Consumer Proposals & Your Credit  

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Consumer proposals are the #1 insolvency solution in Canada.

Consumer proposals can significantly reduce your debt and pay back the remainder over a period of up to five years. It is an opportunity for you to get out of debt, and back on track financially. Those who have experienced insolvency know how difficult it can be. Those who have completed a consumer proposal know the feeling of relief when your debts are officially released. When people come to see us, their primary concern is getting rid of the unmanageable debt load. A common secondary concern is rebuilding good credit once the debts are released. In this article we will look at what happens to your credit when you have unpaid debts, what happens during a consumer proposal, and how you can build good credit as you get out of debt.

How Does Unpaid Debt Affect My Credit Rating?

Everyone knows that they don’t want to have “bad credit” but not everyone knows what that actually means. Often times, when people refer to their “credit” they are referring to their credit history as recorded by the major credit bureaus. Creditors can report unpaid debts to any major credit reporting bureaus. Your credit report shows if you have unpaid debts and includes a measurement that signals to other creditors the risk-factor of extending credit products or payment terms. Your credit rating helps signal if you pay your debts and how long it generally takes you.

Understanding Your Credit Rating

The credit bureau categorizes credit scores on a scale as follows:

  • R1 – Your credit payments are made on time.
  • R2 – Your payments are 30 days late.
  • R3 – Your payments are 60 days late.
  • R4 – Your payments are 90 days late.
  • R5 – Your payments are 120 days late.
  • R6 – This rating is not typically used.
  • R7 – This is reflective of a consumer proposal, debt consolidation, or debt management plan through a non-profit credit counsellor. It indicates that you have gone through a process to negotiate what is owed to creditors in order to settle your debts.
  • R8 – Shows that a secured creditor has taken steps to repossess assets used as collateral. This rating rarely appears on a credit report because legal or collection action is usually taken after repossession which results in an R9 rating.
  • R9 – Is the result of either declaring bankruptcy, or bad debt placed for collection or deemed uncollectible.

When you come to file a consumer proposal there are generally some unpaid debts that are affecting your credit rating. The first step to rebuild a strong credit history is to get out of debt.

What is the impact of a low credit score?

There can be unexpected challenges when relying on your credit score to obtain financing and credit solutions. Lenders may not be willing to provide certain services and credit products. Financial institutions and other lenders will look at your credit history and factor it into their equations for acceptable risk. With a low credit score, you may not have access to traditional offerings and may have to explore some alternative options. This is often the case with personal credit cards, vehicle financing, mortgages, and other services with specific payment terms.

Who else will look at my credit score?

Lenders are not the only people who use your credit score to help make decisions. It helps to know who else may be checking your credit history and how it could impact their decisions:

  • Landlords – They may consider credit history as a factor when they evaluate potential tenants and how much of a deposit is required.
  • Utility Companies – Based on your credit history they may or may not require a deposit. The amount of the deposit can also be affected.
  • Cellular Networks – Cell phone companies and mobile networks may check your credit history to see which of their offerings you are eligible for.
  • Insurance Companies – Some insurance companies may use your credit history as a factor when determining premium amounts.
  • Employers – They may factor in your credit history as they consider you for specific jobs or roles within the company.

Outside of financial organizations, your credit can only be checked with your permission. That means that you must first provide some form of consent. Your neighbours, friends and family cannot access your credit history unless they have a valid reason and you give them permission to do so. Any person or business who receives a copy of your report will be listed on the report, so you will always know who has made an enquiry.

What are my options then?

If you have a low credit score, believe it or not, there are still options for you. In fact, there are solutions designed to help people in your exact situation. We often suggest that you obtain a secured credit card. A secured card works like any other credit card but requires a deposit in exchange for a certain credit limit. With a secured credit card, you can practice healthy spending habits and steadily build up a stronger credit score. Another option could be to have a third-party personally guarantee the credit card or financing. This gives lenders the additional security they need and allows you to have access to a broader range of offerings.

Are consumer proposals a good idea?

A consumer proposal is typically the preferred alternative to bankruptcy, both in terms of financial affordability and credit ratings. Provided your total debts (excluding a mortgage on your primary residence) are less than $250,000, and you have a steady income that allows you to make a regular payment, a proposal may be your best debt solution. At Spergel, a Listened Insolvency Trustee (LIT) will help you determine if a consumer proposal is right for you.

