The credit system is far from perfect. Many Canadians have credit scores that treat them as a greater risk for creditors than they really are.
If you are one of these unjustly scored users of credit, the time to fix your credit score is now. Then, when you need to qualify for a mortgage or lower interest rates, your score will be where you need it to be. In this guide, we walk you through the steps to follow to fix your credit fast, and then we answer some of your most frequently asked questions.
How to Recover from Bad Credit and Enjoy Perfect Credit
If you have bad credit that you need to fix, the first thing to do is figure out why. Are you carrying balances on your credit cards? Are you settling bills by their due date? You need a clear picture of your credit profile. This isn’t the time to sweat your mistakes. Let’s focus instead on getting you back on track with some quick remedial tips.
Get a Copy of Your Credit Reports
Fixing your credit score starts with obtaining a copy of your credit report. Otherwise, you won’t know what needs fixing.
The major credit reporting bureaus are required to furnish you with a free credit report every 12 months. If you space out your requests well, you should be able to receive a credit report every four months. Reviewing your credit report will help you spot inaccuracies, inconsistencies, and signs of identity theft. Review the report as often as you can to make sure that it accurately reflects all of your credit activity.
To access your credit report, you must provide your name, Social Insurance Number, and address to the credit reporting bureau from which you want to receive your credit report:
The credit bureau will ask you a few questions to verify your identity.
You can also use credit-monitoring services to stay on top of your credit reports. A good example is TransUnion Credit Monitoring.
Review Your Credit Reports
Once you receive a copy of your credit report, you will see what lenders and other allowed parties see in your file, including your credit activity. Be sure to check for errors. About 25% of all credit reports contain errors that are serious enough to cause a credit application to be rejected. Common credit-report errors include:
- Incorrect personal information.
- Duplicate accounts or accounts that don’t belong to you.
- Missing accounts that should appear on your credit report.
- Data-management errors.
- Incorrect inquiries.
- Fraudulent activity.
- Incorrect derogatory marks or reports of delinquencies.
Some errors may seem minor but will nevertheless crimp your credit score. Be sure to check whether an error that appears on one report also appears on the reports of other credit bureaus.
When reviewing your report, make sure that all the information is accurate and up-to-date. Verify:
- Your personal information: name, Social Insurance Number, and address.
- Your credit information: payment history, balance, credit card accounts, credit limits, and loans.
- Your closed accounts, unless they are more than seven years old.
- Records of inquiries: every party that has reviewed your report during the past 24 months.
- Public records like bankruptcies, which can remain on your credit file for 10 years.
We always recommend that you take an active approach in managing your credit and fixing any errors. Don’t just sit back and wait for your score to rise a few points. Fixing simple errors can quickly and dramatically improve your credit standing.
Make Corrections to Your Credit Report
If you have observed inaccuracies in your own credit report, what should you do now?
1. Make note of inaccurate details.
If you see a credit account being reported that you’re unfamiliar with, inaccuracies in accounts that you have already paid in full, or closed accounts that should no longer be on your credit report, you can challenge these inaccuracies. Some discrepancies may be honest mistakes; e.g., the report lists a relative’s account as if it were yours because you have a similar name. Other discrepancies may be the result of dishonesty, e.g., identity theft. However minor or serious an inaccuracy may be, it’s important that your credit report reflect your true credit usage.
Also update your personal information so that lenders have the most current information about you. Deleting an old address or updating your phone number can be done online. You may need to provide supporting documents if you wish to update your name, Social Insurance Number, or date of birth.
You can’t dispute everything related to your credit report. For example, you cannot directly dispute your credit score, which is calculated using details of your credit report. If your score has changed and you are unsure why, review the report carefully to find the reasons.
2. Contact your lenders.
If there’s a strange entry on one of your accounts or an entry that you don’t understand, contacting the appropriate lender may be the best route to take. You’ll find their contact details in your report. The lender may be able to provide more information about recent payments and credit-card balances and thus resolve some errors quickly. Any updates your lender makes are sent to the credit reporting bureau, which will update your credit file.
3. Contact the reporting bureau.
After confirming an inaccuracy in your credit report, you may initiate a dispute with the reporting agency that issued the report. A credit reporting agency will enable you to initiate a dispute online or by regular mail. You won’t need to create a new online account if you have previously initiated an online dispute, requested a fraud alert, or requested a credit freeze with the same reporting agency.
Once your online account is set up, proceed to New Investigation and select the items you want to dispute. If you are disputing several items, be sure to select each one before submitting your request. After choosing your disputed items, you will have a chance to provide any relevant supporting documents, including lender documents or court documents that provide evidence for your claims.
After you have submitted all the required items, your credit bureau will take it from there.
4. Check the results of your dispute.
Once the investigation into your dispute is complete, you should receive an email to notify you. Log into your account to review the results and to review the updated credit report. Most dispute investigations are resolved within two weeks, but some may take up to 30 days. Contact your lender if you disagree with the results of the investigation.
Pay Past-Due Balances
Fixing reporting errors may be only half the job of fixing your credit score. Paying off any overdue balances on your accounts will help you wrap things up. The major credit bureaus won’t consider a payment to be late until it’s 30 days past the due date. But once the payment is 30 days past due, lenders and creditors can forward your account to the credit reporting agencies, and this information will hurt your credit score.
