Rebuilding Credit During A Consumer Proposal

Congratulations on taking the first step towards addressing your debt head on and working towards a fresh financial start! Now that you’ve put plans in place to manage your debt payments in a way that’s manageable and fair for both you and your creditors, you are probably wondering how soon you can start rebuilding your credit and a stronger financial future. The good news is, you are allowed to obtain credit during your Consumer Proposal. You should be aware however, that as a rule, lenders don’t like to lend to you during a Consumer Proposal because they realize if your Consumer Proposal defaults then all of your debt returns. If you haven’t missed any payments and your Consumer Proposal has been ongoing for some time (two or more years you may have a chance.

Before you purchase a big-ticket item or obtain any other credit products here are a couple things I recommend you consider:

1. Have you reviewed your current credit report for accuracy? You should get a copy of your credit report form either Equifax or TransUnion and review it thoroughly. The Financial Consumer Agency of Canada’s website has a good section on credit reports and scores. I recommend you visit the website and learn about how to order your credit report, how to review your credit report and improve your credit score.
   
   
2. Have emergency savings in place before obtaining new credit. Earmark these savings for emergencies, not for loan payments or down payments. Then if you find yourself in a temporary cash crunch you will be less at risk of default on your Consumer Proposal payments or loan payments.
   
   
3. Talk to your financial institution about credit building products they may offer – i.e. small secured loan or credit card, with a minimal credit limit.
1. Your mortgage company should be reporting to the credit bureaus that you have been paying your mortgage on time, this is helpful towards rebuilding your credit already and the financial institution may be more willing to lend to you than others because you are already dealing with them in a positive way;
2. Ensure that the financial institution you borrow from reports positive payment history to the credit bureaus, otherwise it isn’t helping you build your credit rating;
3. Pay the balance in full every month, on or before the due date;
   
   
4. If you are looking to make a larger purchase (vehicle, recreational equipment, house etc.) I recommend:
1. Saving a down payment, the greater the down payment the greater the chance of you being approved for financing and for a better interest rate.
2. Don’t finance the asset over more than the life of the warranty. Often you can finance recreational equipment over 25 years like a mortgage. The problem with this type of financing is the cost of borrowing (interest paid over the life of the loan) over time and the potential for repair and maintenance costs before you are finishing paying off the loan. 
3. Read the fine print, understand all hidden charges, fees, interest rates and potential buy-outs at the end of the loan term. 
4. One way to save a down payment is to estimate how much the monthly payment on the loan is you are looking at obtaining. For the next 3-6 months’ ‘pretend’ you already have the loan and pay that monthly payment and any insurance and maintenance / operating costs into a savings account, as though you were paying it to the loan company and insurance company every month. See if this puts too much pressure on your budget or if it is manageable. Then at the end of this period you will have savings for a down payment and you will have the comfort of knowing that the payment is going to be manageable for you.
   
   
5. Consider whether your money would be better spent on paying out your Consumer Proposal early.
1. The Consumer Proposal stays on your credit report for three years after you complete the Consumer Proposal. Therefore, the sooner you pay out your Consumer Proposal the sooner it will be deleted from your credit history. 
2. Once your Consumer Proposal is paid off you will have an additional $300 / mo. to spend on purchases, savings or finance payments

I hope I’ve answered your questions. MNPdebt.ca also has some incredible good resources and FAQs if you’d like to check it out.