Too much debt and failing to repay your debts can both affect your credit rating.
The longer you go without repaying what you owe on schedule, the more your credit rating can take a hit.
Your credit rating is one of the important numbers in your life that can open or close doors to you, not just when it comes to finances but for other aspects of your life, too, such as work or where you live.
So when you have debts that you want to resolve, you might be wondering how you can do it without damaging your credit rating.
A solution such as bankruptcy can eliminate your debts, but it will also remain on your credit report for several years and affect your ability to borrow, as well as other things.
So is it possible to deal with your debts without it having an effect on your credit rating?
The truth is that it’s likely that your debts have already affected your credit rating, especially if you have already missed any payments.
Even if you think that your credit rating looks good, a lender can take a look at your credit report and see all of your recent activity regarding your credit, going back several years.
If they can see that you already have a lot of debt and that perhaps you have missed some payments, they might judge you to be too risky to lend to.
Even if you have consistently kept up with payments and never missed one, you can still find that lenders don’t want to lend to you, despite your good credit rating.
Lenders will look at how much of your income is going toward paying off your existing debts.
They also want to know how much you are using of the credit that has been extended to you.
Are you maxing out your credit cards each month?
These factors also contribute to whether a lender might consider you, not just whether your credit rating is a high number.
How Can You Resolve Your Debt Without Ruining Your Credit Rating?
It is possible to try and solve your debt while keeping your credit rating high.
It might only take some good budgeting to get your finances in order and enable you to pay off your debts.
By taking a good look at your expenses and finding some ways to save, you can budget your money and create a plan to repay your debts as quickly as possible.
However, whether this is possible and how long it might take depends on a few different factors.
The amount of debt you have, your income, and how much you have left after your monthly expenses all make a difference to how you might be able to pay off your debts.
If you have a lot of debt, planning to pay it all off within a certain time frame could increase your chances of damaging your credit rating.
The longer it takes to repay your debt, the more likely it could be that you face some sort of hardship that makes it difficult for you to keep making your payments.
Not only that, but your debts will continue to collect interest as you pay them off.
It could take you years to steadily pay off what you owe.
In some cases, it could be difficult to ever see an end in sight, when you no longer owe anything.
Planning to pay off your debts in this way could work out if you have an adequate income, as well as a safety net if anything goes wrong.
Should You Avoid Damaging Your Credit Rating?
While it might seem like something that you want to avoid completely, a solution that affects your credit rating could actually be the better option.
If you have a lot of debt, you could put a lot of time and money into trying to pay it off, but still fail.
This would then affect your credit rating, and you would still have a lot of debt showing on your credit report.
Although you might think that the ultimate goal should be protecting your credit rating, it might not always be the best option.
In fact, sometimes, it’s necessary for your credit rating to take a hit so that you can then recover your finances.
With the right approach, you can rehabilitate your finances by getting rid of your debts once and for all.
Eliminating Debt
If you want to eliminate your debt, you might consider using one of the paths available to people who are insolvent.
If you are unable to pay your debts, bankruptcy might be an option that you consider.
Or, if you want to avoid bankruptcy, you might want to look at the option of filing a consumer proposal.
These two options are going to show up on your credit report for a number of years, but the end result is that you will be able to start over and improve your credit rating.
Depending on whether it is your first bankruptcy or proposal and which credit rating agency you look at, it might remain on your credit report for as few as six years.
Choosing either one of these options relieves you from your debts.
You are able to work through the steps that you need to take, and then you will be free to start building up your credit rating again.
You will no longer have your debt weighing you down, and you will hopefully be able to start saving again soon.
You can also eventually start looking at ways to borrow responsibly again.
Both bankruptcy and consumer proposals require two credit counselling sessions, which will give you the tools and knowledge to manage your money and credit better in the future.
When you want to solve your debt, it’s often better to think about what will benefit you most both in the short-term and long-term.
A Licensed Insolvency Trustee can help you to find the best solution.
