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7 Tips to Rebuilding Credit Following a Consumer Proposal

Aaron Broverman

Feb 16, 2022 10 min read

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How to Rebuild Credit After a Consumer Proposal
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    What does it take to rebuild credit after a consumer proposal in Canada? Well, coming out of a consumer proposal, you might actually be in better shape than you would’ve been following bankruptcy proceedings.

    That being said, you still aren’t the most attractive borrower to creditors, because a consumer proposal can remain on your credit report for up to six years after the date of filing. We have 7 tips to help you out and hopefully get your borrowing power back on track sooner rather than later.

    Monitor your Credit Report

    The first thing you need to do, once your consumer proposal is done, is keep an eye on your credit report. You need to make sure no creditor that was part of your consumer proposal is listed as continuing to collect payments from you.

    This is a common error after consumer proposal proceedings that can be very damaging, because it tells future creditors that your past debts are still in collections, even though the debt has been settled and you’re trying to rebuild your credit.

    Signing up for a free account with Borrowell entitles you to download your Equifax credit report and review it anytime you want, as many times as you want, for free. 

    If you find an error on your credit report, contact both Equifax and TransUnion and request to have it fixed immediately, because it could be slowing down your ability to rebuild your credit. There are specific steps you can take to dispute your credit report.

    Make On-Time Payments 

    If you’re fortunate enough to be given credit or loaned money, make sure you make all your payments on time going forward. 

    Not only does it condition you toward good financial habits so you don’t find yourself making another consumer proposal, but it’s the single biggest thing you can do to raise your credit score over the long term. 

    You just need to be patient: Rome wasn’t built in a day, so don’t expect to see your credit score rise significantly right away. Slow and steady is the name of the game.

    Apply for a Secured Credit Card

    One of the easiest ways to rebuild credit and get a creditor that is mostly likely to approve you, even after a consumer proposal, is to sign-up for a secured credit card

    The barrier to entry for a secured credit card is low because approval requires a minimum deposit which serves as your credit limit. You charge purchases to your secured card and make repayments every month, just as you would with an unsecured credit card. If you miss a payment or can’t pay back your balance, the secured card issuer will use your deposit to pay it off.

    The benefit of a secured card is that every payment you make gets directly reported to the credit bureaus. Do it enough and your credit score will rise to a level where you’ll eventually be offered a regular unsecured card.

    Take Out an RRSP

    Once you’re able to build some savings, you should invest in an RRSP. If you have a secured card and you’ve already shown your ability to build savings as part of an RRSP, your bank may give you an RRSP loan. Getting this and paying it back will not only build your credit, but you can pay back most of the loan with the tax refund you receive for investing in it, so it’s no skin off your nose to pay this back and banks are fans of people with RRSPs because it shows you want to invest in your future, so opening an RRSP can only help your credit.

    Use a Credit Building Program

    A credit building program is also known as a credit building loan. Unlike a traditional loan, where you are given a lump sum of money you’re required to pay back, the point of a credit builder loan is to pay it so that you can build your credit score.

    What happens with a credit builder loan is the lender will open a savings account and you will make payments to that account that will be reported to credit bureaus. Once the loan period is over, (usually 12 to 24 months) you will have built a strong credit history from making these installment payments on time. In addition, your savings account will be full of the payments you made because you get to keep the money.

    Set a Budget

    To avoid cash flow issues in the future, set a budget and parse out where your money is going and how much expendable income you have at the end of every month. 

    It takes discipline and consistency every month to track your spending and stick to a budget, but doing it ensures you don’t overextend yourself and are able to control your spending enough to not find yourself in a position where you will have to rebuild your credit once again.

    Develop Healthy Credit Habits

    Some steps above already highlight what are considered healthy credit habits, but rebuilding your credit truly means being able to put them all together. 

    These habits include the following: 

    • Making payments on time

    • Not maxing out your credit cards and other available credit

    • Managing your debt-to-income ratio (derived from dividing your monthly debt payments by your monthly gross income) which should ideally be around 30%

    • Contribute to an emergency fund

    • Pay off purchases before acquiring new debt

    • Monitor your credit report

    • Know your credit score

    • Help protect your finances from fraud and identity theft

    Beware of Credit Repair Scams

    There are a lot of places on the internet that claim to be able to boost your credit score quickly – without much effort on your part – for a fee.

    Such a claim should be an instant red flag, since the main way to build your credit is to engage in a slow and disciplined process of making payments on time, paying off your debts in full and keeping your credit utilization on any given credit vehicle at around 30%.

    Some credit counseling services claim they can negotiate with your creditors to reduce any debt payments you may have. In these cases, your creditors don’t have to work with these people, and often all these credit counselors will do is to refer you to a licensed insolvency trustee who is the only authority who can truly consolidate and reduce any outstanding debts through a consumer proposal.

    So you have to watch out for scams coming out of a consumer proposal in the same way you had to watch out for scams going into one.

    How Long Does it Take to Rebuild Your Credit After a Consumer Proposal?

