Consumer Proposal And Your Credit Rating

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One of the most frequently asked questions we receive is, “Will my credit be affected, and will I still be able to use a credit card after I file a consumer proposal?” The short answer is yes, a consumer proposal will impact your credit rating and yes, you will still be able to acquire a credit card after you file.

A consumer proposal will have an effect on your credit report, but these effects are temporary and vary depending on the repayment terms of your proposal.  The longest a consumer proposal can remain on your credit report is 6 years and the shortest is 3 years.

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How to start rebuilding credit with a secured credit card

Living without a credit card can be very difficult, considering that we make so many daily transactions over the internet, and cash seems to be less accepted. The good news is that there are things you can do to rebuild your credit during a consumer proposal, like applying for a small loan or a secured credit card.

A secured credit card works exactly like a regular credit card, but it’s backed by cash deposits from the cardholder. It works the same way a debit card would, by withdrawing funds directly from your savings account.  The main difference between a secured credit card and a debit card is that a secured credit card is reported to the credit bureau and helps rebuild your credit rating.

We recommend that you wait until you have completed your credit counselling sessions to ensure your proposal is on track and you understand the tools and techniques to manage your credit before applying for a secured credit card. A secured credit card will allow you to make the necessary purchases you need and help you rebuild your credit. A secured credit card is not to be confused with prepaid cards, which are not reported to your credit bureau and do not help rebuild your credit.

How does a secured credit card help rebuild credit?

Yes, a secured credit can help you establish or re-establish your credit. Since payments are included in your credit report, paying on time, paying more than your minimum, and managing your balance will help improve your credit score.

Rebuilding credit takes time and doesn’t happen overnight. It’s up to you to show lenders that you can borrow and repay money responsibly and not continue the bad credit habits that got you in trouble in the first place.

Whenever you make a transaction or pay your bills on time, the credit bureaus see that you can use credit responsibly, which will start to improve your credit rating.

Things to consider while you complete your consumer proposal

A consumer proposal can take a maximum of five years to complete. During this time, you may be tempted to apply for a mortgage or unsecured credit card. Timing is everything. There is a right time and there’s a wrong time to apply for more credit. One of those wrong times can be when you’re in the middle of completing a consumer proposal. 

Our advice would be to hold tight and skip any unnecessary credit applications until the proposal has been completed. It’s not sensible to take on additional payments while you’re trying to pay down your consumer proposal. Relying on credit that you can’t afford to repay is a bad financial habit that you need to break. You don’t want to end up right back where you started once you complete your consumer proposal.

After you get discharged from your proposal, give yourself some time to rebuild your credit score and improve your financial standing. 

Boosting your credit score will reduce the chances of application rejection, steep interest rates and tight loan restrictions. A little bit of patience can pay off down the line. Try to use credit only when necessary not when it’s convenient to help keep your balance low. Lenders will look at your credit report and see that you have committed to a repayment plan and put your debts behind you.

You can learn how to use your card responsibly in the credit counselling sessions you will have to attend before completing a consumer proposal. 

How long does a consumer proposal stay on your credit report?

The good news is that consumer proposal won’t stay on your credit report forever. The notice will eventually be removed from your credit history so that you have a clean slate. 

A consumer proposal can remain on your credit report a maximum of 6 years from the date you file based on the new guidelines from TransUnion and Equifax.

A consumer proposal that is completed in five years, will be removed from your credit report one year later (six years from the date you filed).

A consumer proposal that is completed in two years, will remain on your credit report an additional 3 years from the date you completed payment (for a total of five years).

A consumer proposal paid immediately as a lump sum, will be removed three years after the completion of the proposal.

Why does a lower credit score matter?

Whenever you intend to get more secured or unsecured credit, lenders need to check your credit report. This report helps lenders assess whether you will be a low-risk or high-risk client.  A low-risk client has a consistent repayment history and a small likelihood of defaulting on their loans. On the other hand, a high-risk client often has a heavy debt load, inconsistent repayment history, and a greater chance of defaulting on the loan.  

If you’re trying to apply for more secured or unsecured credit, you will want to have a credit report with a healthy score. 

Credit scores get divided into several categories: Excellent, Very Good, Good, Fair and Poor. Factors like heavy debt loads, maxed-out accounts, inconsistent repayments, and collections lead to poor scores.  Filing for a consumer proposal, will also lead to a poor credit score but remember the fastest way to improve your credit is to eliminate your debts. A consumer proposal can reduce your total debt by up to 80% and eliminates interest payment. Trying to pay back the debt on your own without a consumer proposal can take many years and the interest accumulated on those debts can add up to thousands of dollars.

Here are some of the ways lenders react to applicants with low credit scores:

  • Charge higher interest rates.
  • Require collateral (Example: A vehicle or other valuables if debt is not repaid)
  • Require co-signers (Example: A friend or family member becomes responsible for your debts)
  • Requiring higher down payments/deposits.
  • Rejecting the application.

Approval will come with expensive consequences. You’ll have to contend with steep interest rates, large down payments and other restrictions that will make repayments harder to juggle — and that’s if the lender accepts your application. 

Consumer Proposals with David Sklar & Associates

The unfortunate reality is that many Ontario residents have been thrown into financial instability because of the current health crisis and are now concerned about what to do next. If you need financial help, the licensed insolvency trustees at David Sklar & Associates are here for you. 

We offer over-the-phone consultations and electronic document signing so that you can access our services from the safety of your home. We want to encourage our clients to prioritize their health as best as they can during these uncertain times.

Patience can be rewarding. If you wait to apply for credit after you complete your consumer proposal and rebuild your credit score, you’re going to get better options from lenders. Contact us today so we can walk you through your options. 

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt, call us at 1-844-962-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

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