Rebuilding Credit After Consumer Proposals

A consumer proposal will get you out of debt, but it won’t fix your credit score. That part is up to you. A consumer proposal allows you to get out of debt, giving you the opportunity to start fresh and rebuild good credit. Having a good credit score will depend on what you do during and after your proposal is complete. How long does it take to build good credit after a consumer proposal? While you may be thrilled to be debt-free, the only way to effectively rebuild your credit score is to start borrowing money again. This may not be ideal for those who have struggled in the past to manage their finances and repay debts. Nevertheless, having good credit is an important part of our financial structure. Before signing up for a new credit card or loan, it is best to have a clear plan for success for rebuilding your credit. The following tips are very useful tools in building a positive credit history:

Set Up A Budget

When you file for a consumer proposal, your Licensed Insolvency Trustee (LIT) will draft a statement of your income expenses. This template can be a helpful guideline for you to follow when budgeting. It is absolutely essential that you are diligent about tracking your monthly finances. Your budget will help you set aside money for fixed and variable costs each month. It is also important to set money aside for rainy days and unforeseen circumstances. Understand that life does not always go according to plan. It is wise to have at least $1,000 set aside for emergencies. With money set aside and a working budget in place, you can safely begin to rebuild your credit.

Now that your budget is in place and you feel confident that you are able to maintain it, you can begin rebuilding towards your goal of an R1 credit rating once again. It is possible to rebuild your credit during a consumer proposal, but your rating will not change until its completion.

There are two primary forms of credit:

Revolving Credit

Available for use at any given time and is known as ‘open credit.’ Common types of revolving credit include credit cards or lines of credit. Credit unions will report your monthly payment history on a scale of 0-9, with 0 reflecting no payment. The numbers increase with the number of days before payment is received (i.e. 30-120 days). It is possible to obtain a secured credit card through some institutions while you are in the process of paying a consumer proposal. When you apply for a secured card, you will be required to deposit a small amount of money. It is best to begin with a smaller limit of $500 and calculate your monthly payments into your budget. It is ideal to pay what is owed on the card in full within 21 days to avoid high interest rates.

By using your card regularly and paying it off monthly, you will begin to see significant improvements to your credit score.

Installment Credit

This type of credit is essentially based on an agreement with a lender for payment over a term. Most often we see this type of credit used for a mortgage or car loan, but it applies to any type of loan arrangement. Installment credit often costs more because the lender assesses your credit score. A lender may agree to give you a loan for your car, but the car becomes collateral. A set payment will be reported to the credit bureau on a monthly basis. Provided you make your payments on time, you will see your credit score improve. It is also advantageous to apply for RRSP or GIC loans to boost credit – because they are getting a good interest rate, banks are generally happy to lend money for these loans.

With some lenders, you can qualify for a mortgage as early as two years after your proposal is paid off, provided you have established good scores through two or more lines of credit.

Pro Tips

  • After all your hard work and diligence, it is essential that you maintain all your payments. Cell phone bills, utilities, and any other debts you may have started must all be paid in a timely manner.
  • We also recommend having savings in the bank. A large saving account can result in a better interest rate, as your banker will factor in your general savings and assets when deciding your interest rate.

Does it cost to check my credit score?

According to the laws in Canada, a credit bureau must provide a free copy of any documentation related to your credit report. But, this is often only available by mail. You must write a letter and mail it out and then wait several more business days to receive the report. If you need the report quickly, you can go online and pay for immediate access to a quick version. This report will typically have more information along with your score, so it can be highly beneficial to get an electronic copy after you have completed your consumer proposal. If you do see any errors in your score, you can write the companies a direct letter requesting that they correct the mistake. You can check your report yearly to in order to stay up to date on your credit information and ensure there are no errors.

Get out of debt and back on track today!

At Spergel, your first appointment is free, and our caring and knowledgeable team of licensed professionals is well-equipped to answer all your questions. We have 29 convenient locations across Ontario, Saskatchewan and British Columbia and are proud to have helped thousands of people just like you achieve their goal of debt freedom. Call 1-877-501-4321 to get startedyou owe it to yourself!

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