Start fresh

The ultimate guide to building your credit after bankruptcy

10 Steps
to Success

Rebuilding your credit after bankruptcy might feel like climbing Mount Everest. It might not be easy, but it is achievable!

Get back to financial health after bankruptcy with these 10 steps. Consider the process as an occasion to start afresh.

Begin one step at a time, and before you know it, your finances will be back on track.

Step 1
Get Your Bankruptcy Discharged as Fast as You Can
Step 2
Understand Your Credit Score in Order to Improve It
Step 3
Get a Copy of Your Credit Report and Review it for Errors
Step 4
What Affects Your Credit Score and How it Affects You
Step 5
Learn to Budget
Step 6
Pay Your Bills on Time
Step 7
Get a Secured Credit Card or Become an Authorized User
Step 8
Reduce or Eliminate Your Debt Load
Step 9
Get an RRSP and Start Saving
Step 10
Get Help

Step 1

Get Your Bankruptcy
Discharged as Fast as You Can

The sooner you complete all the duties related to your bankruptcy, the sooner it will disappear from your credit report.

If this is your first bankruptcy, you can be discharged from it within nine months.

Completing the following three steps, without making too much in additional income, will make you eligible for an 'automatic nine- month discharge'.

Attend your credit
counseling sessions

There are two types of sessions you'll be required to attend within the first seven months after declaring bankruptcy. These sessions, provided by your trustee, help you identify the causes of your financial trouble, help you detect the warning signs, and teach you how to budget and manage your money. Each session lasts about an hour.

Make your monthly reports
to your trustee

These reports include your household income, expenses, and any change in your family situation. You must also provide copies of your pay stubs.

Make your monthly payments
to your trustee

In Canada, a bankruptcy costs approximately $1800. This amount is divided into monthly payments. 50% of any additional income that comes over the threshold determined by the government is added to the monthly installment. The surplus is sent to your creditors in order to pay off part of your debt.

Attend your credit
counseling sessions

Make your monthly reports
to your trustee

These reports include your household income, expenses, and any change in your family situation. You must also provide copies of your pay stubs.

Make your monthly payments
to your trustee

A first bankruptcy remains on your credit report for 6 years.

If a second bankruptcy is filed thereafter, the first will reappear and they will both remain on your credit report for 14 years after being discharged.

Step 2

Understand Your Credit Score
in Order to Improve It

Your credit score is a number used to determine your creditworthiness. This score is calculated by assessing the information found in your credit report. Your credit score helps lenders and creditors to evaluate the level of risk they’re taking by doing business with you. Understanding your credit score can help you determine where you can improve financially.

In Canada, credit scores range between 300 and 900. 900 is a perfect credit score, while 300 is considered very poor. The higher your credit score, the easier it will be for you to borrow money and have access to lower interest rates.

What the Numbers mean

Lenders will consider someone with a score of 660 and higher as a low-risk borrower.

A person with a fair credit score, between 560 and 659, will likely be approved for certain loans, but might not qualify for a loan with the best terms or interest rate.

A borrower with a credit score below 560 will struggle to get a loan and will be plagued by high interest rates.

Did you know?

The average Canadian has a credit score of around 650. Having a credit score ranging between 650 and 680 is the minimum required to get a mortgage.

Step 3

Get a Copy of Your Credit
Report and Review it for Errors

Many Canadians have lower credit scores due to mistakes made on their credit reports. It’s important to acquire a copy of your credit report and review it regularly for potential errors.

A free copy of your report is made available once a year from one of the two credit bureaus: Equifax and TransUnion.

Send a request by fax or by mail using the forms provided by both
You may also get access to your credit report online for a small fee.

Which Errors You Need to Look For

The most common mistakes found on a credit report are incorrect personal information, inaccurate payment status, duplicate accounts, identity theft and past due or delinquent accounts that do not belong to you.

If you notice any errors, you must dispute them with the credit bureaus. Each bureau has a form to fill out and submit for them to investigate your claim.

Any debt included in your bankruptcy that is still apparent on your credit report will also need to be flagged to the credit bureau.

1 800 465-7166

1 800 663-9980
All except Quebec residents

1 877 713-3393
Quebec residents

Result

Once all errors are corrected, your credit report will accurately reflect your financial situation. You can now work on improving it.

Step 4

What Affects Your Credit
Score and How it Affects You

Your credit score affects you more than you think. A good credit score can take you places by means of loans and a mortgage. Poor credit can make it difficult for you to borrow money. If you are able to get a loan, it’ll be at a high interest rate.

A low credit score can also prevent you from buying a house, or even renting an apartment. Landlords figure that a bad credit score means an increased risk of not getting paid.

Some employers also check credit scores before hiring. A good credit score often translates into an organized, dependable, and trustworthy employee.

Knowing what affects your credit score, either positively or negatively, can help you to improve it quickly.

Here are the main factors that affect your credit score:

Payment history

How you’ve paid back previous debt and whether some payments were late.

Used credit VS
available credit

How much credit is available to you and how much of it you’re using. The lesser, the better.

Credit history

Having older accounts that were managed responsibly.

Public records

Accounts being marked on your report with a 'collection' status and past bankruptcies.

Number of inquiries

The amount of ‘hard inquiries’ made when actively searching for a loan or credit card. Having too many will negatively affect your credit score.

Having different types
of credit

A variety of credit such as credit cards, a mortgage and instalment loans is preferable.

Payment history

How you’ve paid back previous debt and whether some payments were late.

Used credit VS
available credit

How much credit is available to you and how much of it you’re using. The lesser, the better.

Credit history

Having older accounts that were managed responsibly.

Public records

Accounts being marked on your report with a 'collection' status and past bankruptcies.

