How Consumer Proposals affect your credit rating — and how to rebuild it

If you are struggling with debt and looking for a way to avoid Bankruptcy, you may have considered a Consumer Proposal. A Consumer Proposal is a legal agreement between you and your creditors, where you offer to pay a portion of your debts over a period of time.

A Consumer Proposal can help you reduce your debt burden, lower your monthly payments, and stop interest charges and collection calls. However, a Consumer Proposal also has a significant effect on your credit and your ability to borrow money in the future. Understanding how Consumer Proposals impact your credit score is important to rebuilding your credit rating in the future.

What is a credit rating?

Your credit rating is a measure of your overall creditworthiness. In other words — how likely you are to repay your debts on time. Everyone’s credit history is reported by creditors and other institutions to two major credit bureaus in Canada: Equifax and TransUnion. This history includes your record of past and current credit accounts such as loans, credit cards, mortgages, and other debts.

Using the information in your credit history, the credit bureaus use a scoring system to assign you a credit score ranging from 300 to 900. The higher your credit score, the better your credit rating and the more likely you are to qualify for credit products with lower interest rates and better terms.

How Consumer Proposals impact your credit rating

While Consumer Proposals are a great option for people struggling with their finances, they do have short and long term consequences. When you file a Consumer Proposal, your credit rating will be negatively affected in two ways.

1. Your credit rating will drop

The number of points lost in your credit rating will depend on your current score and the amount of debt you have. The exact point-drop a Consumer Proposal has on your credit score is unknown as credit bureaus do not disclose their scoring formulas. However, some experts estimate that a Consumer Proposal can lower your credit score by 100 to 200 points.

2. Your credit report will show a notation that you have filed a Consumer Proposal

The Consumer Proposal notation will remain on your report for three years after you complete your proposal or six years from the date you filed, whichever comes first. This notation will indicate to potential lenders that you have had difficulty paying your debts in the past and that you may be a higher-risk borrower.

Tips to rebuild your credit rating

The good news is that a Consumer Proposal does not permanently damage your credit rating. You can start rebuilding your credit score as soon as you file your proposal, and make even more progress after you complete it.

Here are some tips to help you improve your credit rating after a Consumer Proposal:

• Make your payments on time — Your proposal payments are not reported to the credit bureaus, however, once the proposal is completed, the Federal Government will update the credit bureaus so they reflect the proposal’s successful completion. Completing your proposal indicates you are committed to resolving your debt and improving your financial situation.

• Get a secured credit card — A secured credit card is a type of credit card that requires you to deposit a certain amount of money as collateral and that amount becomes your credit limit. A secured credit card can help you rebuild your credit rating by allowing you to use credit responsibly and make regular payments that are reported to the credit bureaus. However, be careful to choose a secured credit card that does not charge high fees or interest rates and that reports to both Equifax and TransUnion.

• Use your credit wisely — Once you have a secured credit card, use it for small purchases that you can afford to pay off in full every month. Do not use more than 30% of your available credit limit and avoid applying for too many credit products. Both of these patterns can signal to lenders that you are a credit risk.

• Monitor your credit report — You can request a free copy of your credit report from Equifax and TransUnion once a year. You can also access your credit score online for a fee or through some free services. Monitoring your credit report and score yourself can help you track your progress, identify errors, and potentially dispute any inaccurate information.

Moving on from your Consumer Proposal

Rebuilding your credit rating after a Consumer Proposal takes time and patience, but it is possible. By following these tips, you can improve your credit rating and increase your chances of achieving your financial goals on your way to full financial freedom.