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If you have no credit, poor credit, very bad credit or a recent bankruptcy, it is imperative that you first establish or re-establish a good credit rating and change your credit profile before you even think of applying for a loan or a mortgage. Building a good credit history is important. If you have no reported credit history, it may take time to establish your first account. This problem affects young people just beginning careers as well as older people who may never have used credit. It also affects divorced or widowed spouses who shared credit accounts that were reported only in their spouse’s name. You can easily find out how bad it really looks by checking your credit file with the two main credit bureaus in Canada, Equifax and Trans Union of Canada. Simply contact them and request a copy of your file. It is estimated that over 65% of all credit reports have some type of misleading, inaccurate or negative information. Check your credit report at least once a year and have any inaccurate information removed. Further information on credit files and how to correct your credit file can be found on our web page You and Your Credit Rating Generally, the credit rating of your debt falls into a simple pattern based on a zero-to-nine coding system. For example, a credit card debt, known as 'rotating' credit (since, in theory, you charge to the card and then repay it, and then charge again, thus rotating debt on and off the card) may carry a rating of R1. This means that the credit is paid as required (either in full or the minimum payment) as it is billed every 30 days. An example of a poor rating on a credit card would be R3, meaning that your payments are about three months behind. Installment debt is rated using an I-code. I1 means the loan is paid properly, while I3 means you are three payments overdue. Both R9 and I9 are the worst possible ratings in these categories, and indicate that the debt has been written off. Even showing a history with a couple of R3s or R4s is often enough to cause many lenders to decline a loan, insist on additional security, or ask you for a co-signer. According to the Canadian Bankers Association, at the end of 1999, about 333,000 bank credit cards were overdue 90 days or more. Further poor payment patterns can also be seen with retailer-sponsored credit cards such as The Bay and Canadian Tire. While there are often extenuating circumstances surrounding a poor payment record, the system does not necessarily take this into account. Much of the information you will find is automatically generated and reported to the credit bureaus regularly. For example, if your credit card is running at R5 because you have been in the hospital, only the debt lag will be reported and recorded on your bureau -- the circumstances are left for you to explain. It is important to maintain a good credit rating, and if yours has fallen victim to a catastrophic job loss or some other such influence, then you should try to repair it. If you were one of the 75,000 Canadian consumers who declared bankruptcy in 2000, then you will need to wait until your bankruptcy is discharged before you can start borrowing again. Most lenders will not consider extending new credit to discharged bankrupts until at least one year following the date of discharge. One way to get around this is to consider a secured Visa® card. More on this later. On the other hand, many consumers may not have declared bankruptcy, nor does it make sense for them to do so. Rather, they have simply been chronically late with payments and now have trouble qualifying for another loan or a credit card. Beware of the frequent ads for 'instant credit' or 'credit rescue' -- there have been many instances where desperate consumers have applied through one of these ads only to find the 'administration fee' or 'application fee' of $200 or $300 is lost, and no loan or credit is forthcoming. Most direct lenders do not charge for an application. No one can wave a magic wand and absolve the credit history you have established. You are the only one who has the ability to fix your credit problems. Tips on Establishing Good Credit You can save a lot of time and frustration by learning how to establish or re-establish and maintain a great credit rating. Here are some tips to help you do so: Talk to the lender at your financial institution to see specifically what steps you can take, together, to rehabilitate your credit-worthiness. Pay off any credit cards you still have and re-establish a 'current' footing with them. Apply with your bank for a credit card with a very low limit ($300 to $1000); if it will, use the card wisely and make sure it is always paid on time. This will indicate that a trend has passed and a good credit history is being established. You may be able to obtain a credit card from the bank or even a small bank loan by having a friend or relative co-sign for the application. Repay the loan quickly to begin showing positive reports to your file. Do not carry your credit card balances near, at or over the credit limit - such activity will lower your credit score. Pay at least your minimum payments on time and in full as required by your monthly statement. Credit reports will show how many times you have been 30, 60, or 90 days late. Avoid small private loans or, loans for used cars from your local used car dealer are not going to help you much, because these types of loans are not reported to the credit bureaus. All credit cards, whether they are regular bank cards, department store cards, secured or unsecured are reported to your credit bureau and all activities are updated monthly. Avoid applying for credit whenever and however you are offered the opportunity. Each application for credit triggers a credit inquiry which negatively impacts your credit score. A conservative approach is looked upon far more favourably. Use a mortgage broker when applying for a loan or mortgage to eliminate the number of inquiries on your credit file. Also consider only applying for a mainstream credit card like Visa® or MasterCard® as most retailers will accept cards. Department store and retailer credit cards tend to be redundant and also charge a far higher rate of interest. Learn about the most common 'credit criteria' that lenders use to grant credit, and attempt to position yourself as well-established as possible. For example, stability factors such as how often you move or change jobs are quite important. If possible, maintain your employment and residence status for at least two years. If you are married or in a partnership relationship and have a spouse or partner with poor credit, you can insist that your credit bureau files be kept separate so that your good credit rating does not become tainted. In this case, assuming you did not sign for any of the delinquent debt, it is important to keep a close tab on your credit bureau file to ensure that none of the credit problems get moved into your file by accident. You may also wish to confine your future borrowings and credit cards to your name alone, rather than setting up any joint debts. If you can afford to do it, consider borrowing a small loan at the bank (say, $1,000) and repaying it over a year. You can use the borrowed money for an investment and pledge the investment (i.e. term deposit, Canada Savings Bond, mutual fund, etc.) as collateral for the loan. Most bankers are quite approachable with this strategy and some or all of the interest cost on the loan will be tax- deductible for you, depending on the nature of the investment purchased. A similar alternative is a loan to invest within an RRSP. Again, bankers will see you planning for the future as a change in previous spending habits and ready for re-established credit. Get a secured credit card by providing cash equal to the amount of the credit limit they will grant you (if you think a bank credit card is unnecessary, try arranging a rental car or hotel accommodations without one). Home Trust offers an excellent secured Visa® product to assist those attempting to establish or re-establish a good credit rating. See our web page Start Rebuilding Now for more information on this product. Once you have established or re-established a credit-worthy name, continue to use credit wisely and cautiously. A good credit rating is a valuable component of your overall financial health. Your credit rating can be the key to that new home, new car loan or lease, the renewal of some forms of insurance, and in some cases, it can even determine your status for a new job. Demonstrating a lack of credit-worthiness can ultimately be very expensive, as you will be categorized as a higher risk by the lender, and likely be charged a higher interest charge. Conversely, a good credit rating can save you a lot of money in the long run.