score.
Good to know: For a fee, credit bureaus offer services that will alert you of any irregular activities. This can help you quickly detect if your identity is stolen.
The balance on your credit card (or line of credit) should stay low compared to your limit. Along with how credit cards work, it's one of the principles you need to know when you're rebuilding your credit.
In an ideal world, your balance should remain below 30% of the maximum granted. If you exceed 50% of the authorized amount, your score could decrease. Make sure you don't exceed the authorized limit.
Example: Say your credit card limit is $2,000. Ideally, you shouldn't use more than $600. Exceeding $1,000 could have a negative impact on your credit score.
Pro tip: Are you often close to the authorized limit on your credit card? Request a limit increase so that you have a larger available balance. Proportionally, $500 out of $2,000 is less than $500 out of $1,000. (Don't worry, there won't be any more math in this article!)
Spring cleaning your wallet allows to regularly reassess your needs and helps making better use of your credit cards. There's nothing wrong with having two credit cards, especially in case of emergencies. On the other hand, having several cards requires being careful to avoid oversights and late payments. Misuse of multiple credit cards can negatively impact your credit score.
Did you know?
Using two cards responsibly can also improve your credit score.
Tip: Low interest credit cards can be an interesting option if you don't pay off your entire balance every month.
As we saw in the previous point, having too many cards is as bad as having too few. The same goes for credit applications. Make sure you don't submit too many. This applies to:
All these credit applications have an impact. Lenders will check your credit record every time you apply for credit. If you submit too many credit applications:
Lenders want to know that you can manage your debts and are able to reimburse them. Applying for credit too many times could make lenders question your repayment ability and have a negative impact on your credit.
Buying a car? It's a good idea to check out a number of dealerships when you're shopping for a car. However, it's better to wait until you've made your choice before you authorize a credit check. Too many applications in too little time can be bad news for your credit score.
You should feel free to ask specialists for help with your financial issues, such as dealing with a bad credit score. You can work together to draw up strategies to repay your debts and improve your situation. Sometimes, just one factor or bad habit can damage your credit score. To improve it, you could:
When you endorse a credit application, it's as if you were lending out your good credit report and credit score. This can really help a person who has bad credit (or who hasn't yet established a solid credit history) by enabling them to be approved for a loan. However, you will become responsible for their loan.
In case of an unexpected event or if payments are made late or missed, your credit score will take a hit and you may have to repay the debt.
Sometimes the issue is not so much rebuilding your credit, but knowing how to build it in the first place. It can be beneficial to take out a credit card as soon as you reach the age of majority. Use it responsibly and make your payments on time; this will enable you to start building your credit history.
Stay vigilant. A credit card is not the same as a debit card.
Are you an immigrant to Canada? Banking systems and credit principles are not the same in different countries. Discover the ABCs of the Canadian banking system to learn how you can build your credit history.
Even if you have bad credit, you still have options to realize your projects. While you're working to build (or rebuild) your credit score, you may still be able to access traditional financing. Everything depends on your credit report. Otherwise, there are other solutions.
Second or third chance credit is a temporary solution offered by lenders (often outside the major banks) to allow people to access credit (such as a personal loan, car loan or mortgage).
Note that they generally come with high interest rates. However, once your credit score improves, you can transfer the loan to a financial institution. By showing that you're able to meet your commitments, second chance credit can help you rebuild your credit record.
Some credit cards are more easily accessible for people who have a bad credit score. For example, secured cards allow you to make purchases online. If used properly, they can help you rebuild your credit score.
How does it work? Certain credit card issuers will agree to take an amount in security that is equivalent to (or higher than) the credit granted.
Example: To take out a credit card with an authorized limit of $500, you will have to provide at least $500 as security. This amount will be "frozen" until your credit score improves.
There's no fixed timeline for rebuilding your credit. One year, two years, three years or more? It all depends on your situation. It's like renovating a home: the worse the home's condition, the longer it will take to repair. Just remember that it's never too late to adopt good habits. Tell yourself that your efforts will end up paying off, and don't hesitate to ask for help. We’re here to answer your questions.
Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank of Canada.
The articles and information on this website are protected by the copyright laws in effect in Canada or other countries, as applicable. The copyrights on the articles and information belong to the National Bank of Canada or other persons. Any reproduction, redistribution, electronic communication, including indirectly via a hyperlink, in whole or in part, of these articles and information and any other use thereof that is not explicitly authorized is prohibited without the prior written consent of the copyright owner.
The contents of this website must not be interpreted, considered or used as if it were financial, legal, fiscal, or other advice. National Bank and its partners in contents will not be liable for any damages that you may incur from such use.
This article is provided by National Bank, its subsidiaries and group entities for information purposes only, and creates no legal or contractual obligation for National Bank, its subsidiaries and group entities. The details of this service offering and the conditions herein are subject to change.
The hyperlinks in this article may redirect to external websites not administered by National Bank. The Bank cannot be held liable for the content of external websites or any damages caused by their use.
Views expressed in this article are those of the person being interviewed. They do not necessarily reflect the opinions of National Bank or its subsidiaries. For financial or business advice, please consult your National Bank advisor, financial planner or an industry professional (e.g., accountant, tax specialist or lawyer).