Wondering how to restore credit after bankruptcy? Good news! There are several simple and effective ways to rebuild your credit rating after bankruptcy.
Even though the record of your bankruptcy stays on your credit bureau reports (Equifax and TransUnion) for approximately six years after your bankruptcy discharge date, you can start rebuilding your credit as soon as you are discharged – and it won’t be long before you see your credit score begin to rise.
Let’s review a shortlist of the most popular methods.
1. Get a “secured” credit card
Using a secured credit card and keeping a perfect payment record on it will boost your credit rating.
Note that a secured credit card is not the same as a pre-paid credit card. With a pre-pay card, you deposit funds into the card, and you are limited by how much you deposit – so you are not using “credit,” and you do not build your credit rating.
Secured credit cards, by comparison, do build your credit rating. With a secured credit card, you pay the issuing bank or financial institution a deposit, which is kept separate from your credit account as security for the financial institution. The deposit is often the same amount as your credit limit.
Your secured credit card, which is a VISA or Mastercard, is a true credit card and does not look different from “regular” credit cards.
You can use a secured credit card for anything you need credit for, up to its limit. You’ll also have a monthly payment, just as with any credit card. Keep in mind that even though the financial institution is protected by your deposit, your credit rating will still be damaged if you are late on payments, or miss them.
Several financial institutions offer secured credit cards to Canadians. You may also wish to ask at your bank – some banks will arrange secured credit cards within the bank branch for their customers.
2. Get a car loan
Similar to method #1, this method improves your credit score by giving you credit history. Maintaining a perfect payment record until you pay off your car loan will have a noticeable beneficial effect on your credit score.
Car loans are often used to repair damaged credit ratings. Compared to other forms of credit, it is relatively easy to qualify for a car loan. In most cases, the car itself serves as collateral for the loan, so the risk to the credit company is reduced.
3. Get a small loan from your bank – perhaps for your RRSP
If you don’t need a car loan, you can approach your bank and ask about a “credit builder” loan – specifically to help you repair your credit rating. The bank may approve you for a small unsecured loan, or they may use funds on deposit in your savings account as security.
Whether the loan is secured or unsecured, it can be used to apply towards your RRSP if you have one – a financially savvy move – and you can make your loan payment from your income until the loan is paid off.
Having a loan as well as a credit card on your credit bureau report is especially beneficial, as your score increases when you have a good history of managing more than one type of consumer credit.
4. Practise good credit habits, including maintaining a perfect payment history
Make sure that when you begin acquiring new credit after a bankruptcy, you do not experience the pitfalls that may have caused your credit woes in the past.
Be scrupulous about making your payments on time. Never miss one.
Be careful not to acquire too much debt. This may sound like an odd caution, given that it can be challenging to be approved for credit after a bankruptcy. Your available credit sources may charge high-interest rates, so make sure not to overspend on credit.
Check your credit report and credit score to see how you are doing. Many banks now offer free credit reports from Equifax or TransUnion to their customers who use online banking or banking apps. If you find any mistakes in your credit report, be sure to contact the credit bureau.
For more information on repairing your credit score after bankruptcy, see the article “A Guide to Rebuilding Credit After Bankruptcy” from Bankruptcy-Canada.ca.
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