How to Rebuild Credit and Get a Loan After Bankruptcy

As a society we often view bankruptcy as sort of a Scarlet letter that individuals must carry around like a shameful mark of failure. But it shouldn’t be that way. Bankruptcy can be viewed in a positive light – a clean slate or renewed purpose in one’s life. It’s an opportunity to start fresh and chart the course of your financial life in the right direction, like rebuilding your credit score and establishing good credit.

It’s empowering to have control over your finances again, post-bankruptcy. Now, you can begin the journey back to financial health with the kind of credit you need to secure loans and make other big purchases and decisions. We’re going to take you through the post-bankruptcy process of rebuilding your credit and how you can get back on track for loan approval.

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• Bankruptcy Vs. Consumer Proposal: Which Debt Solution Is Right For You?
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• The Easiest, Most Effective Ways To Improve Your Credit

Bankruptcy And Your Credit Opportunities

Although you’ve made the positive step in declaring bankruptcy, giving yourself a fresh start and a new beginning, your immediate access to credit after bankruptcy will be limited. There is nothing restricting you from applying for loans and credit cards but be prepared for a high possibility of rejection. And don’t think about concealing your bankruptcy – you are required by law to disclose it, not to mention it will be on your credit rating report. 

Starting From The Bottom: Your Credit Report After Bankruptcy

The first step towards rebuilding your credit after bankruptcy is obtaining a copy of your credit report and carefully reviewing it. Your can get your free credit reports from Borrowell, Credit Karma and Clear Score. This is the credit report that potential loan lenders look at, so you need to make sure this information is accurate.

If you’re not already in the know, you need to become extremely familiar with credit. Learn about the criteria that are used to calculate your credit score and understand the behaviours that can hurt and raise your credit score. A little education will ensure you take the fastest route back to a good financial standing.

Believe it or not, having a bankruptcy on your credit report is preferable to having outstanding and delinquent balances, which damage your credit reputation. Just make sure your credit report shows $0 balances for those debts and accounts that have been discharged through your bankruptcy.

Your bankruptcy will appear on your credit report for six years after the date you complete your bankruptcy. If you declare bankruptcy more than once, it will appear for 14 years on your credit report.

How Credit Works In Canada

In Canada, there are two main credit bureaus: Equifax and TransUnion. Each of these credit bureaus has its own credit scoring method, which means you’ll get two different credit scores. What impacts these scores also has a lot to do with the fact that lenders can choose which bureau they want to report to. That said, the same basic categories are used to calculate your score. 

There are a few main categories used to calculate your credit score. These include:

• Payment History
• Length of Credit History
• Mix of Credit Accounts
• Credit Utilization Ratio (use of credit limit)
• Number of Inquiries

Each of these factors makes up a portion of your credit score. This is why bankruptcy can hurt your credit, but there are also multiple factors that can help improve it. Small things like paying bills and car loans on time can create a positive payment history and help drown out the negative information.

This is important because credit accounts can stay on your credit file with the credit agencies for up to 7 years. This means your credit check will show delinquent accounts, consumer proposals, collection agency debt, and any other recent credit accounts. Creating a positive payment history and low credit utilization rate can show an increase in good financial habits and increase a low credit score.

Credit Scores In Canada

Using the factors from your credit report, the credit bureaus then calculate your credit score. These scores range from 300 - 900, with 300 being the lowest and 900 the highest. Broken down from these credit scores are categories that can help you determine your approval rating. Here they are:

• Poor - 300-579
• Fair - 580-669
• Good - 670-739
• Very Good - 740-799
• Excellent - 800-855

Once you determine your credit score, you can then determine what you need to do to improve it. 

Repairing Your Credit After Bankruptcy

The unfair reality of bankruptcy is banks are going to look at you with suspicion. You made mistakes in the past, now the bank must consider the potential you will make them again.

Now’s the time to start proving them wrong!

• Open new savings and chequing accounts to show that you’re fully capable of managing your money. If you are still making payments to a trustee after bankruptcy, make them through your own savings account. Ideally, you’d want to set up automatic payments. 
• Look for banks that offer accounts specific to your situation. Financial institutions like Scotiabank offer post-bankruptcy customer savings accounts designed to incentivize financial discipline. For example, you can earn higher interest on a balance when you refrain from withdrawals over a duration of time. This is an ideal scenario because you are rehabbing your financial portfolio, practicing healthy habits, saving for a rainy day, and earning decent interest all at the same time.
• You can also repair credit by becoming an authorized user on a trusted friend’s credit card account. Your credit profile will get a boost from their responsible behaviour. Furthermore, your not-so-stellar credit history won’t hurt them. Just make sure that their positive behaviour remains consistent, though, because any bad decisions on their

Building The Right Habits

Speaking of good habits, leaving your money untouched in a savings account is just one piece of the puzzle. Strong financial habits are best exemplified by the ability to repay debts – something you may have struggled with in the past.

