One of the most frequently asked questions we get asked about consumer proposals is, “Will my credit be affected, and will I still be able to use a credit card during a consumer proposal?” The short answer is yes, a consumer proposal will impact your credit rating. That said, its impacts won’t last forever.
Unfortunately, when you’re in a position to file for a consumer proposal, you’re probably already having difficulty paying your creditors, and your credit rating has likely already been impacted.
David Sklar & Associates’ team of licensed insolvency trustees specializes in consumer proposals and offers credit counselling. We help you weigh your credit options and obtain the tools and resources you need to achieve financial independence.
Can You Get Credit While in a Consumer Proposal?
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.
While in your consumer proposal, you will need to engage in credit counselling to better plan for credit and debt management once you complete your proposal. David Sklar & Associates provides credit counselling services across Toronto.
Can You Keep a Credit Card with a Consumer Proposal?
The short answer is no; you cannot keep a credit card when you file a consumer proposal. However, it is possible, although not recommended, to obtain a new credit card during your consumer proposal. Please note that not all lenders will approve your application as it is at their discretion.
If you must have a credit card, consider applying for a secured credit card that 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 on your credit bureau and do not help rebuild your credit.
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 debt responsibly, which will start to improve your credit rating.
Should I Apply for Credit in a Consumer Proposal?
Timing is everything. There is a right time to apply for more credit, and there’s a wrong time to do it. One of those wrong times can be when you’re in the middle of completing a consumer proposal.
Just because you can find ways to get credit during a consumer proposal doesn’t mean you should. In many situations, one may want to acquire funds when in a consumer proposal, but there are other ways to obtain this financing and you need to be careful not to get yourself into more debt than you can afford to risk the success of your proposal.
Why You Shouldn’t Apply for More Credit During a Consumer Proposal
A consumer proposal can take a maximum of five years to complete. During this time, you may be tempted to apply for secured (example: mortgage) or unsecured credit (example: credit card).
Any licensed insolvency trustee will let you know that this is not the best financial move for you to make. They will advise you to hold tight and skip any unnecessary credit applications until the proposal is off your shoulders. There are several reasons why applying for secured or unsecured credit is an unwise decision in this scenario.
Your Credit Score is Lower
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.
Another thing that tells lenders that you’re a high-risk client? Filing for a consumer proposal. Filing for a consumer proposal, division one proposal or personal bankruptcy shows up on your credit report. Since you are officially declaring insolvency and admitting that you cannot repay your debts under normal circumstances, you’re considered a higher lending risk.
The good news is that filing for debt relief won’t stay on your credit report forever. The notices will eventually be removed from your credit history so that you have a clean slate.
When it comes to consumer proposals, the credit bureau Equifax removes the report’s notice three years after you complete it. The bureau TransUnion will remove it three years after completing it or, if it is not completed, six years after signing the proposal — whatever timeline you reach first.
Why Does a Lower Credit Score Matter?
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. When you’re going through a consumer proposal, your score will likely be in one of the lowest categories. It’s essential to recognize that your credit score was probably lower before you filed for a consumer proposal in the first place.
Factors like heavy debt loads, maxed out accounts, and inconsistent repayments lead to poor scores. Lenders react to low credit scores in several ways:
- Mitigating the lending risk by attaching a very high-interest rate to the original credit request.
- Mitigating the lending risk by requiring collateral.
- Mitigating the lending risk by requiring co-signers.
- Mitigating the lending risk by requiring higher down payments/deposits.
- Deeming the situation as too much of a gamble and 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.
A lender will likely take one look at your credit report and reject your request, asking you to come back at a more convenient time.
It Complicates Your Proposal
You should also avoid applying for more credit during a consumer proposal because it complicates your repayment plan. You will have to be consistent with your monthly repayments until the process is over. Giving yourself more funds to budget and spend every month can muddle the repayment process and be too much for you to juggle. You don’t want to miss any of your consumer proposal payments. If you are three months behind on your payments — without filing an amendment with the help of your Licensed Insolvency Trustee — the proposal is no longer legally binding.
Bad Habits Continue
You may see the act of applying for more credit as giving yourself more financial freedom. In reality, you’re giving yourself more debt to repay. It’s not sensible to shoulder yourself with more payments while you’re trying to remedy your insolvency. Relying on credit that you can’t afford to repay is a bad financial habit that you need to break. Otherwise, you might complete your consumer proposal and slip back into insolvency. You don’t want to end up right back where you started.
What to Do Instead of Applying for More Credit
Instead of taking out more credit, work towards building your credit score for more credibility. There are many different ways that you can rebuild your credit over time; some of which includes:
- Paying everything on time
- Paying more than the minimum
- Leaving your accounts alone
When to Apply for More Credit
How Long After a Consumer Proposal Can I Get a Credit Card?
If you can, put your plans to apply for credit on pause for a little while longer. At the very least, you should wait until your consumer proposal is over to apply for more credit.
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.
Consumer Proposals with David Sklar & Associates
The unfortunate reality is that many Toronto 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, 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.
