How to Fix Bad Credit: A Step by Step Guide to Repairing Your Credit Score

8 Key Steps to Repair Bad Credit

Are you suffering from a poor credit rating? All is not lost. It is possible to reverse bad credit score and continue enjoying financial products from different lenders and creditors. We’ll take you through some simple steps to help you repair credit score and explain how to maintain it.

1. Get a Copy of Your Credit Report

Every year, make a point of requesting for a copy of your credit report from one of the major credit bureaus. In Canada, you can obtain your report from either Equifax Canada or TransUnion Canada. Regularly reviewing your credit report helps you stay on top of your credit health and ensures that your payment information is accurate and up-to-date.

2. Review Your Report for Errors

Once you have your report, make sure to check it for errors. Mistakes aren’t such a rare occurrence as you would think. According to a study by the Federal Trade Commission, 25% of people who requested credit reports acknowledged having some sort of an error, while 5% had to pay extra due to errors in getting a loan.

Here are some of the most common mistakes often found in credit reports:

• Incorrect personal information (name, phone number, or address).
• Accounts mistakenly attributed to you that belong to another person with a similar name.
• Fraudulent accounts created due to identity theft.
• Closed accounts, like credit cards or car loans, that are mistakenly reported as open.
• Accounts inaccurately marked as late or delinquent.
• Duplicate listings of the same debt.
• Incorrect current balance or inaccurate credit limit information.

Make sure to dispute errors as soon as you find them, as mistakes on the credit report can lower your credit score. 

3. Avoid Late Payments at All Costs

Whether it’s a utility bill or a credit card payment, failing to fulfill your financial obligations on time can have a really poor effect on your rating. In order to ensure your payments are made on time, you may consider setting up an automatic payment plan where the money is deducted on a specific date of the month.

4. Don’t Exceed Your Credit Card Limit

Ever heard of credit utilization? This is simply the amount that you use on your credit card compared to what is made available to you by the credit card issuing bank. If your credit card utilization is higher than 30%, it can negatively impact your credit score. Aim at using only a small portion of the amount that is made available to you. In fact, lowering your credit card balances can instantly improve your score.

5. Don’t Apply for New Credit Cards

Stay away from applying for new credit cards or any other form of credit until you have dealt with the existing debt. Your main focus should be on paying back the pending balances and reestablishing your credit history by making on-time repayment going forward. Retain credit cards that have the longest payment history because they have a positive impact on your credit score. Getting into debt is easy and falling into further debt is way easier. You need to think about habits that contributed to your financial situation and take a step to manage your credits more responsibly. Whether it means reducing the amount of times you go shopping or cutting back on going out with friends, simple lifestyle habits can help you spend less and avoid reaching your credit card limit.

6. Pay Off All Debts You Have

Paying off outstanding debts can help creating a positive payment history and lowering your credit utilization ratio. When tackling credit card debt, you can either use the debt avalanche method or snowball strategy. The former focuses on paying off high-interest debts first, while the latter prioritizes paying smallest debts before moving on to larger ones. Choose an approach that aligns best with your financial goals and situation.

Note that when repaying a loan your credit score might experience a brief drop. However, this decline is typically short-lived, and as you continue to make timely payments, your credit score will gradually improve. It’s important to stay consistent with your repayment strategy, as this will not only help you reduce your debt and fix your credit but also enhance your overall financial health in the long run.

7. Don’t Close Old Credit Cards

Once you pay off all debts, you might decide to close old credit accounts. However, make sure not to rush. Keeping your credit account open is one of the best ways to improve your credit score, as it contributes to the length of your credit history, which is a significant factor in determining your score.

Additionally, keeping old credit cards open can help maintain a lower credit utilization ratio, as closing an account reduces your available credit, which could increase your utilization percentage. Therefore, unless there’s a compelling reason to close the account, it’s usually better to keep it open and in good standing.

Keep in mind that a credit card issuer may close your card if it remains inactive for an extended period. To avoid this, consider using your card occasionally for small purchases and paying off the balance in full each month. In case you have to pay an annual fee for your card, it may be a good idea to close it.

8. Don’t Take Out Credit Unless Necessary

Make sure not to take on any new credit unless it’s absolutely necessary during your credit repair journey. Every time you apply for credit, creditors conduct hard credit checks, which can temporarily lower your score. Additionally, new credit can add to your debt load, making it harder to manage your finances effectively. Focus on improving your existing credit situation and aim to build a strong foundation for good credit by following a consistent repayment plan. Only consider applying for new credit when you’re certain it won’t negatively impact your progress.

9. Set Up Automatic Payments for Utility Bills and Credit Card Accounts

Missing the due date on your utility bills and credit card accounts can negatively impact your credit score, as late payments are reported to credit bureaus and remain on your credit report for years. To avoid this, set up automatic payments for all your recurring bills, ensuring that they are paid on time each month. Even if you pay the minimum payment for your credit card, this will help you avoid late payments and positively affect your credit score. Don’t forget to check if you have enough money in your account when setting up autopays; otherwise you might risk overdraft fees.

10. Address Late Payments Immediately

If you’ve missed a payment on any of your credit accounts, address it immediately to minimize the damage to your credit score. Some creditors may offer a grace period or work with you to create a repayment plan, especially if it’s your first late payment. The sooner you resolve the late payment, the less impact it will have on your credit report and score.

11. Consider Applying for a Secured Credit Card

A secured credit card operates similarly to a traditional credit card, but it requires an upfront security deposit. To open this type of account, you’ll need to make a refundable deposit, which often starts at a few hundred dollars and typically sets your credit limit. If you fail to make payments, the issuer will use your deposit to cover the outstanding amount.

This deposit reduces the lender’s risk, making it more accessible for individuals with lower credit scores. Use the secured card for minor expenses to prevent hitting your credit limit. Consistently paying off the balance in full and on time each month can help raise your FICO score.

Timeline for Fixing Credit

The time it takes to improve a low credit score can vary depending on the severity of your situation and how quickly you take actions. Here are some general timelines:

Minor Issues (1-2 months)

If your credit score dropped because of a single late payment or high credit utilization, you might see improvements within 1 to 2 months after you take actions to address these issues. If you pay down credit card balances and/or pay bills on time, you should repair your credit score fast.

Moderate Issues (3-6 months)

If your credit score has been impacted by several late payments, high balances on multiple credit cards, or a small collection account, it may take 3 to 6 months to see significant improvement. During this period, consistently making on-time payments and reducing debt can gradually raise your score.

Severe Issues (6-12 months or more)

If you have more serious issues such as a default, foreclosure, or bankruptcy, it can take 6 to 12 months or even longer to repair your credit. Rebuilding credit after a bankruptcy, for instance, often requires consistent positive credit behaviour over an extended period.

Persistent Impact (7-10 years)

Bankruptcies and foreclosures typically leave marks that can remain on your credit report for 7 to 10 years. While you can start to rebuild your credit and see improvement during this time, they may still make it rather difficult to obtain credit or favourable interest rates.

You Need to Have a Plan

Before you even start seeking credit repair in Toronto, it is important to use your credit wisely, understand where your money goes, and know which steps to take to reduce your expenses or increase your income. A good idea is to create a plan outlining how you are going to deal with any outstanding or missed payments you have. That’s where you may want to enlist the expertise of a credit counselor to help you in budgeting and credit repair.