Re-Establishing Your Credit
Many people who have had financial difficulties wonder how they can re-establish their credit. After a bankruptcy or a consumer proposal, they are starting from zero, or perhaps even less.
Do you remember what you did to get your first loan? Credit is a transaction whereby an individual or an enterprise makes funds available to another individual who promises to repay the amount along with interest, at a predetermined interest rate.
Credit is also the credibility or confidence given to us by lenders when we convince them of our willingness and ability to repay them in the future.
Check Your Credit File
You should start by ensuring that the information in your credit file is accurate.
A credit file contains information about previous credit requests, amounts borrowed and how they were paid. A credit rating ranging between R1 (excellent payer) and R9 (bankrupt or account in collection), is assigned to every person who has a file. There are also a number of other criteria such as age, income, job stability. Would you like to improve the image financial institutions have of your credit worthiness? Then, you have to show lenders, through your future behaviour, that your financial situation and the manner in which you pay your debts have improved.
In Canada, the two main national credit agencies are EQUIFAX CANADA and TRANSUNION CANADA*. As a consumer, you can access your file free of charge by mailing in a written request. In spite of the best intentions, an error in your file could mean that your credit requests will always be rejected. Accordingly, we recommend that you correct any errors by submitting the documentation supporting your representations.
* Their contact information is indicated below.
1. WHAT YOU NEED TO KNOW
Below is the type of information that may be found in a credit file.
> Personal identification:
All information of a personal nature (name, all known recent addresses, civil status, age, employment, SIN, etc.). This information is used to evaluate stability in terms of living accommodation and employment and the person's reliability, among other things.
> Inquiries:
Listing of all individuals or organizations that have requested a copy of your credit file during the past three years. This could be a cause for concern to a potential lender if you have applied for credit a number of times before the current application.
> Collection agency:
This contains information about any collection agency that may have been involved in collecting a debt.
> Business dealings:
Details of your credit transactions and information about loans and credit cards, including the activation dates, the date of the last transactions, payment terms and conditions, balances, account status and payment history. This type of information provides details about your:
- credit history;
- payment habits;
- financial manoeuvrability; and
- debt load.
This section also indicated the aforementioned R1 to R9 credit ratings.
> Public files:
This contains information about loan guarantees, bankruptcies or judgements regarding:
- your payment habits relatingof a mortgage or other secured loan;
- the nature of any lawsuits; and
- the settlement of any lawsuits.
This information is kept on file for a maximum of seven years after it is entered unless there is an exception, e.g. credit history and any banking information are kept for six years from the date of the last transaction. Details about a first bankruptcy are kept for six years from the discharge date. Information about recurring bankruptcies is kept for 14 years from the discharge date. While you are entitled to rectify incorrect information, you cannot erase negative information.
2. TIPS FOR MAINTAINING A GOOD CREDIT FILE
> Pay all monthly minimums amounts.
> Never use your maximum credit card limit.
> Do not exceed a 30% debt ratio.
Percentage of gross monthly income used to pay monthly household and other expenses (e.g. credit cards).
Unfortunately, there is no magic recipe for cleaning up a credit file and no miracle for erasing a poor record. Only time and good payment habits will mitigate the negative points.
3. RESTORING THE CONFIDENCE OF FINANCIAL INSTITUTIONS
Here is some sound advice that represents positive points in your file.
> Having a steady job.
> Preparing a budget and sticking to it.
> Pay as many expenses as possible in cash.
> Acquiring property and putting money aside.
e.g. open a savings account and deposit a certain amount in it.
> Take out a modest loan or obtain a credit card with a relatively low limit, by pledging savings as security.
For example, apply for a loan that you can repay in a fairly short period of time, say, approximately 12 months. Consider asking the lending institution to invest and keep the borrowed funds as security. The loan should be saved, not spent (make an investment, buy a term deposit, RRSP, etc.). These savings will become your financial security once you have paid back the loan. If you encounter financial problems again, you can always cash in the investment and repay your debt. It is important to respect your commitment so that the lending institution will know it can trust you again. At the end of the loan, you will have repaid the borrowed amount with interest and you will still have your investment.
> Obtain a credit card by giving the credit card company a security deposit equal to the credit limit requested.
Your budget should ensure you can pay the balance in full at the end of every month. If your credit card charges are included in your budget, theoretically you should not have any trouble paying the account in full at the end of the month.
"Once bitter, twice shy." If the financial institution with which you normally do business has lost money, it will be less willing to lend you money again. However, the competition is strong in the financial services market, and you just have to knock on another door. There will always be an institution that will lend you money, even though it will probably not give you the best interest rate.
It is imperative to consider the non-monetary reasons that caused your financial problems. Whatever the reasons, you should find a solution to remedy them, otherwise, they will recur. Do not hesitate to sit down with your banker and discuss the reasons for your financial problems. You can show him/her what you have done in order to regain the financial institution's confidence and it will surely be more receptive to your request.
Do You Use Credit Carefully?
For most people, the ability to get credit has almost become essential. Credit makes it easier to shop without having to carry around large sums of money. It also comes in handy during emergencies.
However, credit can also cause problems. It can also cause individuals to live beyond their means. If the payments are too high, individuals may not be able to pay for the basics necessities, such as rent, food and clothing. In addition, interest charges may also eat up funds that could be used for other purposes.
The addresses and telephone numbers of Canada's two main credit agencies are:
EQUIFAX CANADA INC.
Consumer Relations Department
7171 Jean Talon Street East
BOX 190 Jean Talon Station
Montréal, Québec H1S 2Z2
Tel.: 514-493-2314 / 1-800-465-7166
Fax: 514-355-8502
TRANSUNION CANADA INC.
Consumer Relations
1 Place Laval, Suite 370
Laval, Québec H7N 1A1
Tel.: 514-335-0374 / 1-877-713-3393
Fax: 514-334-8698
