How Much Will My Credit Score Go Up After a Consumer Proposal?

Understanding the Impact of Consumer Proposal on Credit Score

Dealing with financial challenges can be daunting, and one of the ways to alleviate this burden is by filing a consumer proposal. However, it’s crucial to understand how this debt relief option impacts your credit score. So one may wonder, how much will my credit score go up after a consumer proposal? This comprehensive guide will explore all the intricacies of a consumer proposal and its effect on your credit score.

Consumer Proposal: A Brief Overview

Let’s start by understanding what a consumer proposal is. A consumer proposal serves as an alternative to bankruptcy, providing debt relief to individuals. It involves making interest-free monthly payments over a period of up to five years to a Licensed Insolvency Trustee (LIT), who in turn pays the debtor’s creditor using these funds.

The amount of total debt forgiven depends on the debtor’s ability to pay the balance. In some cases, consumer proposals can result in a significant reduction of total debt, up to 75%. However, the outcome varies from one case to another.

The Impact of Consumer Proposal on Credit Score

A consumer proposal indicates to present and potential creditors that you have had difficulty meeting your debt obligations, which can adversely affect your credit in two ways:

  1. Lower Credit Score: Filing a consumer proposal lowers your credit score.
  2. R7 Notice on Credit Report: It also results in an R7 notice on your credit report, which can make securing a loan more challenging.

Let’s delve deeper into what these terms mean.

Breaking Down the ‘R’ Rating System

Canadian credit bureaus, primarily Equifax and TransUnion, assign every consumer a credit rating that ranges from R1 to R9. The R1 rating is the best, indicating timely payments, whereas R9, which typically represents bankruptcy, is the worst.

So, when you file a consumer proposal, it results in an R7 rating on your credit report. But what does this mean for you, and how long does it last?

Duration of the R7 Rating on Your Credit Report

The R7 rating will stay on your credit report for a maximum of six years or three years after you have completed your proposal payments, whichever comes first. While this may seem like a long time, it’s important to note that rebuilding your credit after a consumer proposal is possible, and you can start doing so even while you’re in the proposal period.

Rebuilding Credit Score During a Consumer Proposal

While making proposal payments, you can start working on improving your credit score. However, it’s vital to proceed with caution and only take on new credit commitments if you can comfortably handle the payments. Here are some steps to help you rebuild your credit during a consumer proposal:

  1. Obtain Secured Credit: Get at least two secured credit cards and make payments for at least two years. A secured credit card can help rebuild your credit if you make all your payments on time.
  2. Maintain a Low Balance: Ensure your credit card balances are kept below 50% of your limit.
  3. Make Timely Payments: Ensure you make all your payments on time.
  4. Check for Errors: Regularly review your credit report for mistakes and rectify any errors immediately.

Rebuilding Your Credit After Completing a Consumer Proposal

Once you’ve completed your consumer proposal, you’ll need to prove your creditworthiness to potential creditors. This involves building your credit score by obtaining a car loan or a credit card, or by making mortgage payments. However, as your credit history will be less than ideal, getting credit can be challenging. Hence, it’s crucial to work on building up your credit score. Here are some tips:

  1. Obtain a Credit Loan: Start with a secured credit card, and after making several prompt payments, you should be able to get a non-secured credit card.
  2. Get a Car Loan: You might have to turn to a private lender for a car loan as banks might be hesitant to extend credit.
  3. Apply for a Mortgage: Getting a mortgage after completing a consumer proposal can be challenging, but it’s possible if you’ve followed the steps to build your credit score.

Should You Consider Filing a Consumer Proposal?

Whether a consumer proposal is the right choice for you depends on your unique financial situation. It’s a viable option if it would take you more than six years to pay off all your debts. However, it’s crucial to weigh the pros and cons and consult with a Licensed Insolvency Trustee (LIT) before making a decision.

Wrapping Up

While a consumer proposal can negatively impact your credit score in the short term, it doesn’t mean your financial future is doomed. With careful planning and responsible credit practices, you can rebuild your credit score over time. So, to answer the question, “how much will my credit score go up after a consumer proposal?” depends on various factors, including your financial discipline, payment history, and credit utilization.

By understanding how a consumer proposal works and its impact on your credit, you can make informed decisions about your financial future. Remember, the goal is not just to increase your credit score but to achieve long-term financial stability.

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