Declaring bankruptcy can be a hard step to take, even when you know it’s the best course of action. What often makes it harder is the consequences that follow after you’ve been officially discharged. One of those consequences is that it’s a challenge to qualify for loans. Find out why that happens and how you can try to avoid that financial problem in the future.
Bankruptcy & Credit Reports
The act of declaring personal bankruptcy will immediately affect your credit reports for an extended period of time. The biggest credit bureaus in Canada, Equifax and TransUnion, will mark your report with this news for years after you’ve received your discharge. Equifax will keep this information on your report for six years after the official discharge. TransUnion will keep it on your report for seven years.
If you have filed for personal bankruptcy twice, that time-period is doubled. So, you would have the note on your credit report for a total of 14 years. Click here to learn more about personal bankruptcy laws in Ontario and what you can expect after filing for it.
Why Does It Affect Loans?
The first thing that you should know is that credit reports are not designed for the average person. They’re designed to help banks and lending institutions make decisions about their clients. The report gives them an overview of your personal finances and a FICO score between 300 and 850. This information helps them determine whether a client is going to be a big lending risk or whether they’re going to be a safe bet that will make their repayments on time.
When you declare bankruptcy, your credit report adds that information. The addition will likely make your credit score much lower — bringing it down to one of the less favourable categories. Here is a brief summary of the FICO score categories:
- < 580 is Poor
- 580-669 is Fair
- 670-739 is Good
- 740-799 is Very Good
- 800> is Exceptional
The average Canadian’s credit score is around 600, finding a place between fair and good. It’s important to remember that scores vary for every credit bureau. Your reports will not be perfect matches across the board.
So, when you have a score that’s below average and marked with a notice of personal bankruptcy, banks and other institutions are going to see you as a lending risk. That means that whenever you apply for a loan, your options will be limited. When they accept your application, you’ll find that you’re offered a loan with much higher interest rates than normal. Other restrictions might be tacked on to your agreements, like increased down-payment requirements or stringent repayment rules.
It’s also possible that you’re seen as too much of a risk to qualify. They won’t offer you a loan at all. Even if you meet every other qualification, you can get turned away at the door.
What Can You Do?
The best thing that you can do is not give up. It’s true that it will be a challenge to get a manageable loan. It’s true that your bankruptcy will sit on your credit report for several years. But, your credit rating isn’t stagnant.
Remember that your credit report is measured by multiple factors. Bankruptcy is not the only thing that determines your final score. You can work on the other factors that influence your report in hopes of bringing it to a healthier number and improving your chances of accessing funding whenever you need it.
Read Your Report
The first thing that you should do is take a closer look at your report. Don’t just look at the score. Read through all of the information on the report. The reason behind this is that you could spot an error that the credit bureau needs to fix as soon as possible. Even a small mistake can negatively affect the final tally of your report.
These are some of the mistakes that you might find:
- Wrong personal information (name, current address, employment)
- Wrong payment history (payments listed as late or unpaid when they have been dealt with)
- Wrong accounts (showing accounts that have since closed or not showing open accounts)
If you spot a mistake, you should get it corrected right away. You never know what kind of impact it could have on your score. It could move it up a category.
The best way to do this is to file a dispute with the credit bureau (TransUnion, Equifax). You will need to fill out a Credit Report Update Form and provide copies of legal identification to prove you are the concerned user. You will have to mail or fax it to the main company address. Then, you will have to wait for them to investigate the dispute. Within a few weeks, you should have a confirmation letter with the results of their investigation. If you’re right, they will update your report.
If you spot too many strange mistakes, do not file a dispute. A strange report can be a clue that you are a victim of identity theft or financial fraud. The moment that you think something sinister is happening with your personal finances, you should contact your bank to inform them. Then you can contact the local authorities and the credit bureau to update them about the crime.
The truth is, you will probably have to see local licensed insolvency trustees for credit counselling services as part of your bankruptcy process. You will likely have to complete two sessions as part of the terms of the agreement.
You will want to attend more of these credit counselling sessions because they can help you rebuild your rating in the long run. The trustee can focus on lessons like budgeting, debt management and responsible credit use.
These lessons can be beneficial to you. With budgeting, you can avoid spending beyond your means and putting unnecessary payments on credit cards. With debt management, you can learn how to whittle away outstanding debts so that you no longer have to worry about building interest or late fees. And with responsible credit use, you can make sure that you never max out a card again.
