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debt management

A credit rating is a terrible thing to waste.

You'll know this to be true if you've achieved deadbeat status as a borrower and are wondering how long it takes to get back in lenders' good books. In fact, it can take one to two years. So be patient if you're like a reader of this column we'll call Frank, who got swamped by debt but now has regained his footing.

An articling law student, Frank is pulling down more than $80,000 a year now and is debt-free. He's flush enough to have maxed out his 2009 contribution to a tax-free savings account, and have another $5,000 in cash savings. His problem: a scorched-earth credit file that results from a period in which he had a credit card bill and a utilities bill go to a collection agency.

"The idea of being unable to borrow $10K from a bank for a car while making $80K a year is killing me!" he wrote in an e-mail.

Rebuilding your credit rating STEP ONE: View your credit file to ensure all the information about you is correct, and that all your outstanding debts have been paid off. To get your credit file, contact,

TransUnion Canada Equifax Canada STEP TWO: Arrange a loan, likely at a very high interest rate, and then have a perfect payment record over the next 12 months. Follow up: After a year of making your payments in full and on time, try to re-negotiate your loan down to normal rates. STEP THREE: Get a secured credit card, where you keep money on deposit with your card company to offset the maximum you can charge on your card. Follow up: After two years of paying your card off on time, apply for a conventional credit card.

For some suggestions on how Frank can rebuild his credit rating, we turn to Margaret Johnson, president of Vancouver's Solutions Credit Counselling Service Inc.

After cautioning that there are no quick fixes for bad borrowers, Ms. Johnson said Frank's first step should be to get a copy of his credit file from the country's two big credit-reporting firms, Equifax and TransUnion. The point of this exercise is to verify that all the information in the file is correct and to ensure that all outstanding debts are paid in full.

Frank shouldn't be deterred if his credit history nets him rock-bottom R9 ratings on his file for bad debt, Ms. Johnson said. What matters is that the balance owing is zero in all cases. If it's not, the balances must be paid before proceeding.

Now let's say Frank has found a car he wants to buy. His next step, according to Ms. Johnson, should be to explain his situation to his dealer's business manager and see if a loan can be arranged.

The rate on a car loan for someone who fried his credit rating could be as high as 28 per cent, Ms. Johnson said. Think of it as short-term pain for a long-term return to normal borrowing costs.

"For 12 months, he's going to make his payments on time," Ms. Johnson said of Frank's situation. "Then, he's going to go back and say, 'OK, I think I qualify now to have this loan re-financed.' He can go to his own financial institution, or any lender."

Two other tips for car buying from Ms. Johnson: it's easier for people with bad credit to get a loan if they buy new instead of used, and a down-payment of at least a few thousand dollars will help expedite a loan.

Frank said he's living rent-free at home, but let's say he wanted to buy a house. Ms. Johnson said his best move would be to consult a mortgage broker, who could shop his business to a variety of lenders to get the best rate. Stability in terms of address and employment is important to a mortgage lender. If a borrower can deliver on this, then normal mortgage rates may apply.

One thing Frank should not do, whether buying a car or a house, is make multiple applications for a loan. Ms. Johnson said each successive application would add demerit points to his credit file.

Credit cards are next. Ms. Johnson suggested a secured credit Visa card from Home Trust, or a secured MasterCard from Peoples Trust.

Her quick explanation about how these cards work: "You send them $1,000 in a cheque and they put that money in a term deposit or GIC. Then, they turn around and send you a credit card with a limit that matches your deposit with them."

These cards operate like any other credit card, with monthly billing and standard interest rates (some may have service fees as well). Every time Frank makes a purchase and pays on time, he's rebuilding his credit rating. After two years, he should be eligible for a regular card.

Here are two things Frank shouldn't do to rebuild his credit rating: One is to borrow some money and then immediately pay it back. Ms. Johnson said lenders want to see at least 12 months of scrupulous repayment. Another is to get a loan with a co-signer. The reason is that the co-signer is the one who gets the benefit on his or her credit file of making timely payments. That said, it may be possible for Frank to negotiate terms where he gets the merit points for timely repayment.

Ms. Johnson said that as a last resort to get credit, Frank could try "secondary lenders" such as CitiFinancial and Wells Fargo. They're set up to deal with clients who have bad credit histories, but she says they can charge as much as 33 per cent interest.

Whatever debt Frank takes on, Ms. Johnston's final advice is the same: "The most important thing is to never be late with a payment, and never to miss one."