My credit is a mess. I was trying to pay off my student loans when I was sidelined by an unexpected illness and had to use my credit cards and line of credit to see me through. I eventually had to declare bankruptcy. What do I do now?

The first thing you should do is get a copy of your credit report for free by writing to either of Canada’s two major credit reporting bureaus:

• Equifax Canada Inc. Equifax Canada Inc. Consumer Relations Department, PO Box 190 Jean Talon Station, Montréal Quebec  H1S 2Z2, Telephone: 514-493-2314, Toll-free: 1-800-465-7166, Fax: 514-355-8502, consumer.relations@equifax.com, www.equifax.ca
  
• Trans Union TransUnion Canada – Consumer Relations, 709 Main Street West, PO Box 338, LCD 1, Hamilton Ontario  L8L 7W2, Telephone: 905-525-0262, Toll-free: 1-800-663-9980, www.tuc.ca

If you ask to see your report by mail there is no charge.  But you may be charged to view your info online.

TIP: Since it’s important to check your credit report at least once a year, but preferably twice, you can write to one and then the other credit bureau on a six-month basis and get two checks a year for free.

Next, you’ve got to get busy rebuilding your credit history. Start small and build a history that shows you are responsible by paying your bills in full and on time.

Since “assets” are a good indicator you’re your credit personality – if you have some you’re a better risk – set up a savings account and start stashing some money away. Since you need to be doing some long-term planning, both a retirement account and an emergency fund are a good idea. Remember, you can start small. Just START.

Setting up services in your name will also help re-establish your credit ID. Get telephone, cable and utility services in your name. Because you have a crappy credit history, you may need to provide a security deposit. Once you’ve proven your payment track record, you can ask for the deposit back and throw it in your emergency fund.

Now it’s time to apply for a secured credit card. Ask your bank how it works. Usually you need to leave on deposit one-and-a-half to two  times the credit limit. So to get a credit card with a $500 limit, you will need to put $1,000 on deposit with the credit card company or bank. You can get your deposit back after between six months and a year. Make sure you know how long this is (it varies) so you can plan how you’ll reallocate that money (to retirement savings or your emergency fund).

Gas or department store credit cards are often easier to get and can be good ways to re-establish credit. You MUST pay your bills in full and on time because the interest rates on these cards are often astronomical. As long as you don’t miss a repayment – which you never will again, right? – it makes no difference what the interest rate is. Use these cards wisely and they can be a great toe-hold back into credit.

Once you’re on you way, it’s time to get your first new installment loan.  A retirement savings loan is the perfect way to do this since this loan, while not officially collateralized, might as well be. What it does mean is the interest rate won’t be horrendous. Only borrow as much as you can afford to repay in six months. Don’t let them talk you into more. Then, once the six months are up, use the amount you were using to repay the loan as your month retirement savings contribution. Now you’ve gone from catching up to being proactive about saving and you’ve helped your credit history too.

I’m not sure I should have to remind anyone at this point, but you MUST BE LIVING ON A BALANCED BUDGET!  All the work in repairing your credit history will be for naught if you start spending more money than you make. And you MUST build an emergency fund, so that what happened the last time – something like an illness pushing you to credit – doesn’t happen again.

Once upon a time the only kind of credit you could get was called “installment” credit. You had to make monthly repayments that were designed to have that debt paid off within a certain period of time. So you might borrow $12,000 to buy a new car, with the plan to have that paid off in two years, so your payments would be about $560 a month. You knew exactly when the debt would be gone, how much interest you’d pay, and how much you were making a commitment to repay every month. And you had to have a good reason for borrowing. Lenders were loath to just hand out money willy-nilly. You had to justify your borrowing, which made you think. Those types of loans are still around; your mortgage is one.

Much more popular today is “revolving” credit. Lines of credit and credit cards are the primary examples. You can borrow money, pay it back and borrow it again at your whim. You don’t have to explain anything to anybody. You can use it to buy furniture, a car, food. Unfortunately, you don’t have to think too hard or too long before you go and rack up some debt.

When the personal line of credit first came out – I was there, that’s how old I am – they were offered to those people who were most “worthy.” These were borrowers who had proved they knew how to manage their money. They had a high net worth. They borrowed routinely to renovate their houses, finance business ventures, or invest. They were usually building their assets.

When credit became a commodity, FIs started to “sell” credit. Like a toaster or a handy-dandy wrench, credit became something everyone should have and use. And revolving credit became the name of the game. It had cache. It had style. It had unlimited possibilities in terms of generating interest revenues!

And we bought. Like pigs to slaughter, we signed up for as many different sources of revolving credit as we could. We bragged about how many credit cards we had in our wallets. We talked about our latest venture and how we had financed it with our lines of credit. We fell hook, line and sinker for the idea that an emergency fund was a done deal if we had a line of credit. Hmmm.

