Maintaining an acceptable credit rating is a priority for many Canadians. Having “good credit” can give you access to vehicle financing, credit cards, cellular networks, and other important services. For the Canadians who are dealing with insolvency, it becomes almost impossible to keep up with. No one is thinking about their credit scores when they are dealing with service interruptions, collection agencies and impending legal action from creditors. It is important to understand the effects of insolvency on your credit rating and how to improve your score. Remember that the first step to improving your credit is getting out of debt. A consumer proposal may be the best option to get you out of debt so you can start to rebuild a strong credit history.

What is “Credit” Anyways?

There are two major credit reporting agencies in Canada: Equifax and TransUnion. These agencies collect and report information related to your financial obligations including credit cards, cell-phone services, utilities, and other liabilities. They keep track of which bills are paid on time, which ones are paid late, and which ones are not paid at all. Any creditor can report a debt, and many are reported automatically.

Your credit report includes your history plus a calculated risk-factor determined by the agency. This is what people are checking when they do a “credit check.”

 What Do The Numbers Mean?

The credit bureau of Canada classifies every person’s credit according to the following scale:

• R1 – You make your credit payments on time.
• R2 – You are 30 days insolvent.
• R3 – You are 60 days insolvent.
• R4 – You are 90 days insolvent.
• R5 – You are 120 days insolvent.
• R6 – Rarely applicable.
• R7 – This rating reflects some form of debt consolidation or management in which you have been settled your debts for less than the amount originally owed – typically through a consumer proposal.
• R8 – Reflects repossession of assets by a creditor – in most cases, legal action will occur after recollection and this rating becomes R9 status.
• R9 – You have declared bankruptcy; bad debt has gone to collection or non-collectable.

 A consumer proposal R7 rating shows the CRA that you are no longer falling behind on payments or facing collections, and that have paid your debts in full.

What is the impact of a low credit score?

If you are looking to secure financing or credit, a lower rating can pose challenges. Lenders will consider you a higher risk and may be less willing to provide their services. You may have to look for an alternative to traditional lenders if you are considering vehicle or mortgage financing, a personal credit card, etc.

Who else might request your credit history?

Knowing and understanding who else may request your credit history can also be helpful:

• Employers – If you are being considered for a new role within a company, they may wish to review your credit history. They may factor in your credit history as they consider you for specific jobs or roles within the company.
• Landlords – It is not uncommon for landlords to request your credit history as part of the decision making process.
• Insurance Companies – They may wish to review your credit score when deciding premiums.
• Utility Companies – A company require a deposit, or a higher deposit, based on your credit rating.
• Cellular Networks – These companies may review your credit history to determine your eligibility for their special offers.

With the exception of financial organizations, no one can check your credit without your consent. No person, including friends or family members, can access your credit report without valid reasoning and your signed consent. Your credit history cannot be accessed without a note of the inquiry being made on your report, so you can always see who has received a copy of your report.

What are my alternatives?

If you have a low credit score, the good news is, there are still options available to you. In fact, there are solutions to help thousands of people just like you. A secured card works the same as any other credit card, but you must make a deposit amount for varying credit limits. We suggest this method to practice healthy spending habits and rebuild your credit score. You can also have another person co-sign financing or a credit card – this offers security for the lenders and is less restricting.

Should I choose a consumer proposal?

Consumer proposals are the #1 alternative to bankruptcy in Canada. If your total debts do not exceed $250,000 (not including a primary home mortgage) and you have the ability to make regular payments, a proposal may be the most financially affordable and credit-friendly debt solution for you. At Hudson & Company, a Licensed Insolvency Trustee (LIT) will evaluate your financial circumstances to determine if a consumer proposal is the best debt solution for you.

How do I rebuild my credit?

If you have been told that a consumer proposal will “fix” your credit score, this is inaccurate. Instead, a proposal gives you the opportunity to eliminate your debt and rebuild good credit once again. Your financial habits during and following your proposal will determine your credit score. If you are wondering how long it will take to rebuild your credit, the answer is different for every person. While the goal during a consumer proposal is debt freedom, the only way to begin rebuilding your credit is to borrow again. If you have struggled with managing debt in the past, it is important to establish healthy spending habits and manage your finances wisely. It is important to rebuild your credit, but ensure you have all the right tools to succeed. Have a clear plan for success before you sign up for a new credit card or loan. We recommend the following tools for success when rebuilding your credit:

 #1 – Budget

You can request the detailed statement of your income and expenses from your Licensed Insolvency Trustee (LIT). Using this as a template, you can follow this guideline when putting together a monthly budget. Above all, you must be diligent about keeping track of your finances. Having a budget in place will help you track and plan for your monthly fixed and variable costs. We also recommend setting aside money for rainy days and unexpected circumstances. Because life does not always go according to plan, we advise setting aside a minimum of $1,000 for emergencies. With a budget in place and an emergency fund in place, you can begin the process of rebuilding your credit with confidence. You can begin this process during a consumer proposal, but your rating will remain the same until the final payment is made on your proposal.

There are two main types of credit:

Revolving Credit – known as ‘open credit’ – this means the funds can be accessed at any time (i.e. credit cards or line of credit). During your consumer proposal, it is possible to get a secured card. You will be required to put a deposit on the card. We recommend starting with a lower limit of say $500 and factoring your payments into your monthly budget. To avoid high-interest rates, be sure to pay the card in full every 21 days. As you continue to use your card regularly, you will begin to see your credit score improve significantly.

Installment Credit – this is an agreement between you and a lender to make payments within a term. Typically this method is used for a car loan or mortgage or car loan but applies to any loan. This type of credit is often more costly. A lender may give you a loan for your car, but that vehicle becomes Set payments will be reported to the credit bureau each month. You will see your credit score improve with each payment made on time. We also recommend applying for RRSP or GIC loans in order to boost your credit – banks get a good interest rate and are typically willing to lend for these types of loans.

If you build good credit scores through a minimum of two lines of credit, you can qualify for a mortgage within two years of concluding your consumer proposal.

Helpful Tips:

You get to start fresh after a consumer proposal, but you must be diligent about maintaining all your payments. Utilities, phone bills, and all other debts must be paid on time.

Your banking advisor will consider your savings and assets when determining your interest rates, so it can be beneficial to have savings in the bank.

How do I get a copy of my credit report?

All credit bureaus in Canada must provide a free copy of to your credit report upon request. But, this request must be submitted in the form of a letter and sent via mail. Your report may take several days to weeks to arrive. If you need a copy of the report in real time, you can pay for a quick access version online. This electronic report is also more comprehensive, which can be of benefit to you. We recommend accessing this report once your consumer proposal is completed. Check for any errors; they can happen. If you do come across a mistake in your report, you can write a letter to the offending company to correct the error. It is good to check your report every year to ensure that the information is accurate and up to date.

Get started on a fresh start!

At Hudson & Company, your initial consultation with one of our Licensed Insolvency Trustees is free, and our knowledgeable team is well-equipped to get you back on track. We have three conveniently located Calgary offices and over 30 years of experience helping people solve their financial hardships. We will be able to find a solution custom-tailored to your needs.

Call 1 (403) 265-4357 to get started!