The length of time it will take to repair your credit score will depend on what kind of marks are on your report. It’s important to know how long the process of repairing credit will take so that you can plan ahead effectively.
There are multiple factors that impact your credit score. Credit utilization rate, how often you make payments on time and in full, and the overall length of your credit history will all determine where your score falls between the 300-900 scoring system.
According to TransUnion, one of Canada’s major credit bureaus, the average credit score in Canada is 650. However, approximately 20% of Canadians have a credit score that falls below 600. An individual with a credit score under 600 is considered subprime or non-prime.
A subprime consumer’s approval rates for borrowing might have slightly higher interest rates, as this type of consumer is considered to be a higher risk of defaulting due to a less-than-perfect credit report.
Although prime borrowers (Canadians with credit scores over 650) are more attractive to lenders and usually get lower interest rates, it’s not impossible to be approved for great rates on a loan with a lower credit score.
If you’re a subprime customer, the good news is you don’t always need to be one. Improving your credit score starts with understanding what went wrong financially.
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This blog post answers everything you wanted to know about rebuilding your credit score.
The length of time it will take to repair your credit score will depend on what kind of marks are on your report. It’s important to know how long the process of repairing credit will take so that you can plan ahead effectively. It can take a couple of hours to thoroughly review your credit report. An error on your credit report can be disputed with the credit bureaus. For example, you might see a mark on your report that indicated you didn’t make a payment when, in fact, you did.
To dispute a false claim like this, you are required to draft a dispute letter and gather the necessary documents and statements to prove the error is incorrect. Once your dispute is submitted to the credit bureaus, there is a 30-day period that allows the bureaus to contact the creditors to verify the information and respond to the claim. Sometimes, there is a back-and-forth between the disputer, credit bureaus, and the lenders, but it typically takes around three to six months to resolve disputes.
If there are no errors on your credit report but you notice derogatory marks, it can take up to six months to start rebuilding your credit score. Although some marks on your credit report last up to seven years, acting as soon as possible to start paying down debt will show on your credit history within 30 days, as credit reports are updated monthly.
If you have outstanding debt that you haven’t paid off for over six months, whether it be a phone bill or credit card statement, the creditor may have closed the account and sold it to a collections agency.
Once your debt information is sold to a collection agency, the number “9” may appear next to the loan on your credit report. This number means the debt has been sold to collections and it can stay on your credit report for up to seven years. Plus, it could lower your overall credit score by 20 to 50 points. If the claim is legitimate and you haven’t been able to pay off your debts, the best thing to do is to make a payment as soon as possible. If you did make payments and the creditor made a mistake, you can dispute the claim as an error. Read more about How to Handle a Collections Account.
Consumer bankruptcy is a legal process governed by Canada’s Bankruptcy and Insolvency Act. Bankruptcy is an option of debt relief for those who are unable to pay off outstanding debts. It’s a proceeding that allows people to start new financially and according to Statistics Canada, one in six Canadians will file for bankruptcy. It generally takes around a year to be approved for bankruptcy by an insolvency trustee.
Once filed, bankruptcy will stay on your credit report for up to seven years, and your second bankruptcy may stay on your credit report for 14 years. Bankruptcy is no easy way out of debt, so consumers who are thinking about bankruptcy should consult with a financial expert to weigh every option. Similar to bankruptcy, a consumer proposal will also stay on a person’s credit report up to seven years. Read more about the Alternatives to Bankruptcy.
The length of time that unpaid debts will remain on a credit report depends on the province you live in. Global News reports that Canada’s legislation sets a statute of limitations when it comes to unsecured debt (debt that isn’t secured by collateral). This prevents creditors from being able to take borrowers to court after a certain amount of time.
In British Columbia, Alberta, Saskatchewan, Ontario, and New Brunswick, defaults for unsecured debt typically stay on a credit report for two years. In Quebec, unsecured debt will stay on a credit report for three years, while Manitoba, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador will retain this kind of debt on credit reports for six years.
There are two types of inquiries that exist – soft inquiries, also called “soft pulls”, and hard inquiries, or “hard pulls”. Lenders will base approval rates for a loan on the applicant’s financial history. The first step before applying for a loan, whether it be a credit card, an auto loan, personal loan, or a mortgage, is to understand what exactly soft credit pulls and hard credit pulls mean, and how they play a vital role in assessing your overall credit score.
A hard credit inquiry occurs when you apply for a loan and the lender needs to check your eligibility for approval. Common examples of hard credit inquiries are mortgage applications, auto loans, credit cards, personal loans, student loans, and apartment rental applications. When someone applies for a loan that requires a hard pull, one single hard inquiry won’t typically impact your credit score negatively. However, if you have several individual hard pulls recorded on your credit file within a short period of time (i.e. if you apply for multiple different credit cards at once), this could lower your score.
Hard credit checks impact your credit score because credit bureaus assume if you’re applying for a lot of additional credit within a short period of time, you’re in a tight financial situation, which could put you at risk of not being able to make monthly payments. Lenders need to see how responsible you are with your finances, which means they must pull your file to view your credit history before they can approve you.
Credit scoring models typically count auto loan inquiries made over a 45-day period as one inquiry. This method of applying for credit within a specific time frame, otherwise known as “bunching”, will show creditors that you’re shopping smart and not applying for loans irresponsibly.
Given that credit inquiries stay on your report for 2 years, it’s crucial to apply for credit only when you absolutely need it so that when lenders do a hard check, they see a report that reflects good financial sense and not credit abuse. A high number of hard inquiries on your file is associated with elevated risk. Furthermore, a high volume of hard checks on a file could result in subpar interest rates.
Soft credit inquiries occur when a lender checks your credit report for informational purposes. This type of credit check won’t show up on your credit report to other lenders and doesn’t impact your credit score. Soft pulls typically happen if you’re pre-qualified for a credit card, when an employer does a background check, or if your financial institution looks at your credit report to determine your overall financial health.
Unlike hard credit checks, soft pulls won’t impact your score because you haven’t applied for a loan. Requesting a copy of your credit report from the credit bureaus is also considered a soft inquiry as you’re not authorizing a lender after applying for a loan. Soft credit checks often happen without your request, which means you’re never penalized for them.
When you apply for a loan, whether it be a form of revolving or installment credit, creditors will hard pull a copy of your report to see if you are a respectable candidate for borrowing. Generally, an applicant with a lot of marks on their credit report such as connections, a history of bankruptcy, multiple defaults will be treated as a high risk to creditors. If you have any false marks on your credit report, you’ll want to dispute these claims quickly. Otherwise, it might be harder to get approved for a loan in the future. It’s not uncommon for a credit report to include some errors.
The first step to eliminating wrongful marks on your credit history is to request a copy of your report. Once you receive it, double check that all account numbers, balances, dates opened, account status’, payment status’, and credit limits for each loan on your report is correct. If you see an error, which will impact your overall score, you’ll need to write a detailed dispute letter to your creditors that outlines each mistake. The letter should include all errors recorded on your credit report along with a message asking the credit agencies to correct the inaccuracies or remove the entry.
If you’re trying to remove a late payment, paid collections, or paid charge-offs that remain on your credit report after you’ve paid them, we suggest writing the credit agencies a letter of goodwill, which will ask the agency to remove the negative mark. Keep in mind that creditors are businesses and you’re still considered a customer, so you’d be surprised how frequently letters of goodwill to creditors and collection agencies work. If writing a letter of goodwill or dispute doesn’t work, there is an option to negotiate paying the creditors to delete the marks.
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