Monday, January 18, 2021
A consumer proposal can reduce your debt and impact your credit score. Learn how long it stays on your report and the best ways to rebuild your credit score in Canada.
A consumer proposal can be a lifeline for anyone facing unmanageable debt. It provides a way to reduce what you owe and keep all your assets. However, some people hesitate because they worry about how filing a consumer proposal will impact their credit score and financial future.
Understanding the credit implications is crucial for anyone considering this debt solution, but worrying about your credit score shouldn't be the thing that stops you from filing a proposal.
While a consumer proposal will affect your credit rating, it can also be the first step toward rebuilding your financial health.
A consumer proposal is a legally protected way to become debt-free. It works by lowering the amount you have to pay back and having the remainder of the debt forgiven.
Filing a consumer proposal can reduce the amount you have to pay back by up to 80%.
You must work with a Licensed Insolvency Trustee (Canada’s only federally regulated debt professionals) in order to file a consumer proposal.
The Trustee will assess your financial situation and negotiate with your creditors on your behalf to reduce your debt and get you monthly payments you can afford to make; the proposal will be tailored to your unique situation.
A consumer proposal offers real benefits:
You will need to attend two credit counselling sessions as part of your consumer proposal. These sessions are meant to help you gain better personal finance knowledge so you can avoid ending up in this situation again. It is not meant to be a punishment but rather a learning opportunity.
TransUnion and Equifax have the same rules for how long a consumer proposal remains on your credit report.
These are:
Remember, your credit report is not your credit score. You can grow your credit score while going through the consumer proposal process by making your payments on time and in full.
So, while your credit report shows you are completing/have completed a regulated debt relief process, it does not define your future financial potential.
It is better to have a manageable plan to pay off your debt and a bad credit score, than a good credit score and no plan to pay off your debt.
As we said, your credit report will show an R7 rating after you file a consumer proposal. This reflects that you've made a formal arrangement to settle your debts.
An R7 rating can lead to a drop in your credit score, making it harder to qualify for loans, credit cards, or other forms of credit. Lenders view an R7 rating as a sign of past financial struggles, which may cause them to see you as a higher-risk borrower. This can result in higher interest rates or stricter loan approval criteria.
However, it’s important to remember that the impact of an R7 rating is not permanent. The R7 rating will eventually come off your credit report; it is not something that will follow you forever.
A secured credit card is one of the most effective tools for rebuilding your credit after filing a consumer proposal. Secured credit cards work just like regular credit cards for everyday purchases, but with one key difference.
Unlike traditional credit cards, a secured credit card requires you to provide a security deposit upfront. This deposit acts as collateral and typically determines your credit limit.
For example, if you deposit $500, your credit limit will be $500.
Using a secured credit card responsibly helps you rebuild credit by showing lenders that you can manage your money effectively.
Secured credit cards report your activity to credit bureaus, unlike a prepaid credit card. If you make your payments on time and in full, your credit score will rise.
If you have a secured credit card with a limit of $500, it doesn’t mean you should spend up to that limit.
Keeping credit balances low is crucial for improving your credit after filing a consumer proposal. Lenders look at your credit utilization ratio—how much of your available credit you’re using compared to your limit. A high ratio suggests financial stress, while a low ratio shows responsible credit use.
Aim to use no more than 30% of your available credit limit. For example, if your credit card limit is $500, try to keep your balance under $150.
By keeping your balances low, you’ll not only boost your credit score but also reduce the risk of falling into debt again. This shows lenders you can handle credit responsibly, making it easier to qualify for better financial opportunities in the future.
Paying your bills on time and in full is one of the most effective ways to rebuild your credit after filing a consumer proposal. Payment history accounts for a significant portion of your credit score, and consistently meeting deadlines shows lenders you’re financially responsible.
Set up reminders or automate your payments to avoid missing due dates for utilities, rent, phone bills, and any remaining debts. Even small bills matter—late payments can harm your credit score and appear on your credit report.
Over time, a positive payment history can boost your score and improve your chances of securing new credit.
Building this habit not only helps your credit but also strengthens your overall financial stability.
If debt feels overwhelming, a consumer proposal may provide the relief you need. While you might worry about how it affects your credit, working with a Licensed Insolvency Trustee can help you understand the process and its impact on your financial situation.
They’ll walk you through how a consumer proposal reduces your debt and explain what it will mean for your credit report and score.
Remember, it’s better to have a lower credit score and no debt than to carry unmanageable debt and a high score.
Debt creates stress, limits your financial freedom, and affects your ability to move forward. A consumer proposal can help you regain control of your finances by reducing your debts into affordable payments without sacrificing any of your assets.
The first consultation with a Licensed Insolvency Trustee is free of charge and entirely confidential. You are under no obligation to sign anything at the first meeting. It's a chance for you to discover how you can become debt-free.
Monday, January 18, 2021
A consumer proposal can reduce your debt and impact your credit score. Learn how long it stays on your report and the best ways to rebuild your credit score in Canada.
