Improve your bad credit score

Reader in Ontario asks:

Q: I have a question regarding my husband's credit score and how to improve it. My husband has a credit score of 600. Until we met in 2009, he was frequently late in paying his debts, and some debts went to collections. We have cleared up and paid all outstanding debts (all credit cards he obtained while a university student). He now has one credit card (unsecured, with a low limit of $500 that he uses to automatically pay our cell phone bill in full each month). What do we do about improving his credit score, and how long will this take? We would like to purchase a home in the next 2 years and want to make sure that we can get a mortgage.

Response from Debt Expert, Stephanie Holmes-Winton:

You did exactly what I would have told you to do for the first step. Good work! The two big things to improving a poor credit score are time and good behavior; those together will heal your husband's credit. As for items that went to collections, if they were written off, they will eventually drop off his credit; however, they may still show for some time which could affect a lender's perception of your husband as a borrower, even if the three-digit number looks good.  [More: Answers and advice from debt expert Stephanie Holmes-Winton]

There are a few other things your husband might want to consider…

• Ask for more, then prove he can handle it. Once he's shown good payment behaviour with respect to the credit card for 6 months, he may want to request a limit increase. Keep doing the exact same thing as you are now, but get the limit a little higher so his percentage of used credit before the balance is paid each month still shows as very low. [More: Billionaire to broke: One woman's story]

• Pull his credit score every 6 months. Take credit monitoring into your own hands and have him pull his credit online (this will cost you to get the actual score, but I highly recommend it) every 6 months to see how it is improving.

• Mix it up. Another component to healthy credit - and something people must do when reestablishing their credit after a bankruptcy or consumer proposal - is to have both revolving credit and a loan. The reason is because a credit card is considered revolving credit: you can pay what you want as long as you cover the minimum every month. A loan, on the other hand, is an installment payment: you are required to pay a certain amount every month until the loan is repaid. If your husband has a loan of any kind towards which he makes regular, on-time payments, this will help improve his credit. That said, with poor credit in his history, he may not qualify for a loan right away. Alternatively, if he has a car loan, this may already be taken care of. (Note: Whatever you do, don't take out a loan if you can't manage the payments!) [More: The true costs of no-interest, no-payment plans]

• Save 20% down. I know saving this much sounds like a lot and it might mean you don't get a house for four or five years, instead of two. However, if you have 20% saved as a down payment on your home, you will have proven that you are on top of your finances and have gotten into the habit of saving (which you will have to do when you own a home anyway); this will be a true indicator of your ability to maintain financial stability. In addition, with 20% down, you will not have to deal with CMHC or other mortgage insurance (the kind your lender makes you buy to protect them from your risk of defaulting). Not having to purchase this will not only save you thousands of dollars, it will also mean that your husband's past credit may have a lesser impact on your ability to qualify for your mortgage.

Above all else, your husband should have a very clear idea on why he did what he did with his debt in the past. He may have to speak to that to a creditor someday and a valid reason sometimes holds weight. [Money Makeover: $60K in consumer debt & how to get out of it]

GoldenGirlFinance.ca is a free personal finance and education site for women.

Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial or legal strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances, as well as fully aware of current laws and regulations.

Sign up for your free financial scoop - from Golden Girl Finance - today!