Filing for a consumer proposal is an effective way for many Canadians to get out of debt but it can affect your credit score. Your credit rating will be negatively impacted or bruised by filing of the consumer proposal but just like a real bruise, it can heal with the passing of time and directed efforts to improve your credit score.
If you’re wondering how to rebuild your credit in Canada, Frederick & Company is here to walk you through the process.
Let’s take a look at how a consumer proposal can affect your credit as well as the steps you can take to rebuild your credit:
How Does a Consumer Proposal Affect Your Credit?
After filing a consumer proposal, your credit rating will be negatively impacted right away. It affects your credit as if you were to stop making payments on a debt.
However, the quicker you finish your consumer proposal, the more quickly it ceases to impact your credit rating.
This allows you to improve your credit score without being held back by reported debts that you can’t reasonably pay.
Filing a consumer report will put you in an R7 (denoting that you have entered into a consumer proposal or another debt repayment plan with your creditors) rating for six years from the date you file or three years from the day the proposal is complete, whichever comes first.
Alternatively, unpaid debts can remain on your credit report for up to seven years from the day they are received by a collections agency.
Once you complete your consumer proposal, you will receive a “Certificate of Full Performance” from your Licensed Insolvency Trustee, which can be sent to Equifax or Transunion to update your credit score as quickly as possible.
Reasons You Need to Know How to Rebuild Your Credit After a Consumer Proposal
However, simply having your status updated with Equifax and Transunion with this certificate does not automatically increase your score to a good rating.
One of the biggest misconceptions about filing a consumer proposal is that you won’t be able to rebuild your credit while paying your proposal off. However, we would encourage you to do so to get your credit back to a healthy state as soon as possible.
Here are some of the benefits of repairing your credit score:
- Lower Interest Rates. Lower credit scores often lead to higher interest rates, so rebuilding your credit can help you get more competitive interest rates and help you save money.
- Better Approval Ratings. Having good credit means you are more likely to be approved when applying for loans.
- Better Terms. With good credit, you may be eligible for higher credit limits and longer terms on loans.
- Lower Security Deposits. Oftentimes when you open a new account, especially with phone and utility companies, they will run a credit check and require that you pay a security deposit. Having a good credit score can help you avoid this.
- Lower Insurance Rates. In Canada (except for Newfoundland & Labrador), insurance companies can run a credit check to determine your insurance rate. While they can’t deny you insurance, they can justify a higher rate based on bad credit.
- Stop Relying on Co-Signers. With good credit, you won’t need to find someone to co-sign for your loans and credit cards.
The sooner you get started on rebuilding your credit, the sooner you can enjoy the benefits of having good credit.
Step-by-Step: How to Rebuild your Credit After a Consumer Proposal
1. Get a Secured Credit Card
Once you have finished your consumer proposal, it can be difficult to get approved for unsecured loans and credit cards.
However, it’s easy to obtain a secured credit card to start rebuilding your credit.
Secured credit cards require a small deposit that serves your credit limit. You can spend against that deposit as long as you stay under the limit.
Timely repayments are reported to the credit bureaus, which will help you improve your credit score.
2. Make Your Payments on Time
When it comes to determining your credit score, credit bureaus look at more than just the payments you make on loans and credit cards.
They also take into consideration accounts such as your internet service and phone service.
To improve your credit score after a consumer proposal, make sure you are making all of your payments on time.
3. Manage Your Debt-to-Income Ratio
Your debt-to-income ratio is calculated by dividing your monthly debt payments by your monthly gross income.
Ideally, this should be around 30%.
When you’re starting to rebuild your credit after a consumer proposal, don’t take on more debt than you can handle.
Work out a budget that looks at your income and expenses and then determine how much room you have to accommodate that 30%.
4. Don’t Max Out Your Cards
You should also be mindful of reaching the maximum limit on your credit card.
Your credit report takes into consideration how much you have borrowed versus how much you have left to borrow.
The smaller the gap, the more negatively it can impact your score. Try to keep your total credit usage less than 50%.
5. Pay Off Purchases Right Away
In order to rebuild your credit using a credit card, you should use the credit on a monthly basis.
If you plan on making regular purchases to improve your credit score, make sure you are paying off those purchases right away.
This will also help you develop healthy financial habits by not overextending your credit usage.
Just keep in mind that a credit card will only affect your credit score if it has a balance, so never pay it down to zero. Keep a small amount on the card.
Key Considerations for Successfully Rebuilding Your Credit
As you work through the steps to rebuild your credit after a consumer proposal, here are some other factors to consider:
- Credit scores below 520 are considered bad scores.
- Credit history, credit utilization, and new credit inquiries are looked at when determining your score.
- The length of time negative information remains on your credit report depends on the severity of the action, but your credit report will keep information about late payments for up to seven years.
- Rebuilding credit after a consumer proposal takes different amounts of time for different people.
Do You Need Help With Debt?
If you need help getting out of debt before rebuilding your credit, our team of professionals can help.
Click here to book your no-obligation consultation to get started.
Frederick & Company is dedicated to guiding you through your unmanageable debts.