Repairing your Credit Rating after Filing for Bankruptcy or Consumer Proposal in Ontario
When you file for bankruptcy or consumer proposal in Ontario, one of the consequences is that the two major credit reporting agencies in Canada, Equifax and Transunion, are notified of this event. When you attempt to borrow money or open an account with a supplier the lender will generally go to one of these agencies to review your credit history. If you have a history of bruised credit this will make it more difficult for you to get a loan in the future.
When you file a consumer proposal, this fact remains for three years after you have completed the proposal. For bankruptcy, it remains for at least six years and for longer if you have declared bankruptcy before.
Despite this, there are steps that you can take to repair your credit score even if you’ve filed for consumer proposal or bankruptcy. In order to learn how to do so, it’s important to understand how credit ratings and credit scores are determined.
What is a Credit Score?
A credit score is a look at your financial health at a particular time. These scores change quite regularly depending on your financial actions. Credit scores are calculated by the two major credit bureaus in Canada: Equifax and TransUnion. These credit bureaus use a particular financial formula to generate a three-digit number between 300 and 900. This number represents your credit score. The higher the number the better. While the formulas used to calculate credit scores are secret, the factors that affect these scores are known.
Credit scores are affected by:
- Paying your debts on time
- How much of your credit balance you are using
- How much credit you have applied for
- Your payment history
In general, if you don’t borrow too much money, if you pay it back on time and if you have a history of successfully doing so, you will have a better credit score.
What is a Credit Rating?
A credit rating is another important financial number. Credit reporting agencies rate individuals on a score of 1 to 9. These ratings are used in conjunction with a letter. The most common letter is “R” which indicates revolving credit, such as credit cards. The highest of these ratings is R1, which shows that a personal regularly pays their debts within 30 days of them becoming due.
If you file for a consumer proposal in Ontario, your credit rating will be listed as R7, meaning that you have made special arrangements to settle your debts and that you are making regular payments. If you file for bankruptcy, your credit rating will be listed as R9.
An Ontario consumer proposal or bankruptcy will lower your credit rating. But the reality is that you probably have not been paying your bills on time anyway and so your rating is most likely already quite low. In order to be able to access credit and get loans in the future, you will need to improve your credit rating and your credit score. This can be done by proving that you are able to borrow money and repay it successfully
However, as mentioned, having gone through file often makes it difficult to get a loan. So how do you rebuild your credit if you’re not able to borrow anything?
One way is by using a secured credit card. These cards are secured by a deposit that you make to the company offering the card. The deposit then becomes your credit limit for the card. For example, if you put down $1000 as a deposit, you will have a $1000 limit. Secured credit cards can be used just about everywhere where you can use a standard credit card. As you make purchases on this card and pay the balance owing, you build your credit rating and improve your credit report. These actions show the credit bureaus that you can responsibly make purchases using credit and repay your bills in a timely manner. This is the kind of behaviour that they like to see.
Be aware of companies that promise to fix your credit rating instantly for a fee. Repairing your credit takes time. However, it is certainly possible. Creditors and collection agencies often tell people that filing for bankruptcy or consumer proposal in Ontario or anywhere in the country will destroy their credit rating forever. This isn’t true. With some determination and effort, you can rebuild your credit rating and credit score.