Making up for maxing out: rebuilding credit

Sitting alone in my car, stuck in a snow bank on the side of the highway, I realized it may be time to get a credit card.

I’d been without one for nearly two years, but now I needed a tow truck and didn’t know whether they’d take debit or the cash I had on hand.

Luckily, freeing my car was a fairly easy fix. Getting a credit card, however, has been a whole other story.

Like many Canadians, I got my first credit card when I was 18. For years I was dutiful about paying off my balance as soon as I got the bill.

And then, well, I wasn’t.

That, according to credit experts, was a big mistake.

“You cannot have a bad credit rating if you pay all your bills on time,” explains Ian Lee, a professor with Carleton University’s Sprott School of Business.


Lee, who spent 10 years working in banking before making the leap to academia, says credit ratings are earned, not given out arbitrarily.

“People acquire a poor credit rating because of – let me be very blunt – because of bad behaviour on the part of the consumer,” he says.

To rebuild a bad credit rating, a consumer has to start paying his bills on time – all of the time.

“I think young people sometimes have problems with credit … because they have a more casual attitude towards it and they don’t realize that in the business world, no one appreciates casual attitudes towards things like credit,” Lee says.

While I’ve paid off my credit card debt, the scars of my poor decisions left a mark on my credit rating – and an empty slot in my wallet.


It seems I’m not alone. Putting purchases on plastic has become the norm in Canada.

TransUnion looks at Canadian’s average credit card debt each quarter, and found in the fourth quarter of 2012 that the average consumer owed $27,485, not including mortgages.

But how is that debt affecting personal credit ratings? Canadians can check their personal credit report by ordering it for free online. The report is a summary of credit history, listing everything from when an account was opened to whether payments have been made on time.

Julie Hauser, spokeswoman for the Financial Consumer Agency of Canada, suggests people check their credit reports from both Equifax Canada and TransUnion Canada once a year.

“The whole tracking of personal finance is so important, especially for students,” she says. “You want to make sure it’s accurate.”

Employers and landlords may check credit reports, and a good credit rating helps negotiate better rates for future loans, Hauser adds.


Meanwhile, a bad credit rating can mean higher interest rates and credit cards with fewer perks.

Bad credit also takes time to rebuild. And time means more than just a few months, says Lee.

“Three months doesn’t show a real trend. It just shows three months of payment on time,” he explains. “If you have a bad credit rating, it takes probably two years or more.”

There are options out there for people struggling to convince lenders to give them a chance, however, such as having someone with better credit co-sign for a card.

A secured credit card is also an option, says Hauser.

To get a secured credit card, you must put down a deposit with the credit provider, which acts as insurance if you don’t make your payments.

“Once you’ve shown that you pay your balance regularly, you can ask for the deposit back,” Hauser explains.

Soon I’ll have a new credit card in my wallet, and I’ll be following Hauser and Lee’s advice and making sure that I’m a responsible credit user so that it stays there.

“The best way to show you’re responsible,” Hauser says, “is to make your payments on time.”