The risks of credit repair companies in Canada

Some companies claim they can repair your credit and solve your debt problems quickly. However, you can only rebuild credit and there’s no quick fix to do so. We’ll walk you through why you should be skeptical of companies offering credit repair services and explore other ways to rebuild and maintain strong credit. 

The importance of strong credit in Canada

It’s important to have a good credit score so you can get a loan, be approved for a credit card, buy a home and a car. And you want to get the best interest rates when doing so. A credit score may also determine whether a landlord approves your rental application, and employers might even consider credit histories in their hiring process. Having a strong credit score shows you are good at managing debt and credit. In contrast, bad credit suggests you are a risky bet to lenders because you may be having problems with money. 

Why someone might reach out to a credit repair service

The average Canadian owes more than $21,000 in consumer debt. When you have a lot of debt and other monthly bills to take care of, it can become difficult to manage and make all of your payments on time, especially amid high inflation and rising costs of living. However, if you don’t manage your payments on time, your credit score will take a hit. Feeling desperate in a financial situation can cause anyone to make a bad decision. But many people run into further financial problems by trying to repair their credit with a quick fix.

How credit repair companies work

Credit repair companies say they will repair your credit by removing negative information from your credit report, thus boosting your credit score—for a costly, upfront fee. They may also offer to negotiate with credit reporting agencies to improve your credit score or encourage you to take out a high-interest loan to pay off your debts. Be aware that these credit repair companies make money from fees, set-up costs and interest, so you may be left with even more debt without any changes to your credit score.

These companies often take advantage of the fact that many Canadians don’t know you can’t remove accurate information from your credit report—even if it’s bad. You should be skeptical if a company says they can remove accurate, negative information from your history.

Pay attention to the warning signs

Many Canadians run into further financial problems as they attempt to “repair” their credit because they fall victim to credit repair scams. Credit repair services are different from not-for-profit credit counselling agencies. The latter are typically a free service offering non-profit financial education and advice. But back to the scams, here are the warning signs that a company offering credit repair services is likely a scam: 

• They request an “upfront” payment (this is illegal under Canadian consumer protection laws)
• They offer instant approval for loans or other credit products without fully understanding your financial situation
• They call themselves a “credit repair company” 
• They request payment by gift cards
• They use high-pressure sales tactics
• They say they “erase” your negative credit information
• They don’t provide a transparent contract (or any contract at all)
• They warn you against contacting a credit bureau

How to rebuild your credit in Canada

Accurate negative information on your credit report cannot magically go away; it’s there until it falls off your credit report, which takes about six years. If your credit report isn’t great, the only way you can go about “fixing” it is by rebuilding it with a positive credit history. You have to show your creditors that your financial habits have improved, which takes time. Here’s what you can do to get the ball rolling: 

1. Review your credit

It is important to review your credit report regularly by getting a free copy of your credit history from both Equifax Canada and TransUnion. Look over the report to see what’s documented and if the information is correct. For no charge, you can remove incorrect information by filing a dispute with the credit reporting company.

2. Work to pay off your accounts

Instead of paying for a credit repair company to fix your credit, use those funds instead to work towards paying down your debt. Put the most money toward paying down unsecured debts first, such as payday loans, credit cards and/or personal loans, as these tend to have the highest interest rates. You’ll have to keep making payments on all other secured debts, but these tend to be considered “good debts” because they yield future value. 

3. Make minimum payments by the due dates

Late payments have a negative impact on your credit score, so be sure to make at least the minimum payments each month for each debt you currently have. A history of consistently paying down debts can be a good starting point for rebuilding your credit.

4. Contact a non-profit credit counselling agency

If you aren’t able to contact creditors on your own or get current on your payments, you can contact a not-for-profit accredited credit counselling agency, like Credit Canada. Credit Canada offers free credit counselling services from certified credit counsellors to support you through various debt-relief channels.

5. Create and follow a budget

It is crucial to stay on track with your finances to avoid missed payments, as those can lead to a decreased credit score. There are many online budgeting tools and apps that can help you establish a realistic spending plan, including Credit Canada’s free Budget Planner + Expense Tracker. Here’s a step-by-step guide to help you create a budget. Remember, the key to a successful budget is sticking to it.

6. Get a secured credit card

A secured credit card can help you build your credit score without paying interest or fees to a credit repair company. How it works is you put down an initial deposit that determines the amount of credit you’ll have. The bank or lender then keeps this money in case you fail to make your payment. But keep in mind credit shouldn’t be used to replace money you don’t have, so be responsible with it.

Maintaining good credit history

When working to rebuild your credit, remember to be patient. You have to maintain good financial habits over time for your credit history to show improvements. There aren’t any magical solutions for getting rid of past bad debt, regardless of what credit repair companies advertise. Simply correcting any information you can, paying down your debt, and making payments on time will cause your credit score to rise.

Get debt relief with Credit Canada

If you need guidance and support with debt repayment or any other credit inquiries, contact one of Credit Canada’s certified non-profit credit counsellors today for free, confidential advice.

Read more on credit building:

• How to build credit history in Canada
• How to build a credit history while renting in Canada
• Credit scores and credit reports: What newcomers to Canada need to know
• Want to raise your credit score in Canada? Avoid these 5 credit card mistakes