The rewards of these good financial habits will show up on your report. And as long as you keep following the guidelines that you learned in your counselling sessions, you’ll manage to maintain that higher rating on your report.
Make Some Changes
After going for credit counselling, there are lots of habits that you can adopt to revitalize your report. Over time, they will get your score to move steadily upwards.
Don’t Throw Out the Card:
The most important tip to follow is that you should keep your credit card. You might be tempted to cut it up or hide it away for safekeeping, but those plans will backfire. The fact is that you can’t build up your credit while ignoring it. The only way to build it up is to use it. So, put those scissors away and tuck that card back into your wallet. Think of it like a muscle. You have to exercise it to make it stronger.
However, overexerting your credit card may have gotten you into serious debt in the first place. You don’t want to max it out in hopes of getting a better report. Ideally, you want to put small, affordable purchases on it every so often. Only put a purchase on the card if you know you have the means to pay it off. Don’t let the expense sit on the card and accumulate interest. Pay it off as soon as you can. This technique will slowly improve your payment history.
Don’t Get Another Card:
Another crucial tip that you should follow is to avoid getting another credit card. People sometimes think that getting a brand-new card will give them a blank slate to work with. Now that they have a different account to prove themselves, they can show off their savvy habits and refresh their rating. Sadly, this solution is too good to be true.
Making a new account will actually hurt your score. If you have outstanding debts sitting on your credit cards, you shouldn’t be looking for a new card to fill up. It’s much wiser to use the card that you already have and work hard to bring the balances down to zero. If you have multiple cards that you’ve practically maxed out, then focus on the one with the highest interest rate first.
Another reason why you shouldn’t apply for a new credit card is that the application process requires a credit check. Too many hard credit checks — also called hard pulls — in the span of a year will hurt your numbers. This can also happen when you make big lifestyle changes, like applying to rent an apartment or buying a car.
If you want to avoid hard credit checks for the sake of your score, you should avoid opening a new credit account. When you’re shopping around for a new car, rental apartment or other big financial investment that requires a credit check, you should be strategic about it. Get quotes from a variety of lenders within two weeks, instead of spreading it out over months. Keeping it within that strict time-limit will guarantee that the multiple credit checks are treated as a single check. It will be a challenge, but it will be worth it in the long-run.
These are some other changes that you should start making:
- Pay your bills on time, every time. You can set up automatic bill payments through online banking so that you never miss a deadline ever again. At the very least, you can download personal finance apps that send you reminders whenever a bill is due.
- Stop paying the bare minimum. Try your best to pay off the bills in full.
- Keep your balance on the lower-end. The CPA (Chartered Professional Accountants Canada) recommends that you keep your credit utilization below 35% if you can help it. This move will help your rating, and it will discourage you from doing something irresponsible, like overspending on your credit card and reaching its limit.
- See a licensed insolvency trustee whenever you need help with the bankruptcy process — this includes the recovery process after you’ve been discharged. Sometimes, a bit of professional guidance is all you need.
Be Wary of Loans
Until your credit score is a little higher, you may have a hard time accessing loans for essentials like housing or buying a car. In this time, it will be tempting to skip the step of rebuilding your credit and finding a loophole by applying for a high-interest loan from a non-traditional lender.
Getting a debt consolidation loan or another type of high-interest loan — like payday loans —
will give you some instant gratification, but that gratification will likely disappear soon after. These types of loans are notoriously risky.
If you’re already having a difficult time reaching financial stability, turning to this solution could be setting yourself up for serious trouble. You could be walking straight into a debt trap. And sky-high interest rates will make it harder and harder to escape. Click here to find out more information about why you should avoid loans while in a consumer proposal or while recovering from personal bankruptcy.
Being patient and changing your credit habits will be harder than applying for a high-interest loan, but it will be a much savvier financial decision. So, don’t fall for short-cuts. Slow and steady will get you where you want to go: far away from debt.
You want to be able to get a legitimate loan after your bankruptcy. Maybe you want to get a car loan so that you can have a brand-new vehicle. Maybe you want to apply for a mortgage so that you can own a house. Whatever your goals are, you need to have a strong credit score to avoid loan rejections or steep interest rates.
Following these tips will help you qualify for legitimate loans. And it will make you feel like you’ve officially recovered from your personal bankruptcy.