Understanding the Impact of a Consumer Proposal on Your Credit Score
The journey to financial recovery often involves difficult decisions and understanding the implications of those choices. One such decision could be filing a consumer proposal. An important consideration in this process is understanding how a consumer proposal affects your credit rating.
In this article, we delve into the details of how a consumer proposal impacts your credit score, how long it stays on your credit report, and the steps you can take to rebuild your credit after filing a consumer proposal.
The Basics of a Consumer Proposal
A consumer proposal is a legally binding agreement, mediated by a Licensed Insolvency Trustee (LIT), between you and your creditors to repay a portion of your debts over a specified period, usually not more than five years. This debt relief option can significantly reduce your debt load and help you avoid bankruptcy.
It’s essential to understand that a consumer proposal doesn’t equate to a clean slate. It has significant implications, notably on your credit rating. So, how does a consumer proposal affect your credit rating? Let’s find out.
How Does A Consumer Proposal Affect Your Credit Rating?
Credit rating is a measure of creditworthiness, and it’s a factor that lenders consider when deciding whether to extend credit to an individual. When you file a consumer proposal, it gets noted in your credit history, which can adversely impact your credit rating.
The Credit Report Notation
A consumer proposal impacts your credit report in two main ways:
- Public Record Section: The Office of the Superintendent of Bankruptcy (OSB) informs the credit bureau about your consumer proposal filing. This information appears in the “Legal Items” or “Public Records” section of your credit report. The record gets updated with the completion date once you fulfill all your proposal terms.
- Individual Credit Accounts: Each creditor included in your consumer proposal reports the status of your account to the credit bureau. Your credit report will indicate that these debts were included in a consumer proposal.
The credit rating assigned to a consumer proposal is typically R7, which signifies that the individual has entered a payment plan to settle their debts. It’s worth noting that an R1 rating is the best, indicating timely payments, while an R9 rating is the worst, typically assigned in cases of bankruptcy.
Duration of Consumer Proposal on Your Credit Report
The duration a consumer proposal stays on your credit report depends on the credit bureau’s policies. As of 2019, both Equifax and TransUnion, the two primary credit bureaus in Canada, updated their retention policies for consumer proposals.
For TransUnion, the consumer proposal and all associated accounts will be removed from your file three years from the date you complete the proposal or six years from the date you defaulted on the account, whichever comes first.
Equifax follows a similar policy, removing the consumer proposal three years after completion or six years from the date it was filed, whichever happens first.
In essence, the maximum time a consumer proposal can impact your credit report is six years from the filing date.
The Road to Credit Recovery
Your financial health doesn’t end with filing a consumer proposal. The process of rebuilding your credit begins as soon as you file your consumer proposal. Here are some steps you can take to rebuild your credit:
- Monitor Your Credit Report: Keep a close eye on your credit report to ensure everything gets reported correctly. In case of any discrepancies, reach out to the credit bureau to have them rectified.
- Secured Credit Card: Consider applying for a secured credit card during your consumer proposal to establish a pattern of repayment. However, ensure you can pay off your balance each month to avoid falling back into debt.
- Keep Your Payments Current: Keep all your bill payments up-to-date. This includes not just your credit card and loan payments, but also utilities, cell phones, and any other accounts.
Mortgages and Consumer Proposals
If you have an existing mortgage and you’ve been making your payments on time, your lender will likely renew your mortgage during your consumer proposal. However, if you’re looking to apply for a new mortgage after a consumer proposal, lenders will typically require a good credit history for at least two years, among other factors.
The Final Word
While a consumer proposal does affect your credit rating, it’s a viable strategy for dealing with overwhelming debts and avoiding bankruptcy. Keep in mind that the impact on your credit rating is temporary, and with deliberate steps, you can rebuild your credit and regain control of your financial life.
Remember, understanding ‘how does a consumer proposal affect your credit rating’ is crucial to making an informed decision. If you’re struggling with debt, seek advice from a Licensed Insolvency Trustee to explore your options and find a solution that best suits your situation.
Ultimately, the journey to financial recovery is a process, but with determination and the right guidance, you can overcome your financial difficulties and embark on a path towards financial stability.
