Bad credit reminds me of the flu. It's constantly showing up uninvited during inopportune times like the holiday season, and it zaps your energy, leaving you lethargic and unable to tackle tasks. Unfortunately, both possess the damaging ability to take over your life until you get rid of them.
Unlike the flu, bad credit doesn't just show up occasionally, and it's not something you have to tolerate for just a few days; it's around all year long, affecting almost every facet of your life. For example, if you have bad credit you can't buy a house because banks won't give you a mortgage; you can't buy a vehicle because you won't be able to secure a car loan; and you can't get a cell phone contract because no company will deal with you.
"If bad credit is not taken care of, it does have a detrimental impact on a person's life," says Melissa Jarman, director of student banking at RBC. "But there is good news because with the correct steps, improving a credit score is fairly simple."
"The first step to improving your credit score is getting knowledgeable about credit," says Penelope Graham, editor of RateSupermarket.ca. In this article I outlined the basic aspects of credit, including how to understand your credit score and credit report.
Here are six more ways to improve your credit score:
Never go beyond 50% debt-to-credit ratio. For example, keeping a balance of $5,000 on a credit card with a limit of $10,000 is a debt-to-credit ratio of 50%. Lenders view this as acceptable. However, once you go beyond the 50% mark -- say, $7,000 on a $10,000 credit card -- you are viewed as a risk and your credit score starts to drop. "To avoid a credit score drop, pay your credit card or bills off right away," says Graham. In fact, Graham suggests keeping your debt-to-credit ratio to 30%, so that you never have to worry about lenders viewing you negatively.
Be fastidious in paying bills off. Mortgages, credit cards, the hydro bill -- all these transactions are logged by credit agencies, so make sure that you pay all bills off in time. "You're doing yourself a great service by doing this and in turn it will help your credit rating," says Graham. Credit ratings are ranked from 1 to 9 based on how quickly you pay back debt; 1 means you pay debt off within 30 days, and 9 indicates bad debt or bankruptcy. Click here for more information on credit ratings.
Don't lose track of what you buy on credit. "This is where people spiral out of control," says Graham. "For example, they lose track of what they're using their credit card for." So, know exactly how much you're paying and exactly when you're paying it off. Graham suggests keeping a notepad or a spreadsheet for all purchases. She also says it's important to keep in mind that a credit card is not extra money; it is borrowing wealth from your future self. Subsequently, if you're borrowing from yourself you need an idea or a plan on how and when to pay it back.
Dispute mistakes. If you spot a mistake in your credit report, immediately contact the credit agency that you are using -- either Equifax or TransUnion. Under the federal government's Personal Information Protection and Electronic Documents Act, these two companies are required to verify the accuracy of the information on a credit report and launch an investigation if necessary. There is no fee for the investigation, but you may need to provide proof that the disputed information is in fact incorrect. Once the mistake is cleared you can ask the reporting agency to provide a corrected version of the credit report to any persons or companies that received an incorrect report.
Contact the lender. "It is absolutely advisable to communicate with your lender and let them know if your financial situation has changed and you are unable to make certain payments," says Graham. If you have extenuating circumstances in your life like the loss of your job or a sick relative, your lender may offer you a goodwill adjustment, which is a discount or removal of payments. The best way to obtain a goodwill adjustment is via email or letter requesting that the lender disregard or lessen a portion of late payments due to personal issues.
See a financial professional.You don't have to tackle debt by yourself. "Go see a professional, explain your situation and tell them that you need a plan to get back in good credit graces," says Graham. They will help you come up with a strategy, which will make the debt easier to tackle. "Too often people try and take on debt by themselves and they end up drowning."
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