If you’ve been turned down for a loan, credit card, or rental application, it could be your credit report holding you back. If you have the patience to watch your money carefully and wait out the years it takes to improve your credit, we can guide you.

Benefits of improving your credit score:

It’s easier to get approved for a loan
Better interest rates mean lower cost of borrowing
Higher credit limits
More negotiating power with lenders
Better terms and offers from lenders
Easier approval for rental properties
Approval for certain jobs
No deposits for utilities
Lower rates for insurance

Credit scores aren’t important to everyone

Bad credit doesn’t matter if you aren’t borrowing money. People with spectacular credit often don’t need it because they don’t borrow money. They might use credit cards for convenience, rewards, record keeping, emergencies or discounts and pay off their cards monthly. The banks freely lend money to people with the highest chances of paying it back. They make the most money from people who can pay the most over long periods without paying it off. The same can also apply to people with bad credit. They might be denied applications or given higher interest rates on loans, but for those that don’t need to borrow, it doesn’t matter. If you aren’t borrowing, you aren’t paying interest.

Beware of Credit Repair Agencies and Lenders

Beware of agencies that try to sell credit repair services, especially when they say they can do it fast. In some cases, they make it worse. It could be expensive. It might not work. Credit Repair Agencies might:

Take monthly payments to make a deal with your creditors in the future
Charge a fee for getting your credit reports and scores (which are free)
Charge monthly fees for monitoring your credit (also free)
Promise to repair, change or erase information on your credit report
All of their services can be done yourself for free
Your money can be better spent paying down your debt

We have searched for different ways to improve your credit score and creditworthiness, and the following is what we’ve found:

What lenders look for:

Lenders evaluate the risk that you won’t be able to repay the debt when considering your application. They look at obligations, assets and risk factors:

Character: trust that you’ll repay debt based on documented experience
Capacity: Having enough cash on hand to repay a loan
Capital: Funds on hand for contingency, so loan repayment is more assured
Conditions: Economic or industry situations that may impact your ability to repay a loan
Collateral: Specific assets pledged in case you’re unable to pay
Employment history: How predictable is your income
Debt income ratio: How much of your income is available for repayment
Down payment: The bank’s safety net if the asset’s value drops
Liquid assets: Can assets be sold in a pinch to make payments
Term length: Longer terms are riskier

Someone with a stable job, a spare vehicle they can sell for quick cash or collateral, low debt amounts and cash on hand is more likely to be approved for a loan. The irony for borrowers is that the people that need money the most are often the ones who are denied. It could be seen as risky. You can repair your credit if you have some items on the list.

Repair your credit. Free

Credit Report

Get a free copy of your credit report from the two bureaus, Equifax and TransUnion. You can also pay a monthly Equifax Subscription or TransUnion Subscription, costing around $20 per month. As of the date of this article, there is an issue with TransUnion’s website, where all links to credit reports show only errors. (We’ll check on this again when we find a working link). We don’t usually recommend this extra expense. It’s helpful but not necessary. Your one free report per year is usually enough to see your progress. This step takes time to arrive in the mail, so start here.

Once the credit report arrives, list all the outstanding debts and their contact information. Correct errors on the credit reports using the dispute forms at Equifax or TransUnion. You can’t remove negative information if it’s correct. Neither can credit repair agencies.

Budget

The most important process at any stage of financial management is knowing where your money is going. It’s more than setting a budget of where you want your money to go; it’s seeing where it’s gone in the past. Use this to set and meet your monthly targets and estimate how soon you can reach your goals. Here are some tips:

See where your money is going each month with income and expense statements.
Set up expense monitoring using programs with online banking or mint.com
Find out how much money you have available to pay down debt
If you have money left at the end of the month, you can catch up on late payments and pay down your balances.
If you have month left at the end of the money, consider what expenses can be reduced or if there are any options to increase your income or cash flow.
If your expenses exceed your income, you should talk to a professional to assess your situation and explore other options.

Evaluate and Plan

Compare each debt’s balances, minimum payments, interest rates and impact. Calculate which debts should be prioritized

Negotiate

When you have money to pay down a big chunk of your debt, call a few creditors first to find out what terms they can offer. See if other creditors will offer better discounts and have them compete with each other for your money, but there are risks to this. It might save you money if they offer a discount on the balance paid, but it will show on your credit report as a settlement. It might look better than a bunch of outstanding and unpaid debts, but not as good as paid in full.

Stick to the plan

Once you have a routine, be patient. As debts get paid down, your debt ratio will improve. As debts get paid regularly, your payment history will start looking good on your credit report. Your credit may improve to a point where you can get loans with lower interest rates, reducing your interest expense, and freeing up more money to pay debts down faster. It takes years to fully rebuild your credit since most items stay on your credit report for 6 or 7 years.

Re-establish your credit

Once your debt is under control, you can start looking at ways to show more positive items on your credit report.

Retail Cards
Utility contracts
Secured credit cards
Secured overdraft account
Have a co-signer with good credit*
Have two or three credit cards reporting to the bureaus

In addition to improving your credit report or score, there are things that you can do that banks like to see when considering loan applications.

Build up assets
Lower your total debt
Avoid borrowing just for credit history
Find the right lenders
Strategically close or keep open old accounts
Don’t apply for too much credit or too often
Keep older accounts open to show a long positive history
Apply when you don’t need the money

If your situation changes

The future is uncertain, especially long-term. Lenders are cautious of long-term loans because surprises happen. This happens to many people, and it’s ok. If it does, go back to your budget and re-evaluate your situation. We are also here to help if you need us.

In case of emergency, ask for help.

If you want help getting started, we offer free consultations and help you do it yourself. If it’s still overwhelming, and you would like someone to assist you through the steps, we offer this service for a fee. If you are in a bind and don’t have enough to make your payments, options like bankruptcy or consumer proposals can reduce your debt payments. Before signing up for new loans or monthly subscriptions, contact us for a free evaluation of your options for dealing with debt.