Consumer Proposals & Credit Ratings
Rebuilding Your Credit After A Consumer Proposal
For many insolvent Canadians, the burden of a high debt-load is often made worse by long-term implications arising from poor credit history. Having “good credit” is often just as much a priority as getting out of debt. It is important to remember which should come first. It will be impossible to achieve a high credit score if there are unpaid debts on your file. Once you get out of debt, you can take steps to rebuild and improve your score. First, get out of debt, then start working on your credit. Consumer proposals will eliminate your debt and result in an R7 consumer proposal credit rating, laying a solid foundation for you to start rebuilding a strong history of “good credit”. This article has information to help you develop the habits that support a good credit history and improve your credit score after completing a consumer proposal.
Your Credit Report – How does it work?
Your credit report summarizes your credit history, which is a record of borrowed money and credit usage that follows you throughout your life. Financial institutions and companies that lend money or provide credit send your account information to credit reporting agencies, which are private companies that record and interpret the data to provide an overall credit score.
There are two major credit reporting agencies in Canada: Equifax and TransUnion. These two agencies keep a collaborated history of debts and obligations including credit cards, cell-phone networks, utility bills, and more. Any creditor can report a debt to these agencies and many are automatically reported. Your credit report includes your credit history and a statistical analysis indicating how likely you are to pay your bills on time. There is also a risk-based score based on your history and multiple other factors. This is what future creditors will use when considering if you qualify for their offerings.
R7 – Consumer Proposal Credit Rating
Where Does it Come From?
Did you know that there is a Financial Consumer Agency of Canada that is responsible for protecting your rights and responsibilities as a consumer? This is where we can find the policies surrounding credit and lending in Canada, including what information can be collected by the credit reporting agencies and what it all means. The ratings on your credit report are actually codes with information about how you make payments.
The “R” from the consumer proposal credit rating indicates that it is a revolving or recurring credit. This simply means that you are making regular payments depending on how much you owe. The “7” from the consumer proposal credit rating indicates that the payments are being made as part of a debt management solution.
A Complete List of Ratings for R-Type Credit:
- R1 – Your payments are on time (within 30 days of being billed, or as otherwise agreed)
- R2 – Your payment is between 31 and 59 days late
- R3 – Your payment is between 60 and 89 days late
- R4 – Your payment is between 90 and 119 days late
- R5 – Your payment is more than 120 days late
- R6 – This rating is not in use.
- R7 – This is the consumer proposal credit rating, but it can also be used to indicate an orderly payment of debts program or debt management program with a credit counsellor.
- R8 – Your debt has been absolved through the sale of an asset – typically one that has been repossessed.
- R9 – Your debt has been sent to a collection agency or has been written off. Also used for bankruptcy.
Do Credit Ratings Matter?
The credit ratings are used together with other signals to determine the levels of risk when lending money or extending credit. This becomes a factor if you want to apply for credit or financing. If a lender sees R1 ratings they will know that you make payments on time. If they see R2 to R5, they will know that you are late with your payments. If they see a consumer proposal credit rating of R7, they will know that you are making payments and will soon be debt-free.
Prospective lenders are not the only ones that may be interested in your credit history.
- Employers – if you are applying for a new position or a new role within a company, your prospective employer may do a credit check.
- Landlords – for those who are looking to rent, some landlords may require a credit check.
- Cell Phone Providers – may do a credit check to see if you qualify for offers.
- Utility companies – may require a higher deposit if your credit score is lower.
- Insurance Companies –may base their premium rate on your credit rating.
In most cases, your permission is required before anyone can check your credit. Your spouse, relatives, friends cannot request your credit report without your consent and a valid reason. Each time a copy of your report is requested, a note of the request will be recorded on your credit history for your own reference.
Alternative Credit & Financing Options
Because thousands of people experience financial challenges every day, solutions have been designed to help. A secured credit card works just like your regular credit card but requires a deposit. Your credit limit is determined by the amount you put down a deposit. By getting a secured credit card, you can start to rebuild your credit. We recommend starting out with a small balance and paying your card off every 21 days. You can have another person co-sign for loans or even a credit card. We suggest learning healthy spending habits with a smaller limit of $500, for example, before signing up for a card with a high limit.
