Credit cannot be rebuilt overnight, but it can be rebuilt. That is why it is best to start as soon as possible. Like a fine wine, a carefully aged, 50 year old bottle of wine will likely taste much better than a one month old bottle straight off the store shelves. The process of rebuilding your credit is much the same. While the steps you take to rebuild your credit can begin making some impact to your credit fairly quickly, time is the most important ingredient. The actual amount of time varies from person to person, depending on their situation and how poor their credit is. If you follow a sound credit rebuilding plan, you should expect to see significant improvements to your credit within approximately one year, and excellent progress after two to three years. Nevertheless, it is important to remember that you do not need perfect credit to get car loans, mortgages, credit cards, or other forms of credit – but the better your credit, the easier it will be (and the less it will cost you).
It's a common misconception in Canada that you cannot obtain a loan until you are discharged from bankruptcy. If you have declared bankruptcy, your only legal requirement is that you must disclose to a potential lender or creditor that you are undischarged from bankruptcy – it is up to the lender to decide if they are willing to give you a loan. This means that you can start rebuilding your credit the day after you file for bankruptcy, and since rebuilding credit takes time, that is not a bad idea! Depending on your financial state and short-term goals, the sooner you begin the process of rebuilding, the better off you will be in the long run since your credit history will have had more time to build since filing for bankruptcy.
Payday loans do not report to your credit report due to the short term nature of the loan, so it is impossible for a payday loan to help you rebuild your credit. Whenever you are looking to rebuild your credit, it is absolutely critical that the lender who gives you a loan reports your monthly payments to credit monitoring agencies like Equifax.
While having some credit amount reporting to credit monitoring agencies is better than nothing, the amount will impact lenders' decisions to give you financing for things like a mortgage, a car loan or a business loan. For example, if you only have a $500 secured credit card reporting to your credit and you apply for a $500,000 mortgage, the creditor will not look favorably on your situation because you do not have a history of being able to manage a significant amount of debt. While the definition of "significant amount of debt" will vary from lender to lender, it is typically agreed that a loan or credit card with a starting balance or limit of at least $1500-$2,000 is necessary to make a significant difference. And if you have previously filed for bankruptcy, some mortgage lenders require a minimum of $5,000 in re-established credit on your credit report before you will be considered for financing.
No. A secured credit card, sometimes called "revolving credit", will help if you don't overuse it and get into more financial trouble, but you should also have at least one "non-revolving" term loan, such as a car loan or an investment loan. If you are approved for a non-revolving loan, that loan will provide significant additional help towards rebuilding your credit. Ideally, therefore, it is best to obtain two types of credit – a revolving loan (credit card) and a non-revolving loan (a term loan).
The sooner you begin the process of rebuilding your credit, the better. However, if you owe a number of creditors and are falling behind on
your payments, you need to take care of your creditors first by either paying them out or by talking to a credit counselor or bankruptcy trustee to advise you about your options.
Your credit report is your financial resume. Future lenders, such as banks, credit card companies, and mortgage lenders, use it to decide whether or not give you new credit. If you have no credit or bad credit on your resume, you won't have much success obtaining competitive, low-interest financing. If you have bad credit, and you do qualify for financing, it is often extremely expensive, and those additional fees and higher interest rates can result in thousands or tens of thousands of dollars in additional costs over the life of a loan. For example, the total cost of a $200,000 mortgage amortized over 25 years at 4.5% is about $333,000. But if you can only get a mortgage at 7.5%, the total cost for that same mortgage would be almost $445,000 – that is $112,000 more expensive! The better your credit is, the more money you will save in the long term through affordable, low interest financing.
It is important to be strategic when applying for loans. If you apply for every financing opportunity that comes your way, this will show up on your credit report and appear that you are desperate for financing, resulting negatively on your ability to get a loan or a credit card. If you are serious about rebuilding your credit, you should only apply for credit that you really need and with lenders who have a high approval rate.
If you have previously filed for bankruptcy, it can be difficult to rebuild your credit without a credit card. If you decide to get a credit card, it is absolutely critical that you use it responsibly. But the good news is that there are alternatives that do not run the risk of creating a lot of new, unmanageable debt that could get you into even more financial trouble.
In the long term, we recommend that you have both types of credit reporting to credit monitoring agencies: a non-revolving type of credit (i.e., a term loan such as the GIC Investment Loans) and a revolving type of credit (a secured credit card). Since some people can run into financial difficulty when managing a credit card, however, a term loan can be a safer, more financial responsible way to start the credit rebuilding process.