How to rebuild your credit score

Rebuild your credit score in just a few simple steps.

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If you find yourself with a bad credit score, rebuilding it is important if you plan to get credit and affordable financing in the future. Fortunately, rebuilding your credit is not particularly difficult, however it does take time, some money and plenty of effort.

Following simple measures like obtaining and reviewing your free credit report, paying your bills on time, reducing your existing debt and not opening multiple new accounts can help your credit score. Some people even turn to short term loans, also known as payday loans, in order to rebuild their credit scores.

In our guide below, learn how taking out a short term loan can help or hinder your ability to better your credit score.

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Can you rebuild your credit with a short term loan?

Getting a loan from a bank or a credit union can be difficult if you have a bad credit score. Short term lenders tend to follow less stringent lending criteria, which is why they provide loans to individuals with poor or bad credit ratings.

When you take out a short term loan to improve your credit score, you’ll have to repay it on time in order to achieve your goal. Upon successful repayment of your loan, you can expect your lender to report your timely repayments to the major credit bureaux: Equifax and TransUnion.

While short term loans give you the ability to repair your credit rating to some extent, they can also greatly damage your score if you don’t make your repayments on time. You will also need to take out repeat loans since it’s going to be a long process to rebuild your score. This also means its going to be an expensive process in the short term.

How can I rebuild my credit score with a short term loan?

You can potentially rebuild your credit history using a short term loan, provided you play your cards right. There are risks involved and you have to be certain you’re going to make your repayments on time. Here’s what you need to know:

  • Credit education. Learn about what factors actually affect your credit score before you embark on a journey to fix your score. You can receive a free copy of your credit score online by finding a reputable website that provides your score.
  • Lenders reporting payments to the credit bureaux. Not all lenders will report timely (or untimely) repayments to the credit bureaux. Consider speaking to your lender about the reason you are taking out the loan so that you can increase your credit score by making timely repayments that the credit bureaux find out about.
  • Borrower reputation through repeat loans. When you take out repeat loans and pay them back on time, your repayment pattern is reflected on your credit report. Taking out repeat loans to rebuild your credit is important because repaying just one loan on time would not have the desired effect. By taking out multiple short term loans and repaying them on time, you can expect positive marks to appear on your credit report, which will have a positive impact on your credit rating in the long run. Keep in mind that this is going to be a costly process in the short term, since you’ll be paying a lot of interest and fees on loans. In the long run, improving your credit score will save you money.

Features of loans that let you rebuild your credit

When looking for a short term loan to rebuild your credit score, make sure you check the following features on the loans:

  • Interest rates. Short term loans are famous for their excruciatingly high interest rates when compared to traditional loans, however provincial regulations tend to restrict the maximum annual percentage rate (APR) payday lenders can charge, but this is not the case for all provinces and territories. Even within provinces that have restrictions, you can expect to find lenders that offer cheaper loans than others in order to stay competitive.
  • Loan amount and term. Some provinces may regulate how much money you can borrow at once and for how long. Depending on your credit score, your income and your ability to repay your loan, your loan amount and term will likely be determined.
  • In store and online. You can apply for a short term loan both online or in person at a store. When you apply online, the lender transfers the money directly into your bank account after you sign and accept the loan contract, which typically takes one to three business days. By applying in person at a physical store, you can get your hands on the loan funds almost immediately after your application’s approval. Generally funds are disbursed in person within the hour.
  • Repayment flexibility. You have to provide your bank account details so the lender can request repayments on the due date directly from your bank account. If you apply in person at a physical store, the lender may require you to provide a post-dated cheque.

Benefits and drawbacks

Here are some of the pros and cons of trying to rebuild your credit score with a short term loan:

  • Apply with bad credit. People who suffer from poor or bad creditworthiness normally find it difficult to get credit, but they can potentially qualify for short term loans. Short term lenders pay less attention to your credit score and more attention to your ability to repay your loan.
  • Repair credit. As long as you can keep repaying short term loans on time, they can help you repair your credit rating. Timely repayments improve your credit score.
  • Get money quickly. A short term loan can give you access to money much faster than a conventional loan. Some short term lenders can give you access to funds on the day you apply if you make your application in person at a physical store. Online lenders will likely be able to transfer the money into your bank account by the following business day.
  • Cost. One major drawback with short term loans is the typically high interest rates they attract. If you don’t pay the loan back on time, you can expect to pay even more fees.
  • Potentially damage your credit score further. Short term loans are costly and if you don’t repay them on time, you could find yourself in more debt. In turn, you could damage your credit score further. Consider your own financial situation and ability to manage repayments before applying for any loans.

Is there anything you should consider before applying?

Getting a short term loan to rebuild your credit can be a good idea, but keep in mind that you might be left worse off than you started if you don’t make your repayments on time.

If you don’t think you can make your repayments on time, consider whether you should take out a short term loan in the first place and think about alternative ways to improve your credit score.

Consider this scenario:

You take out a short term loan to try and repair your credit score, but can’t pay it back. Your lender reports your lack of payments to both credit bureaux, and your credit rating takes a further negative decline.

It’s important that you go through the loan contract carefully, as this document gives you a clear indication of all of the terms and conditions of the loan, as well as all associated fees and charges that you may be expected to pay.

Frequently asked questions about rebuilding your credit score

Are payday loans available in my province or territory?

Payday loans are available in all provinces and territories across Canada. You should be aware that payday loans are regulated by individual provinces, meaning costs and fees can vary. Ensure that any lender you choose abides by the laws of the place you live.

At the time of writing in July 2018, the Yukon, Nunavut and the Northwest Territories do not have legislation regulating payday loans.

Find out how much lenders can charge across Canada

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