The longer your payment remains overdue, the worse things can get for your credit. A late payment will remain on your credit report for seven years, so try to pay it as soon as possible.
In some cases, your creditor may turn your account over to a collections agency to try to obtain the funds from you. Once a collections agency is dealing with your account, this fact can be added to your credit report and hurt your credit score. You can dispute a collection entry if you determine that it is incorrect.
If a payment is six months past due, a charge-off is listed on your credit card, which means that you no longer have the option to consistently make the minimum payments. A creditor records it as a loss and cancels your credit account; now you can settle only the full balance. A charge-off greatly damages your credit-worthiness, and you may now have to pay a higher rate of interest in addition to paying the late penalty.
Past-due accounts are just as damaging to your credit report as any other negative information. If you can’t clear the full balance, and there is a risk that your account will be sent to a collections agency, talk to your creditor or lender to see if you can arrange a payment plan.
Reduce Your Credit-Utilization Ratio
Your credit-utilization ratio is a crucial number in credit-score calculations. It’s the sum of your credit card balances divided by your total credit limit. Lenders often like to see utilization ratios of 30% or less, and the best credit scores are often associated with low debt-to-credit ratios. A low credit-utilization ratio indicates that you haven’t maxed out your credit cards and that you can manage your credit capably.
The easiest way to reduce your credit-utilization ratio is by increasing your credit limit. Let’s consider an example.
- If you owe $2,000 on all of your credit accounts and have $10,000 of combined available credit (your credit limit), your credit-utilization ratio is 20%.
- If you increase your combined available credit to $20,000 but still owe only $2,000 on all your credit cards, your credit-utilization ratio has now been reduced to 10%.
Other ways to improve your credit-utilization ratio include:
- Keeping credit cards with zero balances open even if you don’t intend to use them.
- Opening new credit-card accounts.
- Paying off debt and maintaining low credit-card balances.
How Credit Scores Are Calculated
It should come as no surprise that you have more than one credit score. A particular credit score is affected by which credit bureau is providing the score, its method of calculating the score, and the data on which the score is based. Moreover, creditors and lenders don’t necessarily report information to each of the national credit reporting agencies.
The credit bureaus and other companies that provide credit scores, such as VantageScore or FICO, use different scoring models. In general, the following factors tend to be considered when calculating your credit; but depending on the model used, the impact of a particular factor on your credit score may vary.
- Your payment history.
- The length of your credit history.
- Your credit-utilization ratio.
- The types of credit you have.
- The number of accounts you have.
The VantageScore scoring model puts more emphasis on your payment history. Other scoring models may prioritize other factors.
Learn How Your Credit Score Controls Your Life
Lenders use your three-digit credit score to predict how responsibly you will use any credit line that they extend to you. Your credit score affects your life in many ways.
- It may prevent you from getting the house you want. Landlords want tenants with good credit scores. You may miss out on your dream home if you have a poor credit score.
- It affects mortgage interest rates. You’ll get a better interest rate on your mortgage if you have a high credit score. Some lenders treat a low score as evidence that you can’t afford to buy a home.
- It determines whether you get approved for loans. You need a good credit score to secure a private loan, such as an auto loan. Besides making it nearly impossible to secure a loan, a poor credit score means that you’ll probably have to pay higher interest rates if you nevertheless do secure a loan.
- It may prevent you from being hired. Some employers run credit checks to reduce the chances of bringing on board someone who would commit embezzlement and theft. You could be disqualified if your score doesn’t meet the threshold.
If you’ve done all the heavy lifting to fix your credit, you may be tempted to move on and focus on other things. It’s true that you probably won’t need to pay as much attention to your credit score now that you’ve repaired it. But it’s still a good idea to keep an eye on it.
Monitoring your credit will help you spot any errors or inconsistencies that once again trigger a drop in your credit score. It will also give you a heads up if someone commits identity theft, enabling you to address the problem before it gets out of hand.
Frequently Asked Questions
What is a decent credit score?
A decent score with VantageScore 3.0 is any score between 661 and 720. As your credit score reaches and exceeds this range, you will enjoy more financial flexibility and options. Hitting 850, the highest possible score, would be great; but no particular opportunity gets unlocked only when you reach this magic number.
How can I fix my credit on my own?
There’s no quick fix for your credit. But you can take steps yourself to fix your credit.
- Check your credit report.
- Improve your payment history.
- Know your debt-to-credit ratio.
- Reduce your appetite for new credit cards. Making fewer applications for credit cards may reduce the number of hard inquiries.
- Avoid making late payments.
- Don’t get too close to your credit limit.
What is the fastest way to improve my credit score?
How fast your credit score improves depends on your financial habits. Improve these habits as quickly as possible to improve your credit score as quickly as possible.
- Fix your credit-report errors.
- Make payments on time.
- Pay off cards carrying the highest balances first.
- Have a mix of different kinds of credit accounts.
- Apply for a credit-builder loan.
Your credit score can have a big impact on your financial future. Sign up for Borrowell to get your credit score and credit report for free! Join over a million Canadians and get the tools you need to help understand, manage, and master your credit—in under 3 minutes. Checking your credit score with Borrowell won’t hurt your score.