How Long Does it Take to Rebuild Your Credit?
While it’s true that negative information can stay on your credit report for up to 10 years, you don’t have to live with bad credit forever, which is good news if you’re one of the 20% of Canadians with a score of below 600. In fact, you don’t even have to wait a decade to begin doing damage repair. You can get on the path to good credit today by deciding to commit to improving your score. From there, how long it will take you to work your way up from Very Poor to Poor to Average to Good all depends on the severity of your past financial difficulties and how greatly you let them impact your credit score.
That said, rebuilding your credit will not happen overnight.
The process could take several months to a couple of years of unwavering
commitment. What you choose to do during that time, however long it may be,
will determine the success of your efforts. To put bad credit behind you once
and for all and as quickly as possible, follow the steps below.
Check Your Credit
Before you can fix a problem, you need to get to the root of
it. Review your credit report to figure out how you fell so far behind in the
first place. For many debtors, the problem is obvious: They spent beyond their
means with money they didn’t have. For others, however, the issue is not so
It is not uncommon for credit reports to contain errors that
cause undeserved dings to scores. Scan your report for any indications of
fraud, accounts that wrongfully went into collections, late payments and other
credit-damaging influences. Make a note of each inaccuracy and file a dispute
with each credit bureau. Once you resolve those issues, you should see an
instant boost in your credit score.
Unfortunately, it’s unlikely that all negative information
on your credit score is inaccurate. Once you’ve established that all the other
information in your report is accurate, you can begin to correct the mistakes
for which you’re responsible.
Pay Off Past Due
For many, this first step is the most difficult, as it
involves paying large sums of money they may or may not be able to afford. With
each missed payment, the minimum amount due increases by both the regular
minimum amount due and the late fee.
For example, say your minimum credit card payment is $25 and
the late fee is $11. You missed three payments. You now owe $108 — $75 in
missed minimum payments and $33 in late fees. If you struggled to pay $25, you
might think it impossible to pay $108. However, paying the total minimum is
necessary, as doing so can move your account’s status from "delinquent” to
"paid,” which will keep your score from dropping even further.
Build an Emergency
Once your credit card payments are back to a manageable
level, start building an emergency fund. Continue to make the minimum payments
on your accounts, but don’t do any more than that until you have at least one
month’s worth of income stashed away. Once you’ve accomplished that, increase
your payments by $5 to $10 until you stash away several months’ worth of pay.
The goal is to have enough saved for one year before you can really buckle down
and focus on credit repair.
Improve Your Credit
You can do this in one of two ways — decrease your balances
and apply for new credit. The ideal credit utilization rate is 20% or lower,
though achieving a 30% rate is a good start. If you have substantial debt,
begin by paying as much down in any given month as possible. Take the money you
would have spent toward, say, coffee or Friday night pizza and put it toward
one or more debts. As your balances diminish, you should see an improvement in
your credit score. This will make it easier to apply and receive approval for
additional credit, which will further improve your utilization rate.
Use All Future Credit
Though credit is the source of your troubles, it’s also the
key to your recovery. You need credit to improve your score, but that doesn’t
mean you need to rely on it. Before using a new credit card, make sure you have
the funds to cover a charge. If you don’t, don’t buy the item. Avoid maxing out
your cards, as this will hurt your credit utilization rate, and pay off
balances in full and on time each month. By following this advice, you will see
gradual improvements to your score.
Rebuilding credit will not happen overnight. The process may
take months to years, depending on how bad your situation is. However, by
committing to repair the damage and buckling down until the storm is over, you
will be out of the bad credit woods quicker than you could have imagined. If
high-interest rates, monthly maintenance fees and late payments are making it
difficult for you to get ahead, look into taking out a loan to consolidate your debt to make it more manageable.