Q: We’ve been wanting to buy a home for a while but when we applied for a mortgage, we were told that our credit isn’t that great. Our lender suggested that we work on improving our credit score and reapply in a year or two. Mortgage rates have come down and we’re worried we’ll miss out if we wait too long, so we talked to a company that says we can take out a loan and they will help us repair our credit. They told us that in about a year we should have a good credit score. When we asked how exactly the program works, we started wondering if it’s legit. Is a credit repair loan a good way to improve our credit score? ~Mahesh
A: A credit score is based on specific factors which are drawn entirely from information in your credit file. It is important to understand that if details on your credit history report are accurate, they will not be removed or changed. As time passes they become less relevant and eventually, after six to seven years, most drop off your credit report entirely. However, it takes time and effort to rebuild a credit rating; there is no quick, easy fix, especially if your credit report contains negative information and you have a low credit score.
Your credit score is an integral part of any credit application. It indicates to lenders how likely you are to repay any money they lend you, based on your track record of how you have managed your current credit obligations in the past.
If you’re curious what is on your credit bureau, here is how to get a copy of your own credit report (for free) .
Credit repair – buyer beware
Given a choice, consumers want to fix their credit rating quickly, and over the years various credit repair schemes have sprung up. The best I can say is credit repair; buyer beware – no matter how much you pay someone, they cannot change what is on your credit report. And if they are selling you a service that takes time, save your money, because time is on your side whether you buy their service or not.
Here are some things to consider when trying to decide if a credit repair program is worth your time and money:
Credit repair loans
Borrowing money to repair your credit rating is nothing new; however, specific credit repair loans tend to be at higher interest rates and often require security. Some businesses will lend you the money, for instance $1,000, and then keep that money as security for the loan. You make your payments, plus interest, and then they release the funds to you once you’ve made all of your payments. The idea is that by making payments on time and as agreed you are proving that you can handle a credit obligation.
Three potential catches with credit repair loans
The first potential catch is that the interest rates can be quite high. If the company lending the money retains the loan as security, the interest you pay is essentially a fee for the service (in addition to any traditional fees they might have charged up front). Considering you can repair your own credit without paying a fee, you might be handing money to a company that would be better used if applied directly against your debts.
The second catch is that if you make all of your credit repair loan payments as agreed but falter on other credit obligations, your credit score won’t improve dramatically, if at all. It could even get worse as other debts get further behind. Repairing a credit rating is a bit of an all or nothing thing, especially if you want to see your score go up as quickly as possible.
A third potential catch is that in order for your credit score to improve, a lender must report your payments, preferably to both credit bureaus, monthly. Not all do because it costs companies money to utilize the services of the credit bureau companies. Lenders must pay for a membership with TransUnion and/or Equifax in order to exchange information about a borrower. Some lenders are members of both credit bureau companies, some of only one and others aren’t members of either.
It is better for both credit bureau companies to be notified than only one because they each calculate credit scores slightly differently , and you don’t know from which company a future lender will obtain your credit score.
Cheaper ways to fix your credit rating
Secured credit cards are cheaper than credit repair loans. A secured card means that you save up an amount equivalent to your credit limit and place it on deposit with the credit card company. Then you make all of your payments as agreed as you use the card. At the end of a specified amount of time, your security deposit is returned to you. If you pay each bill in full by the due date, other than a nominal annual fee with some cards, there is no added cost to use a secured credit card.
To find secured credit cards in Canada, try using the credit card comparison tool from the Financial Consumer Agency of Canada. After completing the first three filters, open the optional filters menu and option 11 allows you to filter for secured cards.
Cellphone plans on contract are a credit repair option you might already have. By nature of how they work, cellphone contracts are a relatively quick way to (re)build a credit rating (but an even faster way to ruin one). They are considered an “open” form of credit because they do not have a spending limit (like a credit card); as such, the whole bill is due each month.
When you make all of your agreed upon payments each month, this starts to help your credit score head in the right direction.
Living within your means is by far the best way to repair your credit score. By creating a realistic budget that allows you to stay on top of paying bills and making debt payments on time, as well as catching up collection items and setting some savings aside for emergencies, these are the steps that you need to take so that your credit rating recovers.
The bottom line on fixing your credit rating
If after trying to get back on track by yourself you find that you’re not making as much headway as you’d like, we’re happy to help with a second set of eyes for your budget and overall financial situation. It’s rare that a budget works perfectly right from the start; most need some adjustments and our credit counsellors can make unbiased suggestions to get you towards your goals faster. It took time for your credit rating to go down; it will unfortunately take a while longer to fix it. However, save your cash and resist paying for credit repair that you can do yourself for free .
Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email , check www.nomoredebts.org or call 1-888-527-8999.
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