Once your bankruptcy is finalized, your credit score may drop significantly.
In Canada, bankruptcy remains on your credit report for up to 10 years (or 7 years after discharge). However, you don’t have to wait for it to disappear to begin rebuilding your credit.
If you’re wondering how to rebuild credit after bankruptcy, the process may seem daunting. Instead of feeling overwhelmed, focus on taking small, strategic steps to gradually restore your financial health.
Why Rebuild Your Credit Score?
Many Canadians regularly check their bank balance or credit card debt, but understanding your credit score is just as crucial for financial health.
Your credit score impacts more than just loan approvals—it influences decisions made by lenders, employers, utility providers, and landlords. A strong score improves your chances of securing a loan, credit card, job, or phone plan. In fact, a Loans Canada survey found that 85.3% of Canadians who were denied a loan cited a low credit score as the reason.
If your score is low, you may still qualify for credit or rental applications, but often at higher interest rates, with larger security deposits, or requiring a co-signer. Conversely, a higher credit score signals reliability to lenders, making it easier to access credit and secure lower rates.
Rebuilding credit after bankruptcy in Canada takes time, but consistent financial habits can help you regain stability. Whether you’ve filed for bankruptcy or a Consumer Proposal in Toronto, learning how to rebuild credit after bankruptcy will improve your chances of securing better financial opportunities, such as renting an apartment or obtaining a favourable phone contract. If you’re facing financial challenges, consulting with a licensed insolvency trustee in Toronto can provide tailored advice on your path to rebuilding credit and regaining financial control.
What Has the Biggest Impact on Your Credit Score?
Before focusing on how to rebuild credit after bankruptcy, it’s essential to understand the key factors that influence your score. Knowing what has the biggest positive or negative impact can help you take the right steps toward financial recovery.
Canadian credit bureaus like Equifax and TransUnion use different credit scoring models, but they generally assess similar factors. Some actions have a greater effect on your credit score than others.
For instance, payment history significantly impacts your credit score more than a hard credit inquiry. Similarly, the amount of debt you owe plays a larger role in your credit health than the mix of credit accounts you hold.
If you’ve gone through bankruptcy, working with a Personal Bankruptcy Service in Toronto can provide guidance on rebuilding your financial standing. Below is a quick data visualization to illustrate how different factors affect your credit score.
Source:fairstone
Rebuilding Credit After Bankruptcy
Here are some useful tips to help you begin rebuilding or improving your credit score in Canada after experiencing bankruptcy:
Review your credit score
The first step in rebuilding your credit after bankruptcy is to understand your credit report.
In Canada, the two primary credit bureaus are Equifax and TransUnion, both offering free access to your credit report.
By checking your credit score, you can track how your financial actions impact it, monitor improvements, and understand why your score is rising. You’ll also be able to see when your bankruptcy is removed from your report.
Credit counselling services in Toronto can help you monitor your score and report without affecting your credit.
Consistently monitor your credit score and consider signing up for credit monitoring
When learning how to rebuild credit after bankruptcy, it’s important to remember that checking your credit score once isn’t enough.
To track your progress, sign up for credit reporting through the Canadian credit bureaus, Equifax or TransUnion.
Rebuilding your credit takes time, so don’t get discouraged if improvements seem slow at first. This is a long-term process, and progress may take a while.
It’s helpful to check your credit report every three to four months to see how your score evolves. Checking too often might lead to frustration, as progress may not be visible week to week. If you’re seeking professional assistance, consider using a Corporate Proposal to get the support you need.
Create a budget to manage all your bills
When learning how to rebuild credit after bankruptcy, it’s crucial to establish a budget that aligns with your income.
Adjusting spending habits after bankruptcy can be challenging, but having a budget provides a clear plan without relying on credit. This is especially important since obtaining credit will be difficult until you’re discharged from bankruptcy.
A functional budget allows you to track your monthly income and expenses. When balanced, it ensures you can stay on top of debts and cover all payments.
Ideally, you’ll also have room for savings, which can help you manage unexpected emergencies. Once your budget is set, stick to it and spend within your means to ensure you pay your bills on time.
Pay your bills on time, every time
One of the most crucial steps in rebuilding your credit is ensuring your payments are made on time.
Late or missed payments, especially if they occur frequently or remain unpaid for extended periods, can significantly damage your credit score. In contrast, consistently making timely payments has the most substantial positive effect on boosting your score.
To maintain a strong payment history, create a budget, stick to your payment plan, and consider setting up automated payments to avoid any lapses.
Automate remaining payments to prevent negative credit effects
To avoid further harm to your credit score from late or missed payments, automate any outstanding payments you have.
Bills such as rent, mortgage, and utilities can all be set up to automatically withdraw from your bank account.
It’s helpful to schedule these payments to align with your payday. This ensures you won’t have funds sitting in your account, which could tempt you to spend them.
By consistently making timely payments, your credit report will reflect your improved payment habits, and over time, your credit score will start to rise.
Consider applying for a secured credit card
After a bankruptcy, you might feel hesitant about opening a line of credit. However, having at least one active credit product on your report is beneficial.
By using a credit card responsibly, you show your ability to make timely payments, building trust with lenders.
A secured credit card is an excellent option after bankruptcy. While you may face rejection for a regular credit card due to your bankruptcy, a secured card allows you to make a deposit as collateral, protecting the lender in case of non-payment.
Once you have the secured card, start by making one or two small purchases each month and pay off the balance in full before the due date. This positive payment history will help rebuild your credit score over time.
Limit your credit applications
Once you’ve made progress with your secured credit card and your credit score is improving, you may gain access to unsecured credit products, like an unsecured credit card or an installment loan.
When you’re ready, consider applying for one of these products to show you can manage multiple debts and make timely payments. However, be cautious—avoid applying for credit too often. Excessive credit applications can signal “credit-seeking behaviour,” which is a red flag for credit reporting agencies. Each application is recorded on your credit report, and more than two credit applications within six months can lower your credit score.
Before applying for a new credit product, check for companies that offer quotes or estimates without performing a hard credit inquiry. If you don’t qualify based on the quote, it won’t negatively affect your credit. This is an important strategy for rebuilding your credit after bankruptcy.
Improve your financial literacy
Rebuilding your credit after bankruptcy will require time and the development of new financial habits and boundaries.
One of the most effective steps you can take to repair your credit and regain control over your finances is to strengthen your financial literacy.
Financial literacy enables Canadians to make informed decisions about borrowing, spending, saving, and investing, all of which have a positive impact on their financial well-being. According to the Canadian Financial Capability Survey, individuals with stronger financial literacy are more likely to save money, pay bills on time, reduce debt, and manage their cash flow effectively.
There are plenty of valuable resources available to help Canadians improve their financial literacy, including those tailored to specific demographics, such as financial literacy for millennials and women.
Conclusion
These steps are an excellent starting point for rebuilding your credit after bankruptcy.
If there’s one key takeaway from this article, it’s this: The most important step in improving your credit is consistently making on-time payments.
Repairing your credit post-bankruptcy is a gradual process. Avoid overwhelming yourself by trying to do too much at once or seeking shortcuts. It will take time, and it could take a few years to reach a fair score. But by consistently following the steps outlined above, your credit score will improve.
