Published: August 21, 2017 • Last updated: January 6, 2021 at 6:59 am
There’s nothing more sickening than being approved for a 29% car loan, or only qualifying for an 8% private mortgage. I cannot stress enough the importance of rebuilding your credit history after a major event like bankruptcy or consumer proposal. It’s just as true if you have recently paid off your bad debts some other way – like through a debt management plan or a consolidation loan.
So many people vow to live without credit after one of these harrowing life events, and that is a big mistake. Or they never get around to doing it properly. Maybe they apply to Capital One and are granted a $300 secured credit card, and they heave a sigh of relief. Well that’s a start, but it’s not nearly enough.
Why you should rebuild your credit score
In this day and age, you cannot avoid the need for a healthy credit history. Landlords request permission to access your credit report. If you are buying or leasing a car, they will check your credit. If you wish to sign a cell phone contract, or if you need a mortgage, your credit report will loom large. Some employers even insist on seeing your credit history before issuing an offer of employment.
Surely it’s a lost cause?
No that is not true. Yes, time is your friend – the more space between you and your bad debts, the better your report will look. In fact, in Ontario, three years after completing your consumer proposal, the fact you were even in one will drop off your report. And in the case of a bankruptcy, it will take six years.
But what matters now is “what have you done lately?” Are you a reformed citizen? Have you accessed credit since the bankruptcy and have you demonstrated an ability to service and repay the new debt each month?
Your score will begin to increase within a few months of accessing new credit. And within a year or two, you will actually have a reasonable chance to secure a mortgage or arrange a car loan at less than disgusting interest rates. However, it is very unlikely any creditor will grant you unsecured credit of any magnitude until the bad information has completely disappeared from your credit report.
How to rebuild your credit score
In a perfect world, you need at least two new active trade lines – credit facilities that have been arranged since your bankruptcy or proposal. If you had a car lease or loan during the entire process, that may count as one. Same with a student loan.
If you had a mortgage during the process, only a few lenders actually report your payment history to the credit bureaus – so you should not assume this will count as one. (Home Equity Lines of Credit are reported in most cases; traditional mortgages are not – Scotiabank being a notable exception.)
Try to arrange two credit cards from major chartered banks. The bank you deal with on a daily basis may even give you an unsecured card – the limit will likely be only $500 to $1,000. But regardless, this is so important that I suggest you offer up a security deposit for these new cards. Don’t ask any bank that was included in your original debt load – they will be less welcoming.
In a perfect world, these two new cards would ultimately have a credit limit of at least $2,000. But just do the best you can to get started. It’s better to have two $500 cards, than one for $1,000. Later you can offer to increase the security deposit (and the associated credit limit) when you feel more power.
If your circumstances are such that even this door is closed to you, then yes try Capital One, Home Trust, or Peoples Trust. Stay away from reloadable or prepaid credit cards – they will do nothing for your credit score.
Some people arrange one new credit card, and perhaps a small loan from their bank too. It could be an RRSP loan, or a car loan, or it may even be secured against your own money – like a one year GIC say. Pay the loan off as quick as you can (6 to 12 months) and this too will help rebuild your credit.
Retail store credit cards are better than nothing – but not much – don’t go overboard on these.
When can I start this?
Most advisers will tell you to wait until you receive your discharge from bankruptcy or at least six months into your consumer proposal. But I would suggest you start even sooner – the sooner the better. Of course, you should (you must) disclose to the new credit card issuer your present state, but you can honestly tell them you are working overtime to reform and part of your reformation is to rebuild your credit history as quickly as possible.
One of Toronto/GTA's Most Trusted and Knowledgable Mortgage Agents
Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
With unique dual certification as a licensed credit counselor and mortgage agent, Ross's insights are valued by mortgage professionals and homebuyers alike.
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