Tempted to try a loan to repair credit? Spoiler alert: save your money

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Q: We had wanted to buy a house for some time, but when we applied for a mortgage, we were told that our credit was not very good. Our lender suggested we work on improving our credit score and reapply in a year or two. Mortgage rates have come down and we’re worried we’ll miss out if we wait too long, so we spoke to a company that says we can get a loan and they’ll help fix our credit. They told us that in about a year we should have a good credit rating. When we asked how exactly the program worked, we started to wonder if it was legit. Is a credit repair loan a good way to improve our credit score? ~Mahesh

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A: A credit score is based on specific factors that are taken entirely from the information in your credit file. It is important to understand that if your credit history details are accurate, they will not be deleted or altered. Over time, they become less relevant and eventually, after six to seven years, most drop your credit report entirely. However, it takes time and effort to rebuild a credit rating; there is no quick and easy solution, especially if your credit report contains negative information and your credit score is low.

Your credit score is an integral part of any credit application. It tells lenders how likely you are to repay the money they lent you, based on your track record of how you handled your current credit obligations in the past.

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If you’re curious about what’s on your credit bureau, here’s how to get a copy of your own credit report (for free).

Credit repair – buyer beware

Given the choice, consumers want fix their credit rating quickly and over the years various credit repair programs have sprung up. The best I can say is credit repair; buyer beware – no matter how much you pay someone, they can’t change what’s on your credit report. And if they sell you a service that takes time, save your money, because time is on your side whether you buy their service or not.

Are you trying to pay off your debts without money?

Here are some things to consider when trying to decide if a credit repair program is worth your time and money:

Credit Repair Loans

Borrowing money to repair your credit rating is nothing new; however, some credit repair loans tend to have higher interest rates and often require collateral. Some companies will lend you money, say $1,000, and then hold that money as collateral for the loan. You make your payments, plus interest, and then they release the funds to you once you’ve made all your payments. The idea is that by making payments on time and as agreed, you prove that you can handle a credit obligation.

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Three potential pitfalls with credit repair loans

The first potential catch is that interest rates can be quite high. If the company lending the money keeps the loan as collateral, the interest you pay is essentially a fee for the service (in addition to any traditional fees they might have charged up front). Whereas you can repair your own credit without paying a fee, you could hand over money to a company that would be put to better use if applied directly to your debts.

The second problem is that if you make all your credit repair loan payments as agreed, but fail on other credit obligations, your credit score will not improve dramatically, if at all. It could even get worse as other debts fall behind. Repairing a credit score is a bit of an all-or-nothing affair, especially if you want to see your score go up as quickly as possible.

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5 steps to rebuild your credit

A third potential pitfall is that for your credit score to improve, a lender must report your payments, preferably to both credit bureaus, every month. Not all do because it costs businesses money to use the services of credit bureaus. Lenders must pay membership to TransUnion and/or Equifax in order to exchange information about a borrower. Some lenders are members of both credit bureaus, some are members of only one, and some are members of neither.

How credit scores are calculated in Canada

It is better for both credit reporting companies to be notified than one, because they everyone calculates credit scores slightly differentlyand you don’t know which company a future lender will get your credit score from.

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Less expensive ways to fix your credit rating

Secured credit cards are cheaper than credit repair loans. A secured card means that you save an amount equivalent to your credit limit and put it on deposit with the credit card company. Then you make all your payments as agreed when you use the card. After a certain period of time, your security deposit is returned to you. If you pay each bill in full by the due date, except for the nominal annual fee with some cards, there is no additional cost to using a secured credit card.

To find secure credit cards in Canada, try using the credit card comparison tool from the Financial Consumer Agency of Canada. After completing the first three filters, open the optional filters menu and option 11 allows you to filter secure cards.

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Cellular plans under contract are a credit repair option you may already have. By the nature of how they work, mobile phone contracts are a relatively quick way to (re)build a credit score (but an even quicker way to ruin one). They are considered an “open” form of credit because they have no spending limit (like a credit card); as such, the entire bill is due each month.

When you make all the agreed payments each month, it starts helping your credit score move in the right direction.

Live within your means is by far the best way to repair your credit score. By creating a realistic budget that keeps you in control of paying bills and repaying debts on time, as well as catching up on collections and setting aside savings for emergencies, these are the steps you need to take to ensure your credit rating recovers.

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How to Fix Bad Credit in Canada

The Basics of Fixing Your Credit Score

If after trying to get you back on track on your own, you find you’re not making as much progress as you’d like, we’d be happy to help you with a second look at your budget and overall financial situation. It’s rare for a budget to work perfectly from the start; most need some tweaking and our credit counselors can provide unbiased suggestions to help you reach your goals faster. It took time for your credit rating to drop; unfortunately it will take a little longer to fix it. However, save your money and avoid paying for credit repair you can do for free.

Related Reading:

3 Ways People Destroy Their Credit Score

Is a free credit score really free?

Credit Score and Report Myths – Debunked and Explained

Scott Hannah is president of the Credit Counseling Society, a non-profit organization. For more information on managing your money or debt, contact Scott by E-mailCheck www.nomoredebts.org or call 1-888-527-8999.

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