    Rebuilding your credit fully after a consumer proposal will likely take a minimum of three years. With both credit bureaus in Canada, it can take up to six years from the day a consumer proposal is filed to fall off your credit report.

    However, if you’re able to satisfy all the requirements of the proposal and pay your debts as agreed before the six-year period from when you filed ends, a consumer proposal will be off your credit report with both credit bureaus in three years.

    The bottom line is, as long as a consumer proposal remains on your credit report, fully rebuilding your credit won’t quite be an option. You can get close, but you will need the consumer proposal to be removed to fully be treated as a regular borrower.

    How Does a Consumer Proposal Work?

    A consumer proposal can only be legally administered by a licensed insolvency trustee. If you visit them, they will want to know details about your financial situation, including all debts you have and what means you have to pay them back. If you have some debts that are all around the same amount and you still have the means to pay a portion of what you owe, they will likely suggest a consumer proposal.

    A consumer proposal, consolidates all of your debts into one lump sum that you pay at a lower monthly amount than you would likely pay if you had to pay all your creditors individually. The sum and the terms of your proposal are agreed on by your creditors and legally binding. 

    You pay this lump sum to the licensed insolvency trustee who distributes your payment among your creditors. The whole plan usually takes between one to five years to complete and make all the monthly payments. Once the plan is complete, you are released from all the unsecured debts under the proposal and free to start over.

    Keep in mind that a consumer proposal does not include secured debts such as mortgage payments, auto loans, or any other debts backed by collateral.

    What Happens to Your Credit After You Submit a Consumer Proposal?

    Once you submit a consumer proposal, all of your creditors – both secured and unsecured – will be informed, though only your unsecured creditors will receive money from it. The consumer proposal will eventually be reported on your credit report as an R7. The R means “Revolving” and the 7 indicates that your debts were settled as part of a consumer proposal or debt consolidation arrangement.

    Though not as bad as an R9, which signals you have bad debt and are a write-off, an R7 still makes borrowing difficult for as long as it remains on your report. Though not guaranteed,  you are still likely to be turned down for loans, credit cards or mortgages if they aren’t specifically designed for those with bad credit.

    How Long Does A Consumer Proposal Remain on Your Credit Report?

    An R7 – designating your debts were settled as part of a consumer proposal – remains on your credit report either up to six years after you filed the proposal or three years after you’ve satisfied all the obligations of the consumer proposal, whichever comes first.

    How Do I Correct Errors on My Credit Report?

    To correct errors on your credit report, you can contact Equifax and TransUnion directly. There are specific steps you can take to dispute your credit report

    You can also contact the business that is reporting the inaccurate information to the credit bureaus and get them to correct the record the next time they report. 

    Whether you file a dispute with the business or the credit bureaus, you will need to submit copies of documentation proving the information is inaccurate. The credit bureaus will also need  proof of your identity, the reason for your dispute, and your account number.

    How Long After A Consumer Proposal Can I Get Credit?

    The short answer: it depends. Each creditor has different criteria and lengths of time that will satisfy them when it comes to getting approved. Below are some of the most common types of loans or credit and how each one treats a consumer proposal:

    Mortgage

    To be approved for a mortgage after a consumer proposal, you will need at least two years of clean borrowing history following the conclusion of the proposal itself. Even after that, you will need to provide at least a 20% downpayment and paperwork proving that you’ve been working on rebuilding your credit.

    Credit Card

    The fastest way to rebuild your credit is with a credit card, and you can qualify for one while you’re still in the midst of your consumer proposal. It needs to be a secured card, but if you are able to make payments on time for the next two years, you should receive an offer for an unsecured card following that two-year period.

    Auto Loan

    While it’s possible to get a car loan during your consumer proposal period, it’s best to apply when you are coming to the end of it. This is because you need to be able to prove affordability and you stand the best chance when most of your consumer proposal payments have already been made. You also need to show that your debt-to-income ratio is the lowest it can be under the circumstances and at the end of your proposal is when you can do that. 

    What Happens If I Pay Off a Consumer Proposal Early?

    The good news is there are no penalties for paying off your consumer proposal early. All it does is get you out from under the consequences of bad credit sooner and get you on the road to rebuilding your credit much sooner than otherwise.

    Do what you can to make this happen, because even though a consumer proposal is a less consequential alternative to bankruptcy, it still very much takes time to be back to normal from a credit perspective. Anything you can do to shave off time from that process the better off you’ll be.

    In either case – whether you can complete a consumer proposal early or you pay it off as scheduled – recognize that anything to do with rebuilding your credit takes time and patience, so you won’t be able to get back to good credit fast and anyone promising you that is likely looking to scam you.

    Keep your head up, make your payments on time, and follow the other steps recommended above. Before you know it, your credit will be good as new. 

    Aaron Broverman
    Aaron Broverman

    Aaron Broverman is a writer and journalist with over a decade of experience. He specializes in personal finance and credit card topics, and his work has appeared in outlets such as CBC, Huffington Post, Yahoo Canada, and Greedy Rates.

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