Is a consumer proposal right for me?
If your debts are $250,000 or less (excluding a mortgage for your primary residence) and you can afford to make regular payments, a consumer proposal could be an affordable solution to get out of debt and start building good credit. This is a great way to consolidate and repay your debts at a fraction of what you owe. It also allows you to retain your assets. At Goth & Company, we offer free professional advice with our licensed professionals who understand the stress you are going through and can help you find the best solution to help you achieve debt freedom.
The Best Ways To Rebuild Your Credit After Filing A Proposal
Many of our clients ask us how long it will take for them to rebuild their credit after a consumer proposal. The answer varies from person to person and depends on how they manage their finances. It seems counter-intuitive to go into debt as soon as you have gotten out of it but, in order to rebuild your credit, it is necessary to begin borrowing again. It is good to start slowly, budget, and never spend more than what you can afford. If you are diligent about making your payments on time and choose a few different forms of credit your score can improve significantly in a relatively short period of time. In particular, there are a few tips and tricks that can really boost your credit:
#1 – Budget
If monthly budgeting is new to you, consult the Licensed Insolvency Trustee who put together your consumer proposal and ask them for a copy of the statement they of your finances. This can work as a great guideline for what your monthly budget should look like. By following a budget, you will ensure that all costs are accounted for and that you do not overspend. We suggest to all our clients that they set aside an emergency fund. With a working monthly budget and money set aside for unforeseen circumstances, you can begin to rebuild your credit. Clients also often ask if they can get started on improving their credit while they are in a consumer proposal. The short answer is yes. But, your credit will not show the improvement until after you have finalized the proposal.
Primary Types of Credit
- Revolving Credit – is also referred to as ‘open credit,’ meaning that you can access the funds at any time (i.e. credit card or line of credit). While it may be hard to get a credit card with a lower rating, you can apply for a secured credit card. They work the same way, but you must put a deposit on the card. We suggest starting off with a lower limit of a few hundred dollars and budgeting to pay the balance in full every month. If you use the card regularly and pay the balance every 21 days your interest rates will not rise, and your credit score will steadily improve.
- Installment Credit – is a long term loan agreement. Most commonly, this will be a mortgage or vehicle loan but applies to any loan. If you have poor credit, the rates for a standard loan have been extremely high. A secured loan may cost less as you agree to collateral, which makes the loan less of a risk to the lender. This can be another good method to rebuild your credit. Your monthly payments will be reported to the credit bureau. FYI: RRSP and GIC loans are typically easy to get because the banks get a good interest rate, and can be another great way to build up your credit.
Many of our clients ask how many years it will be before they can qualify for a mortgage after their consumer proposal has been paid in full. If they have steadily built good credit through a minimum of two different forms of credit, it is possible to be approved for a mortgage within two years of concluding a proposal.
Tips From The Experts
- We cannot stress enough how important it is to follow a monthly budget and make all your payments on time. Cell phone bills are no exception to this, and consistent late payments can be the source of a lot of grief for individuals who otherwise have decent payment habits.
- Having savings in the bank can help lower your interest rates when applying for credit.
Stay up to date on your credit report.
There are both print and electronic versions of your credit report that can be accessed through a credit bureau. You can request a hard copy of your credit report from Equifax or TransUnion once per year for free. This copy must be applied for via a mailed letter and can take a few weeks to arrive. If you need an immediate copy, you can pay for the online version. The online report is also more detailed and will give you the opportunity to flag any errors. By checking your online report yearly, you can ensure there are no mistakes and stay up to date on your credit standing.
Have Questions?
At Goth & Company, you will talk with a licensed professional who will offer compassionate and educated advice. There is no cost. You are under no obligation. Call 1.780.435.5110 to connect with any one of our six conveniently located offices throughout Edmonton and Northern Alberta.