Keep on top of your monthly bill payments either with some organizational help or auto-repayment systems. Most banks offer automatic bill payments to help you keep track of phone, internet, utilities, and whatever else is coming out of your monthly income. This should reduce some stress and help you stay disciplined with prompt payments.

How RRSPs and TFSAs Can Help Build Credit

While we suggest plugging money into a savings account, if you have extra cash consider an RRSP or TFSA. Contributions to an RRSP (Registered Retirement Saving Plan) will mean a higher tax return at the end of the year. When you get that bigger tax return, put it towards any small debts and clear it off. A paid-off loan on your credit report is a key indicator to banks and lenders that you’re trustworthy and capable of getting a bigger loan. And at the end of the day, you have money invested in your RRSP, which will help you even further down the road. A TFSA (tax-free savings account) is a more flexible savings vehicle you can use, but it will not earn you a higher tax return at the end of the year.

Credit Builder Programs vs. Secured Credit Cards

Depending on the individual, it can be somewhat stressful to re-enter the world of credit cards. Their convenience makes them a constant temptation and a slippery slope to the debt hole you don’t want to slip back into. But, if you can manage your spending, secured credit cards are also one of the best methods for rebuilding your credit rating.

Secured credit cards are a recommended re-entry point to handling credit cards. They are usually easier to qualify for compared with traditional credit cards because you are required to pay a security deposit upfront. They also come with higher interest rates and more restrictions, but if you keep usage low and payments prompt, you’ll be heading to credit respectability soon enough. Issuers like Capital One offer applicants various credit card options to get their credit back on track. However, many different credit card companies offer these. 

Unlike secured credit cards, credit builder programs do not require a security deposit. And they come with a savings component, so after a few months of minimum payments, you should have an improved credit score as well as a nest egg worth hundreds of dollars. You don’t have to have bad credit to sign up for them, either.

So what’s right for you – a credit builder instalment program or a secured credit card? If you don't have the money to pay the upfront deposit on a secured credit card, a credit builder program might be a good option for you. Compared to revolving credit, instalment credit is easier to manage and budget for with fixed recurring payments.

But it's a good idea to get approved for both as it will help you combine revolving and instalment credit to diversify your credit mix (which the credit reporting agencies love to see).

Unsecured Loans After Bankruptcy

We all need a little help from our friends and family once in a while. You might qualify for unsecured loans and even credit cards if you have a willing family member or friend to cosign your application. This will help you establish a better credit rating in a shorter amount of time. This can be risky for the co-signer because if you default or miss payments, both of you will take the hit on your credit reports. If you enter this arrangement, be prepared to behave in your best way. Otherwise, there will be tears.

The Easiest Forms Of Credit To Get After Bankruptcy

If you’re looking to obtain credit after bankruptcy, the easiest forms of credit you can get to build credit are secured cards and auto loans. Due to the fact that these are both forms of secured debt, you can get them even with a poor credit score. However, you can just as easily negatively impact your credit score. 

In order to improve your credit, you need to make timely payments. Late payments will show up on your payment history and make it difficult to get unsecured cards and future loans. If you can make your regular payments in a short period of time, you can show that you can use credit responsibly. Keeping your available credit limit high can also improve your negatively impacted credit and increase your chances of getting an excellent credit score. 

When you're looking for easy-to-get credit options, you may stumble upon payday loans. While these are easy to get approved for, the don’t improve your credit store and incur high fees, costing you more money. 

Alternative Options To Bankruptcy

While bankruptcy may be the best decision for you, it isn’t the only option. Another great option that Canadians use instead of bankruptcy is consumer proposals. These are done through credit counsellors and allow you to negotiate with your creditors to reduce your debt. 

While consumer proposals also have a negative impact on your credit report, it isn’t as severe. Plus, you can work with a licensed insolvency trustee to reduce or negate some of your debt and make it more affordable to pay off. They don’t just work with traditional creditors either. They’ll also work with collections to help you reset your financial health. 

Another of many debt relief options is a debt consolidation loan. However, you might be past this stage. Essentially, debt consolidation loans are loans you can pay off all of your debts with. This turns all of your debts into one low monthly payment and allows you to pay only one interest rate. For some, this can make their debt much more affordable. 

Walk Before You Run

You’re eager to repair your credit score and put the past behind you. It’s understandable. But as most credit experts suggest, you should tread cautiously and avoid making mistakes that set back your credit rehab progress. Take it one payment at a time, do not overextend yourself, and be judicious with any new credit undertakings. You’ll get to where you want to be sooner than you think.