How to Fix Bad Credit in Canada: 10 Tips to Get You Started

If you've recently been denied a loan or credit card application, it was likely due to bad credit. Whatever your situation, we'll give you a starting point to help you start rebuilding your credit.

Improving your credit score will make it easier to get approved for loans, apartments, credit cards, and help you score better terms when borrowing.

10 tips to improve your credit score

If your credit score is lower than you'd like, here are 10 tips on how to build it up.

1. Pay down debts

Paying down your debt will go a long way to improving your credit score. The sooner you can clear outstanding debt, the sooner your credit score will start to improve.

Debtors are often willing to work with you on payment arrangements. After all, they still want to be paid what they're owed, and it's easier to work with you than through other means (like a courthouse). If you're able to come to a new agreement with updated payments, create a plan so you can make the payments on time. Otherwise, you'll be right back where you started.

If you have several debts with multiple creditors, it might be a good idea to take out a debt consolidation loan or get a balance transfer credit card. These can both allow you to pay off multiple debts in exchange for having a single loan with a single payment every month.

2. Regularly check your credit report

Your credit report has all the details on your current and past credit products, as well as any inquiries to your credit file. You can access your report (which may also include your credit score) for free through Equifax and TransUnion, so make a point of checking it at least once a year, even after your score improves.

Check for errors like accounts you didn't open or inaccurate payment information. These errors could be harming your score, so reach out to the bureau to fix them or file a dispute.

3. Aim for 30% credit utilization

Credit utilization is the portion of your total credit limit that you're using at any given time. After payment history, it's the second most important factor when calculating your credit score.

To find your credit utilization ratio, divide all of your debt by all of your available credit. For instance, if you have $5,000 in credit card debt and a $10,000 total credit limit, divide 5,000 by 10,000 to get 0.5. Multiply this by 100 to get a percentage – 50% in this case.

Lenders don't want to see you using more than 30% of your credit, so keeping your utilization at 30% or lower will gradually improve your score.

4. Get a cell phone and plan

This may seem like a strange thing to mention here, but if you get a cell phone contract, it's often actually a credit product (since they're fronting you money towards a phone).

What's more, the cell phone companies will do a soft credit check on you before granting you a contract.

But once you're on a contract, paying your cell phone bill every month will appear on your credit report and help boost your score.

5. Keep old credit cards and accounts open

This may seem odd, but keeping your older credit card accounts open can help with your score.

One of the five factors in your credit score is your length of credit history. The longer the history you have, the better your score.

Keeping your older credit card accounts active helps with this. Simply make a few purchases with the card a year to keep it active (and pay them off immediately), and you'll enjoy a longer credit history.

However, if you don't intend to use the card and you're charged inactivity fees or an annual fee, it may not be worth keeping.

6. Limit credit applications and credit checks

Another one of the five factors in your credit score is application frequency.

Most of the time, when you apply for credit, the lender will do a hard check on one of your credit files.

These credit checks have a small impact on your score. If you apply for a few products at once, you may have a harder time getting approved for something else, as another lender may see this as a sign of financial distress.

7. Speak with a credit counsellor

If you're having trouble paying back your debt or keeping up with your payments, you may want to talk to a credit counsellor. Simply talking to a credit counsellor won't affect your credit score; they're here to help you out.

A credit counselling agency can do one-on-one counselling or group courses while helping you create a personalized debt management plan. You'll most likely have to pay for these services, but it can be money well spent if you are able to improve your credit.

8. Use a secured credit card

A secured credit card is one of the only types of credit card you can get approved for if you've got fair or poor credit (a score of less than 660).

Since you provide a security deposit to open the account, these cards have near guaranteed acceptance. Your deposit becomes the card's credit limit.

Use the card for purchases, make your payments on time, and your good behaviour will be reported to both major credit bureaus, which will start to improve your credit score.

When it's improved and you've closed your account, you'll get your security deposit back.

9. Use a credit building loan

If you don't have the funds for a secured credit card, check out a credit building loan. These are accounts offered by banks or fintech companies. Usually, you sign up for a membership and make a small monthly payment.

The lender puts the payment into an account and reports the payment to the credit bureaus. Over time, these consistent payments improve your score. When you're ready to finish the program, you'll get the money in the account (minus any fees for using the program).

10. Maintain good personal finance habits going forward

Once your score starts to improve, keep up the good work by continuing to make your minimum payments on time (and ideally paying every month in full), keeping your spending in check, and limiting your applications for new credit.

Continue educating yourself on personal finance so you can establish healthy savings or retirement accounts and reach big financial goals.

What is bad credit?

A credit score is a three-digit number, ranging from 300 to 900, that represents all the information available on a credit report. This number is calculated by algorithms made by the credit bureaus.

On a credit score scale from 300 to 900, anything under 559 is considered a bad credit score.

How does someone get a bad credit score? These are the kinds of things that can lead to these low credit scores:

• Consistently missing payments (a missed payment once every couple of years won't drop it this low)
• Bankruptcy
• Having collection agencies looking for you
• Consistently using most of your available credit

When your score is in this range, it's likely you won't be approved for any credit products, and if you do, you'll be looking at extremely high interest rates.

Once you get to this point, thinking about how to fix bad credit should be one of your top financial priorities.

A good credit score is between 660 and 724, with anything above that point considered either very good or excellent.

In the good range, you're likely to be approved for most products you apply for; however, you may see slightly higher interest rates. You'll get the best possible rates once you hit the excellent mark (760+).

Like anything, though, there's no guarantee that you'll be approved, even with a good, very good, or excellent score. There are many other factors a bank may take into consideration when approving your application, some of which may not have anything to do with you.

Secured credit cards

A secured credit card is going to be the best thing you can do to improve your score.

These are bare bones cards – no rewards, very little (if any) insurance coverage, and no perks to speak of.

They're here for one thing – near guaranteed approval, to help those with poor credit start the road to recovery.

Here are the best secured credit cards in Canada.

Credit builder loans

Credit builder loans are a simple but very effective way to build your credit score. Just sign up for one with a lender and make a small monthly payment. The lender reports the payment to a credit bureau while the funds you paid are held in an account. You'll receive the funds when the loan term is up (and your score has hopefully improved).

Credit monitoring

You've got options when it comes to selecting a credit monitoring service. We've made it easy to compare them.

FAQ

How do I fix my bad credit score ASAP?

One of the best things you can do is to make all of your payments on time. Ideally, make them in full, but if you can't, make the minimum required. Continue to watch your spending while paying down your debt.

Is it true that after seven years, your credit is clear?

It is true that negative information typically only stays on your credit report for six or seven years. However, the exact time depends on the bureau, the information, and your provincial legislation.

Can you fix a really bad credit score?

You can fix a terrible credit score by following a smart financial strategy, but you won't see your score improve overnight. If your score is very low, it may take some time to see it improve, but it can.

What's the best way to rebuild my credit score?

If you're not already, start by making at least the minimum payment for all of your debts and ensure you're making them on time every month. Beyond that, try to pay off debt without charging more to a card.