Number of inquiries

The amount of ‘hard inquiries’ made when actively searching for a loan or credit card. Having too many will negatively affect your credit score.

Having different types
of credit

A variety of credit such as credit cards, a mortgage and instalment loans is preferable.

Step 5

Learn to Budget

Creating a budget helps you to determine where your money is going, and how to reduce unnecessary expenditures.

First, establish a long-term goal. Do you want to save money to buy a house, for a trip, or a car? These goals can motivate you to respect your budget day in and day out.

Use the budget you've made as soon as you begin your credit counselling sessions. Track all your expenses over a 2 month period in a very detailed fashion.

There are plenty of money management tools and apps available to help you stay on track. The Canadian Government offers various free financial tools and calculators on their website. The Credit Counselling Society also has a free budget calculator which creates a graph representing the percentage of your income that should be allocated to each expense. Use the tools that best suit your needs.

Analyzing your Needs and Wants

Once you’ve tracked your spending over a period of 2 months, split your expenses into needs and wants. Your needs should include rent, utility bills, and groceries. Wants are non-essential expenses like cable TV, gym subscriptions, restaurant food and your morning stop at the coffee shop.

Making Adjustments

Use your budget to determine what can be sacrificed in order to put your money to better use, paying bills, repaying debt and savings. Budgeting helps you put your money to good use, and stops you from getting into unnecessary debt.

Analyzing your Needs and Wants

Making Adjustments

Step 6

Pay Your Bills on Time

Paying your bills in a timely fashion is an unfailing way to build your credit.

Payment history is one of the main factors used to determine your credit score. Every payday, pay all your bills that are due. Repeat the same step every payday until your bills are paid off. This way, your payments won't ever be late.

Plan and save at least a month in advance for large payments such as rent or your mortgage.

Make paying your bills a priority.

Late payments can appear on your credit report for 6 years!

Step 7

Get a Secured Credit Card or Become an Authorized User

A secured credit card helps you build your credit without being a risk for the financial institution emitting the card.

A secured card is a credit card that you receive in exchange for a deposit of the same amount as the card limit. You can use it for small expenses that you can repay immediately. This has a positive effect on your credit report and helps build your credit.

If you have a close friend or relative who manages their finances responsibly and who would agree to give you access to their account, you can become an authorized user. Your credit history won’t impact them, and you will be able to benefit from their timely payments and good credit history. On the downside, if the cardholder makes a late payment, it will impact your credit negatively.

Step 8

Reduce or Eliminate Your Debt Load

Learn to sacrifice nonessential expenses to pay off your debt more quickly. Can you cut out your daily visit to the coffee shop? Do you really need cable TV?

Reducing your debt load also means not accumulating new debt. That means reducing, or completely stopping, impulse buying. Evaluate your spending habits and TEMPO: Time of day, Environment, Mood and Place. When and why are you are most likely to make impulsive purchases? Is it when you’re tired, hungry, depressed? Learn to listen to yourself.

Another trick to stop impulse buying is to ‘sleep on it’. Take the evening to contemplate your purchase, even if that means leaving the store empty-handed. If it’s a very large purchase, consider waiting a few weeks. Don’t get suckered into the current sale price, it will most likely fall on sale again if it’s something you need.

When you see something you'd like to buy ask yourself if you really need it. If the answer is no, it’s a want, not a need.

Step 9

Get an RRSP and Start Saving

After you’ve been discharged from your bankruptcy, get in the habit of saving the same amount you were paying your trustee every month. Saving money in an emergency fund will prevent you from resorting to credit when a financial crisis strikes.

Opening a standard savings account can also help you save towards a future goal or trip.

Use Your Savings to put Money in an RRSP

If you invest $1000, the bank could lend you another $1000 to invest in your RRSP. At the end of the year the $2000 in your RRSP will generate a tax refund that can help repay the $1000 borrowed from the bank. For further information regarding the potential RRSP tax return you may be eligible to receive, please consult a tax return specialist or a reliable RRSP savings calculator.

Once the loan is cleared, it will look great on your credit report and you will have $2000 saved for retirement.

Step 10

Get Help

While growing your credit score is easy for some, it can also be very difficult. If you’re struggling at improving your financial situation, there is help available.

Canadians have access to free or low-cost credit counselling from Credit Counselling Canada. They offer free webinars that show tips on how to budget your money in your everyday life and how to be financially savvy in various situations. A certified credit counsellor can also help you manage your financial situation.

Reaching the top

These ten steps will help you rebuild your credit,
One step at a time.

After only a little while, you’ll notice an increase in your credit score, giving you access to more options and lower interest rates.
Once you’ve built-up your credit score, continue maintaining good habits in order to stay on top of your finances.

Resources:

https://www.mymoneycoach.ca/spending-money/how-to-avoid-control-impulse-shopping-spending-buying

https://www.mymoneycoach.ca/credit/check-credit-rating-report-score/what-is-a-credit-score

https://www.consumer.equifax.ca/personal/education/credit-score/how-are-credit-scores-calculated/

https://www.equifax.com/ecm/canada/EFXCreditReportRequestForm.pdf

https://www.transunion.ca/resources/transunion-ca/doc/personal/Consumer_Disclosure_Request_Form_en.pdf

https://www.canada.ca/en/services/finance/tools

https://www.nomoredebts.org/budgeting/budgeting-tips.html

https://jessicamoorhouse.com/improve-credit-score-canada/

https://www.savvynewcanadians.com/free-personal-finance-apps-tools-websites-canada/

https://creditcounsellingcanada.ca/your-rights-and-responsibilities/

https://www.hoyes.com/personal-bankruptcy/cost-of-bankruptcy-fees/surplus-income-payments/