Understanding Your Credit Rating and How to Rebuild It
The most common question we are asked by debtors is how they can recover from their debts and rebuild their credit. Many people, even before meeting with a Licensed Insolvency Trustee, have had their credit ruined by missing payments or collection agencies. At Crowe Mackay & Company in Vancouver, we hope to provide you with the information you need to make smart decisions about your long term credit.
What Makes Up Your Credit Rating?
Your credit rating is a collection of financial information such as your employment history, bank account details, outstanding debts, loan payments, whether or not you have declared bankruptcy or filed a consumer proposal in the past, and whether or not that proposal was discharged. Credit reporting agencies or credit bureaus collect information about a consumer’s financial affairs and sell that information to their business members, such as credit grantors, employers and insurance companies.
Where Does the Information Come From?
Credit bureaus obtain their information from consumers when they fill out application forms for credit, and from public records such as bankruptcy filings at Industry Canada, Court judgments, foreclosures, etc. Credit grantors and collection agencies send their credit files electronically to the credit bureau every month, resulting in files that include account numbers, outstanding balances, and a rank on a nine-point credit rating scale as follows:
0 Too new to rate; approved but not used;
1 Pays (or paid) within 30 days of billing, pays account as agreed;
2 Pays (or paid) in more than 30 days, but not more than 60 days, or one payment past due;
3 Pays (or paid) in more than 60 days, but not more than 90 days, or two payments past due;
4 Pays (or paid) in more than 90 days, but not more than 120 days, or three or more payments past due;
5 Account is at least 120 days overdue, but is not yet rated 9;
6 (Code 6 does not exist);
7 Making regular payments under a consolidation order or similar agreement;
8 Repossession (indicate if it is a voluntary return of merchandise by the consumer);
9 Bad debt; placed for collection; skip; bankrupt.
It’s important for you to determine that your credit rating is accurate and complete. If you suspect that your information may not be accurate, it’s best to contact the credit bureau. The principal credit bureau for British Columbia is Equifax Canada Inc., P.O. Box 190, Station Jean Talon, Montreal, Quebec, H1S 2Z2, toll free phone # 1-800-465-7166 and fax # 1-514-355-8502.
What Not to Do
Filing a bankruptcy or a consumer proposal will impact your credit score negatively. Filing a bankruptcy is a 9 on the credit rating scale and the notation for the bankruptcy will stay on your credit report for 6 years from your date of discharge in the case of a first time bankruptcy. For a subsequent bankruptcy filing, the notation will remain for 14 years from the date of discharge. A consumer proposal is a 7 on the credit rating scale and this notation will stay on your credit report for 3 years from completion of your proposal.
Rebuilding Your Credit
Despite the notations remaining on your credit report, once you have received your discharge from bankruptcy or completed your proposal, you can begin rebuilding your credit score. The speed in which your credit score is rebuilt depends on you and your circumstances. The catch is that in order to rebuild your credit score, you will need to obtain and use credit which may be more difficult with the notations on your credit report but it is not impossible. The credit grantor may require a larger down payment from you, a co-signor or they may wish to give you a higher interest rate. Negotiating with the credit grantor to come to satisfactory terms is up to you.
Will a Secured Credit Card Work for You?
For most people, the simplest way to rebuild your credit is to apply for a secured credit card. This is not to be confused with a pre-paid credit card, which in effect is just a gift card. A secured credit card is an actual credit card with a credit limit, interest rate and payment terms and will be reported to the credit bureaus.
The difference with secured credit cards is that you will need to put a deposit down when applying for the card. The deposit will most likely be equal to or greater than the credit limit on the card. For example, if you wish to have a $500 credit limit then you will need to have $500 to $1,000 to be able to give as a deposit. The deposit will be locked into a savings account by the bank and held as collateral for the credit card. In many cases, after a year and once you have proven yourself to be a good credit risk to the bank, your security deposit will be returned to you.
Contact a Licensed Insolvency Trustee in Vancouver
Your credit score, while important, is not the bottom line for determining if you are a good credit risk. Credit grantors will review your credit report but they will also ask you for a list of your assets. Savings and investments will go a long way to showing that you are a good credit risk. Remember that having too much credit is also a bad thing. It’s wise to have only one or two credit cards and keep your borrowing to a minimum.
For more information please visit the Financial Consumer Agency of Canada or contact a Licensed Insolvency Trustee at Crowe Mackay & Company for a free consultation.