Monday, 9 July 2012

How to Rebuild Your Credit Blog Series – Part 2 Late Payments and Defaults to Creditors


This is the second part in a four part blog series about how to rebuild your credit. If you have made late payments on your credit card or have defaulted on debts to creditors this will have a severe impact on your credit that will not resolve itself until you deal with the debt you owe. Many people think that late payments and defaults on debt obligations simply disappear after 7 years, but this is not the case. 

If you want to know how to rebuild your credit you will need to understand “tradelines” and how long items remain on your credit report. There are two different areas where credit is rated on your credit report. Your credit score, also known as your beacon score or fico score, is a number between 300 and 900 which scores your entire credit situation. 300 is the worst credit score and 900 is the best. Most banks like to see that individuals have a credit score of 680 or higher.

The second area on your credit where you are rated is on “tradelines”. Each loan or credit card provider will report on their own tradeline how you have paid them. The tradeline will show the name of the creditor, the starting balance of the credit product, your repayment terms, your current balance, the number of times you have been 30, 60 or 90 days in arrears and an overall rating. If it is a credit card, there will be an R or an I with a number beside it. R is used for credit card and line of credit products and stands for revolving because credit cards allow you to constantly borrow against them. I is used for loans and stands for instalment because loans are repaid in equal monthly instalments.

You may have heard people say that they have an R1 or an R9 on their credit report. The number beside the letter represents the current standing of the account. 1 means up to date, 2 means 30-60 days in arrears, 3 means 60-90 days in arrears, 4 means 90-120 days in arrears, 5 means 120 days to 150 days in arrears, 7 means you are in credit counselling, 8 means that you have had security repossessed and 9 means that the account is a bad debt (6 months or more behind). When you have an account showing a number from 2-5 beside the letter, if you pay the account up to date the rating on that tradeline will be restored to a 1, however the record of the late payment will still show. If your rating falls to a 9 it will remain a 9 until 6 years from the date that the creditor reports that the debt was settled or paid in full.

If you want to know how to rebuild your credit, a fast trick will be identifying how bad your credit actually is. If you have a lot of debt, habitual late payments, or 9’s on credit items, then looking for ways to consolidate or settle your debts is your fastest road back to having good credit.

Simply leaving defaulted-on items on your credit will not mean that they will magically go away by themselves. They will remain there for 6 years from the last date that the creditor reported to the credit reporting agency that you owed the money.

There are fast avenues that you can take to rebuild your credit depending on the severity of the damage to your credit and the amount of debt you owe. For example, if you leverage a consumer proposal to settle your debt, a consumer proposal is removed from your credit report 3 years from the date it is paid in full, which can in many cases result in the removal of a 9 rating faster than if you paid the debt in full. In addition, when 9 ratings are present (and where funds are available) you can often make a direct settlement with your creditor for much less than you owe which makes good sense considering that once a 9 rating is present whether you settle the debt or pay it in full the 9 rating will remain on your credit for the same amount of time.

Figuring out how to rebuild you credit will begin with requesting your credit report so that you can know what is on it. From there you can work with a financial professional who can come up with the fastest solution to deal with your debt and rebuild your credit.

For more information about how to rebuild your credit or if you are in debt and need help, please contact DebtCare Canada at 416-907-2582 or visit www.debtcare.ca.

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