That’s not to say that revolving credit is in and of itself a bad thing. Nope. I love revolving credit because it puts me in the driver’s seat when it comes to getting rid of my debt. But I will tell you that it’s not suited to everyone. It takes discipline and a firm commitment to money management to bridle this bronco. Without a firm hand, you can find yourself on the ground being stomped to death by wickedly high interest and a never-ending repayment schedule.

On the upside, revolving credit is one of the best ways to build a credit history and shine your credit score. Used and repaid on a regular basis, it creates a record of positive credit management behaviour, which will stand you in good stead when you need to borrow lots of money for something important, like buying a house.  That’s because trust is built through experience, and when a lender can trust you based on your credit history, you’re more likely to be approved and not pay through the nose for the privilege.

The best way to use revolving credit to YOUR advantage is to use a credit card to pay for the necessities of your life, things like groceries and gas. When you charge something, transfer the same amount of money you spent into a savings account set up explicitly for paying off the card. Come the due-date, you can use the money you transferred into your Credit Repayment Account to pay off the card in full.  There ya go: you’ve used and paid off your credit, added to your credit history, and stayed in the black. What a concept!

I received an email the other day from a young woman named Annie who was inquiring about companies that say they’ll improve a consumer’s credit rating. Was it true? Was it worth the money?

Annie had been in to apply for a car loan at her bank and the lender had declined her loan. She was told only that she should check her credit bureau report. Something there was gumming up the works

If you don’t already know, when you sign a loan application form, you give your consent to the lender, be it a bank, credit card company and retail store, to access your credit bureau information to decide whether or not you’re a good credit risk.

Your credit file contains a listing of debit and credit payments and it includes public record information about how promptly you’ve paid bills, along with all the yucky stuff like collections, judgements and bankruptcies.

You don’t have to be a late payer to be declined. A lender may refuse a loan application simply because the credit bureau’s records indicate that you have other loans outstanding. Yes, everything you owe shows up — including all those credit cards you have even if there are no balances outstanding. When credit is refused, you’re usually advised to have a look at your credit bureau report to see what’s amiss.

In Annie’s case, someone else’s information was being recorded on her credit report. The other woman had a similar name, and it was an honest mistake. All Annie has to do provide the credit bureau with proof of the error and her credit report will be cleaned up.

So back to Annie’s original questions: Can a credit-repair company clean up a mess and is it worth the money? When a company offers to fix your sloppy credit history, it’s often just a ploy to get your money. And wouldn’t you rather spend that fee — anywhere from $250, to $1,000 — paying down your debt, especially when it’s virtually impossible to cover up your past mistakes. While ads for credit repair companies may seem like the cure for a credit life lived less than perfectly, in reality, no credit repairer has the power to change or erase accurate information in a consumer’s file.

If the reason you’re in trouble with a potential lender is because of wrong information on your credit file, you could pay someone to take care of the problem for you, but it’s often just as easy to take care of that problem yourself.

If you’ve damaged your credit rating by missing payments, carrying high balances or over extending yourself financially, you can improve your credit rating. Start by locking away your credit cards. Don’t cancel them because if your credit rating is low, you could have trouble getting new ones. But don’t use them until you are debt free. You must pay at least the MINIMUM to stay on the positive side with your credit history. But paying the MINIMUM isn’t going to get you out of debt. So figure out what it’ll take to get out of debt and then DO IT!

Creditors like to see a solid credit payment history. If you have a credit card, use it every month. Make small purchases and pay them off IN FULL. If you can’t get a credit card — maybe you’ve just come through a bankruptcy —  use a secured card. You deposit money with the lender and they give you a credit card with a limit of between 50% and 100% of the amount you deposited.

Can’t cope with all the bills you’ve got? You have two choices. Declare bankruptcy or find a way to put more money toward you bills: cut expenses or make more money.

You should check your credit files at least once a year to ensure the information is correct. Send a written request to one of the two major credit bureaus in Canada: Equifax Canada Inc. or Trans Union of Canada Inc. More information can be found online at www.equifax.ca and www.tuc.ca. There is no charge for this service. If you’re into instant gratification, you’ll have to pay a fee.

If you question an item on the file, the credit bureau will investigate on your behalf to verify the status of the entry. If an error is found, the credit bureau will fix it and send copies of the updated file to credit grantors upon request.

The longer you exhibit good credit behavior by paying your bills on time and managing your credit wisely, the more your credit rating will improve, until you once again achieve a favorable credit rating. And if you’ve got a good rating that’s been marred by inaccurate reporting, it’s your job to fix it. It’s your credit, after all.