If you have been through a bankruptcy or consumer proposal, you are very likely to want to improve your credit score as quickly as possible. You may even be considering paying a credit repair company, who offer tempting promises of quick fixes to get your credit rating back on track. We hate to be the bearers of bad news, but there is no easy solution to repairing credit. It’s something that takes time, patience and perseverance. If you are considering working with a credit repair company, first read through this article about why we think you are better tackling the issue on your own.
What is a credit repair company?
A credit repair company offers various services that promise to improve your credit score quickly. They charge a fee, and in return offer a number of things such as:
- setting you up with a credit repair program
- loaning you money which will be reported on your credit report
- loaning you money to ‘purchase’ a GIC which they will keep until you make all the payments
- selling you a credit repair tool kit for a fee and say they will report the payments to the credit bureau
Typically, people approach credit repair companies after a significant event has negatively impacted their credit score. Usually this is a bankruptcy or a consumer proposal or series of late payments. With debt levels skyrocketing in recent years in Canada, an increasing number of these services have been popping up across the country, often charging ongoing and deceptively high costs for services that you could do without.
Why are credit repair companies risky?
The simple fact of the matter is that there is no quick fix to repair a poor credit rating. It takes hard work and consistency to see results. An improved credit score is often the work of many months – sometimes years – of positive behavior changes. Any company that promises you a silver bullet to credit problems is offering false promises when you are at your most vulnerable and cash-strapped
Let’s take a look at a specific example of the true cost of a loan as offered by one credit repair company, Refresh Financial.
One of the services they offer is to provide you with a loan of up to $5,500 so you can begin building your savings. Let’s say, for example, that you opt to borrow an amount of $1200, based on the contract terms, you will make weekly payments of $9.70 over three years to repay the full $1,200, plus interest, at a quoted rate of 15.99%. There is also a loan setup fee of $200, which means that the you will only receive $1000 of your loan amount. You’ll pay $511 in interest and fees on a three year loan of $1200, which is an equivalent interest of just over 26% – which is well above the market rate. You will only receive your loan over time as you make payments, you won’t have access to it right away. The amount builds slowly, as initially a higher portion of the $9.70 payment goes towards interest. Effectively, the won’t have access to your $1,000 in savings until the end of three years, by which point those savings cost have cost you $1,511 in payments and you will hopefully be in a drastically improved financial situation.
You would be much better off placing $9.70 a week through automatic payroll deductions into some form of savings account like a TFSA. With this method, after three years you would have $1,513, plus a little bit of interest, and you wouldn’t be indebted to anyone.
What should you do instead?
There are a number of ways that you can establish a better credit history without the additional cost or risk of working with a credit repair company. Just because you have a low score today, it certainly doesn’t mean that you’re stuck with it for life. You have options available that you are in control of, which will have a big impact on improving your rating.
In general, you should consider a secured credit card, a small unsecured credit card or a small loan as a way to begin the process of rebuilding credit after filing a bankruptcy or consumer proposal. With responsible use, these forms of new credit will allow you to rebuild your credit history by showing lenders that you are able to manage credit responsibly and stay on top of your monthly repayments.
Over time, responsible debt and money management will go a long way to improving your credit profile. Though you may start with a simple secured loan, within a year you should be able to move onto a normal credit card with better terms, and eventually even finance for bigger ticket items like a house or car. Only ever borrow what you need – or you risk further damaging your credit score if you are unable to keep up with the repayments.
Once your credit is in a better shape, it’s extremely important that you keep your accounts and any debt liabilities healthy. Some tips for doing this are:
- Always pay your bills on time. Set up automated payments to eliminate any risk that you could miss a payment
- Always pay more than the minimum repayment to keep your loan utilization rates below 30%.
- If you are denied credit, wait a while before re-applying to avoid the negative impact of multiple credit applications.
If you want to come back and read this later, we have pulled together a guide on 5 simple ways that you can begin establishing a better profile.
How long does it take to get your credit back after a bankruptcy?
Your credit report will have a record of your bankruptcy for a minimum of six years. A proposal remains on your credit report for a minimum of three years after you have completed all of your payments.This means that if you apply for a loan or credit card during these time periods, the lender will know that you went bankrupt or filed a proposal, which may make it more difficult to borrow.
However this does not mean you have to wait out this period to begin to rebuild. Your credit report is only one factor in your ability to borrow.
Other factors include the income or assets you have, whether you can offset risk to creditors with a co-signer, the downpayment you have available for new loans and the savings you have.
If you can demonstrate that you have learned how to handle money, you will repair your credit relatively quickly.