For many Canadians with debt problems, a consumer proposal represents a viable financial solution. In our experience, many people do not quite understand the impacts of a consumer proposal in Ontario, so this week we aim to clear up the misconception that a consumer proposal will ruin your credit.
To better understand why this perception exists, it is important to first understand the ratings on your credit report. Any lender you apply to for credit will look at your credit report.
Your credit report lists any and all credit activity. These activities are broken down into line items. Each creditor line item will have a letter assigned to it – either “I” or “R”. “I” stands for “installment credit” which represents loans and “R” stands for “revolving credit” such as credit cards. These letters are then followed by a number – 1 through 9. 1 means that you are up to date, a 2-5 signifies the number of months you are behind. When you are 2-5 months behind, paying the account up to date will return your rating to a 1. However, these late payments will remain on the report as history for a number of years.
If your credit is in worse shape, you may see a 7, 8 or 9. A 7 means credit counselling, an 8 signifies repossession and a 9 is a bad debt write off. A 7 remains on your credit for 3 years from when the debt is paid in full, whereas an 8 or 9 remains on your credit for 6 years from the date of last activity – even if you settle or repay the debt.
For example, if a creditor has sent your account to collections, in addition to the bad rating for that particular credit item, you may also have a collection item registered from the third party collection agency. These remain on your credit for 6 years from when they are settled or paid in full. Also, if your credit cards are at their limit, this will drastically reduce your credit score.
If you are habitually late at making payments, have defaulted on debts and/or have credit cards at or above their limits, your credit score has negatively been affected.
A consumer proposal in Ontario is registered on your credit report and removed 3 years from the date that it is paid in full. A consumer proposal is open and can be paid in full at any time. The maximum term for a consumer proposal is 5 years. However, since it can be paid at any time, the 3 year period on your credit report can begin much earlier.
Rebuilding your credit is critical after filing a consumer proposal and we highly recommend looking at credit products such as a secured credit card or secured GIC after your proposal to begin the rebuilding process. After a proposal, how you manage your new credit is also key – it is crucial that you do not make late payments and also manage credit card balances conservatively. Do not max them out, and as a rule never keep more than 50% of your limit as a balance.
If you are drowning in debt and are struggling to make even minimum payments, it might be time to consider what options are available to remedy the situation. A consumer proposal in Ontario may be one such option. For more information, please visit Spergel today at www.spergel.ca or call 310-4321.