Filing Consumer Proposal & Your Credit Rating
One common fear that many people have when it comes to filing a consumer proposal is what will happen to their credit rating. There are many myths that continue to exist. One common false fact is a consumer proposal ruins your credit rating forever. This is not true. Your credit rating is not destroyed forever by a consumer proposal or by a bankruptcy.
However, there is an impact to filing a consumer proposal. Here is information on credit ratings and how a consumer proposal affects your credit rating.
Credit Ratings in Canada
There are two major credit bureaus in Canada. These are credit reporting agencies that collect, store and share information about how Canadians use credit. The two major bureaus are TransUnion Canada and Equifax Canada.
Some credit agencies use a scale to display your credit history. The most common scale involves a letter followed by a number. The letter stands for the type of credit and the number indicates how often you pay your bills. The most commonly used ratings are “R” ratings. These indicate “revolving credit” where you borrow money up to a certain limit and make regular payments depending on your balance (for example, as with a credit card.)
R ratings are as follows:
- R0: Approved for credit but not used or too new to rate
- R1: Pays debts within 30 days (Considered “on time.”)
- R2: Pays debts within 30 and 60 days.
- R3: Pays debts within 60 and 90 days.
- R4: Pays debts within 90 to 120 days.
- R5: Pays debts more than 120 days after they become due.
- R6: This rating is not used.
- R7: This rating indicates someone has made a special arrangement to pay their debts, such as a consolidation plan, debt management plan or consumer proposal.
- R8: Indicates voluntary or involuntary repossession.
- R9: Indicates that a person has a bad debt that has been placed for collection or that the person has filed for bankruptcy.
As you can see, when you file a consumer proposal, credit rating bureaus list you as “R7.” You will likely remain at this rating until you have completed the proposal. When you complete your proposal and receive your Certificate of Full Performance, a note is placed on your credit report. It remains there for three years.
Improving your Credit Rating after Consumer Proposal
As mentioned, your credit rating isn’t hurt forever after you file a consumer proposal. This is a common misconception that is sometimes reinforced by creditors and collection agencies trying to scare people into paying them.
There is an impact on your credit rating. However, if you are in a position where filing a consumer proposal makes financial sense for you, your credit has likely already been damaged by prior missed payments or late payments. Therefore, filing a consumer proposal can actually help you in the long run. A consumer proposal puts you on the right path and places you in a position to rebuild your financial life. Doing nothing and continuing to miss payments or make late payments will cause your credit rating to continue to deteriorate. It also opens you up to legal action from creditors trying to collect their debts.
One of your duties as part of the consumer proposal process is to take two financial counselling sessions. These sessions teach you about money management, budgeting and provide you with information that will help you manage your financial life and avoid issues in the future. These sessions also give you information on how you can rebuild your credit rating following a consumer proposal.
When it comes to rebuilding your credit rating, it’s important to consider what actions are considered important by the credit bureaus. One of the most important factors is paying your debts on time. Therefore, in order to improve your credit, you will need to show that you are able to responsibly borrow money and pay it back as it becomes due.
However, you may find it difficult to get new loans if you have a low or poor credit rating. One solution is to get a secured credit card. This is a card that allows you to put down a payment that is then used as the limit for the card. For example, if you put down $500, your credit card will have a $500 limit. You can then use this card for purchases. Paying the bill on this card as it becomes due will show credit bureaus and lenders that you are able to responsibly use credit and this will help improve your credit report.
Consumer proposal does not mean that your credit rating is ruined forever. By taking the right steps, you can improve your credit and put yourself back in a strong financial position.