Rebuilding Credit

September 5, 2017

Many people are interested in a rebuilding credit – think of it as a process.

Credit (or debt) is available in many forms and to most people. Sometimes the credit you can get is not the credit you want. Your eligibility to access to new debt may be impacted by a variety of issues:

  • Loss of income
  • Legal actions or collections activity
  • Late payments or sketchy payment history
  • Debt service ratio

Positioning yourself to get more new debt can, and probably should, take time after getting into trouble. Most items sit on a credit report for about six years – and because it takes about a year to complete a bankruptcy the urban myth has arisen that “you can’t get credit for seven years after filing for bankruptcy”.

The reality of course is that most people filing for bankruptcy have experienced one or more of the issues listed above and if they don’t file for bankruptcy their credit reports will still be affected for at least six years after they solve the problem (by paying back their existing debts – which might take many, many years).

There are different tiers of lenders from the high-risk type lender such as Finance Companies – often charging between 29-59% interest and the Pay-Day Loan Companies all the way through to the top tier lenders such as Chartered Banks. The high-risk lenders will sometimes lend to bankrupts even before they are discharged the top tier lenders have somewhat higher standards.

Access to debt isn’t really a problem but access to lower interest debt, extended on better terms can be. Getting out of debt is a huge issue for consumers, lenders are in the business of lending, they want you to not only get into debt but to stay in debt and continue to pay them the highest residuals that you can tolerate for the rest of your life.

The cleanest methods of getting out of debt, aside from a lottery win, are typically to file a bankruptcy or proposal. But this article isn’t about getting out of debt or staying out of debt it is about getting right back into it again. You have had difficulty paying your bills or you are carrying too much debt and your credit rating has dropped, now you can’t wait to accumulate more debts.

The only thing that will improve your credit rating is to get into debt and stay in debt. If you saved all your money, never used credit and bought your house, vehicles and everything else you own with cash – you would actually “own” stuff, in fact you could be rich but if you have never used credit, never been in debt, you would have a low credit score.

You need to be in debt at a tolerable level and you need to make your monthly payments on time. Do not use all your available credit and always make more than the minimum payment. Always stay well within your debt service ratio and you will be able to stay in debt and have access to new debt for the rest of your consumable life.