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Ask Bruce: How long will my bad behaviour affect my credit score?

Q: I finally found out what my credit score is. I knew it was free online, but I procrastinated because I was worried it would be bad. And it was bad. How do I go about fixing it and how long will it take?

You have probably seen this phrase on a mug, or a tea towel: “Time heals all wounds.” I hate when people say it, and I don’t think I’ve ever found it reassuring, but it is often true. It’s true for high school romance certainly, and it’s true of credit scores. However, the amount of time depends on just how bad the past was, and what you’re doing to get over it now.

Credit Missteps Have an Expiry Date

The government has regulations in place to protect consumers so that bad things don’t follow you around for the rest of your life. (Those protections don’t exist for your social media posts. Sorry.) Generally, there is an expiry date of 6 years on a bill that was sent to collections or included in a bankruptcy filing.

The timeline is much shorter for missed or late credit card payments. They become less of a drag on your score the further they are in the past, provided you’re now paying on time. And credit “utilization” – the amount of outstanding credit you’re using on any given day – can be fixed very quickly by reducing your total outstanding debt.

The message is that the sooner you start doing the right things, the sooner your score improves.

Request Your Credit Report

It is great that you have your credit score. You should also get a copy of your full credit report, also free, so that you have some what is affecting your score. The report will have the basic details on what’s been reported to the credit bureaus, and you can use that to see what your biggest issues are. You should also look for any errors, by the lender or by you. Maybe there is a debt you forgot about that is dragging down your score.

Pay Your Credit Cards on Time, Every Time.

The factor that has the biggest impact on your credit score is payment history – that is, whether or not you have paid your bills on time. It is the most important factor because the credit bureaus know that past behaviour is a pretty good predictor of future behavior.

The first thing to do to improve payment history is to set up a pre-authorized transfer to pay the minimum balance on all of your debts – that way you don’t have to worry about forgetting. If you always pay the minimum, you are keeping up your end of the bargain with the lender. Sure, it is better if it is more than the minimum, but that’s the starting point.

Pay Your Smartphone Bill in Full, Every Time

You can get away with paying the minimum on a credit card bill, but not on a smartphone bill. You need to pay that in full, before the deadline, every single time, otherwise the credit bureaus will sound an alarm.

Again, set up a pre-authorized payment. But this time pay your smartphone bill off in full, either from your bank account or your credit card.

Keep Your “Utilization” Under 30%

Utilization refers to how much of your credit limit you are using on what are called “revolving accounts”, such as a credit card or line of credit. Say you have a limit of $10,000 across all your cards -- you don’t want to exceed $3,000 outstanding, not even for a day. The reason is that the bureaus can take a snapshot on any day, and if the number is over the 30% it can hurt your score.

The 30% number is just a rule of thumb and isn’t true in all cases. What happens is that the factors get weighed differently in the credit score calculation, based on your past behaviour. But because you’re trying to rebuild your credit, it is best to play it safe and keep your utilization low.

Don’t Apply For New Credit

The credit bureaus get nervous when they see a borrower applying for new credit, because they worry that you’re having trouble meeting your payments. These applications are called “hard inquiries” and they can hit your score. You don’t have worry about checking your own score – that won’t have a negative impact – but resist all temptations for a free “bonus gift”, a 40% discount on purchase with the application for a card. It will only hurt you.

Keep Your Oldest Card

Payment history refers to whether or not you have paid your bills on time. Credit history refers to how long you’ve had a particular card, and that matters. The older the better. So while you should finally let go of that high school boyfriend or girlfriend, keep your oldest credit card around. Use it every once in a while, and make sure that you pay it off.

Consider a Secured Credit Card

In order to rebuild your credit score, you need actually need to keep using credit. So, while moving entirely to cash might help keep spending in check, it doesn’t help your credit score.

If you have a hard time qualifying for a traditional credit card, you might want to consider a secured card. Basically, you prepay up to the limit, say $500, so the lender isn’t taking on any risk, and then you use the card as you normally would.

You have dug your head out of the sand. Congratulations. Here’s to a new year and a new you.