Credit has become an incredibly important part of our financial system. Credit is needed for many basic everyday tasks like renting a car, booking a hotel room, or paying for gas at the pump. As well, if you want to apply for a mortgage and purchase a home, you need to have an excellent credit score. So what happens if you have had debt problems in the past, missed a few payments, or are suffering from a poor credit score? In many situations, your ability to qualify for credit in the future is diminished.
Most mainstream lenders like banks want to see a solid track record of repaying credit accounts prior to lending again. The challenge is how do you prove that you have turned your financial situation around and are “worthy” of credit again?
Smart Ways to Re-Establish Credit
Do you currently have a poor credit score? Try these strategies to re-establish credit, but keep in mind that a combination of these strategies will work better than just implementing one of them.
Pull Your Credit Report and Deal with Any Issues
We all have the right to pull a copy of our credit report and everyone should do that at least once a year.
You can easily get a copy of your credit report online. You want to read it through and look for things such as incorrect information, past due accounts, fraudulent activity, accounts that you closed but still show as open, and so on.
Any of these errors could be the cause of your poor credit score. Highlight any errors and contact the credit bureau immediately to discuss the errors and ensure they are corrected.
Once you have been told that the errors have been corrected, pull your credit report again just to make sure. Within 6 to 12 months of cleaning up your credit report your credit score should start to increase.
Open a Secured Credit Card
The most common way to repair your poor credit score is to get a secured credit card. With a secured credit card, you need to save up a deposit which usually ranges from $500-$1,000. Then you are issued a “regular” credit card with a credit limit that is the same as your deposit.
You can then use this card to purchase items that you can afford to purchase. By that I mean, that at the end of each month you have the money necessary to pay off the charges on the card.
To continue to re-establish your credit rating financial institutions want to see that you can not only pay off your balance owing each month, but that you can manage on-going payments. In fact, doing that is more important to them than paying everything off each month. Sounds strange, but it is true.
Occasionally you should leave a small amount owing on the card and continue to pay it off in chunks each month.
Managing your payments well will definitely improve your poor credit score.
You can use your secured credit card like you would any other card but keep in mind that if at some point you simply stop paying your monthly bill, the company will take your deposit to pay off your bill and cancel your card.
The problem with a secured credit card is that if you had debt problems in the past stemming from credit card use, having a credit card might trigger old habits of overspending causing more debt and less saving.
Open a CreditSpark Savings Loan
Another smart option would be a CreditSpark Savings Loan. CreditSpark has introduced this new product aimed at helping people re-establish their credit while saving for the future.
There are no upfront out of pocket expenses to start a Savings Loan and you can begin saving immediately.
This works by taking the proceeds of the loan and placing it in a Guaranteed Income Certificate (GIC) with a large insured financial institution in your name. You then make monthly payments on the loan which are reported to your credit profile and you are saving by building up equity in the GIC with each payment. At the end of the loan term, you collect the GIC principal and the interest it has earned.
Both CreditSpark and secured credit card companies charge administration fees but the interest on a CreditSpark Savings Loan is significantly lower for borrowing the money than the interest rates offered on secured credit cards. Plus, the interest you pay on a CreditSpark Savings Loan is partly offset by the interest that you will receive from the GIC, while you may receive nothing for the money that you have deposited with the credit card companies. In addition to that, the loan sizes on a CreditSpark Savings Loan are totally customizable to meet any budget with payments starting as low as $34 per month.
For example, Mr. Smith takes out at CreditSpark Savings Loan of $2,500 for a three year term and the proceeds are used to purchase a GIC. Mr Smith repays the loan with a monthly payment of $84. With each monthly payment, CreditSpark is able to report the payment history to his credit profile. Once the loan is paid off Mr Smith has access to the GIC and the interest it has earned. This along with managing any other debts properly will have a positive impact on his credit history.
The biggest advantage of using a CreditSpark Savings Loan to re-establish your credit is that virtually everyone that applies is approved.
Re-Establish Credit after a Bankruptcy or Consumer Proposals
If you declare bankruptcy, or are working on a consumer proposal to repay your debt, you are usually told that you cannot apply for a new credit card or obtain a loan until your repayment program is complete, or you are discharged from bankruptcy.
The day after you are discharged from bankruptcy you can apply for a secured credit card. But what if you do not want to wait that long?
The good news is that with CreditSpark, you are able to apply anytime as CreditSpark is one of the few lenders in Canada who is able to lend to individuals prior to being discharged from bankruptcy.
For bankruptcies and consumer proposals, it is highly recommended that both a Savings Loan and a secured credit card are obtained as the combination of a revolving credit line and an installment loan have the most impact in re-establishing credit again.