Filing for a bankruptcy or a consumer proposal is not a decision anyone takes lightly. They have undeniable consequences on your credit, but they also offer a unique opportunity to break free from the shackles of overwhelming debt. Once you’ve completed the bankruptcy or proposal process, all your unsecured debts are forgiven, providing you with a clean slate and a chance to rebuild your financial life.
At C.E. Craig & Associates Inc. our debt recover team helps you through the journey of rebuilding your credit after bankruptcy or a consumer proposal. We are also happy to discuss credit reports and the major credit reporting agencies in Canada.
Understanding Credit Reports and Major Credit Reporting Agencies in Canada
Before delving into strategies to rebuild your credit, it’s essential to understand what a credit report is and who the major credit reporting agencies in Canada are.
What is a Credit Report?
A credit report is a detailed record of your credit history. It includes information about your credit accounts, payment history, outstanding debts, and any public records related to your finances, such as bankruptcies or consumer proposals. Credit reports are maintained by credit reporting agencies, which collect and compile data from various sources, such as lenders, creditors, and public records. These are agencies that, for profit, report on consumer behaviour for the benefit of credit grantors (like the banks or credit card companies). They are a data house and not credit lenders themselves.
In Canada, there are two major credit reporting agencies:
Equifax: Equifax Canada is one of the leading credit reporting agencies in the country. They gather and maintain credit information on individuals and businesses, which is used by lenders and creditors to assess creditworthiness.
TransUnion: TransUnion Canada is another major credit reporting agency. They provide credit reports and credit scores to individuals and businesses, helping them make informed decisions regarding credit applications and lending.
Now that we have a clearer understanding of credit reports and the major credit reporting agencies in Canada, let’s explore the steps you can take to rebuild your credit after bankruptcy or a consumer proposal.
Create a Budget
After emerging from bankruptcy or a consumer proposal, it’s crucial to establish a budget. You won’t have immediate access to credit, which limits your spending power. Moreover, it’s essential to avoid overspending, which could lead to a recurrence of the problems that led to your financial difficulties in the first place.
Creating a monthly budget template and consistently monitoring your spending against it is a great way to ensure you stay on track. After a few months, take the time to re-evaluate your budget. Are you spending too much? Are your expenses primarily wants or needs? Adjust your budget accordingly, focusing on essential needs while trimming unnecessary expenses.
Review Your Credit Report for Inaccuracies
One of the first steps in rebuilding your credit is to review your credit report for inaccuracies. Correcting errors and inaccuracies on your credit report is crucial, and you can do this on your own without the need for credit repair specialists. While it may take some time to send letters and get your report without professional help, the effort is worth it.
You can obtain a copy of your credit report from both Equifax and TransUnion in Canada. Review the reports carefully, and if you spot any inaccuracies, dispute them with the respective credit reporting agency to have them corrected.
Make Timely Payments
Consistently making payments on time is the most significant factor in raising your credit score and rebuilding your credit history. Any payment you make, especially with a secured credit card, is directly reported to the credit bureaus. Making payments by or ahead of the deadline is essential and the most effective way to reflect positively on your credit score, especially when done regularly.
In addition to timely payments, here are some other important factors to consider for improving your credit score:
Keep your credit utilization below 30% of your available credit.
Pay off your balance in full consistently within the statement period.
If you can’t pay your full balance, strive to pay much more than the minimum payment.
Build Savings
Emerging from bankruptcy or a consumer proposal provides an opportunity to save more money. A stricter budget than you’re used to can help you put money away and build your savings. Having savings not only provides a safety net for covering unexpected expenses but also demonstrates your ability to exercise restraint and plan. Lenders consider the amount of savings you have when evaluating your creditworthiness. The more you save, the better your chances of obtaining credit in the future.
Additionally, consider investments to grow your savings, which brings us to the next recommendation.
Open an RRSP and Acquire an RRSP Loan
Once you’ve built your savings, consider opening a Registered Retirement Savings Plan (RRSP). Demonstrating a consistent ability to contribute to a registered savings vehicle may encourage banks to offer you an RRSP loan. With this loan, you can further grow your RRSP, simultaneously improving your credit score.
One of the advantages of an RRSP loan is that you can repay it quickly with the tax refund you’re likely to receive for using the loan to invest in your RRSP. This strategic move not only bolsters your retirement savings but also helps rebuild your credit.
Avoid NSF and Overdraft Fees
Non-sufficient funds (NSF) fees and overdraft fees can be detrimental to your financial recovery. If these fees have become a recurring issue for you, it’s a sign that you may be heading toward financial instability. Being overdrawn and unable to honor checks can rapidly worsen your credit score.
Furthermore, having to pay these fees indicates that you’re spending more than you can afford, potentially leading to an inability to cover your debts once again. Avoiding NSF and overdraft fees is essential for maintaining financial stability and rebuilding your credit.
Take Out a Credit Builder Loan
A credit builder loan is a unique financial product designed to help you improve your credit score. Unlike a typical personal loan, the purpose of a credit builder loan is to pay it back and, in the process, build your credit score.
With a credit builder loan, you make regular payments into a savings account over 12 to 24 months, and these payments are reported to the credit bureaus. Once the loan period ends, you will have built a strong credit history, and you will receive the money deposited into the savings account, albeit with some interest costs. Some lenders even choose to reimburse you for part of the costs after the loan is paid off.
Get a Cell Phone Contract
While it may seem unusual, getting a cell phone contract can be considered a credit product. Cell phone companies typically conduct soft credit checks before granting you a contract. Once you’re on a contract, paying your cell phone bill every month is reported to the credit bureaus, helping boost your credit score over time.
Keep Old Credit Cards Open
Maintaining older credit card accounts can positively impact your credit score. One of the factors considered in your credit score is the length of your credit history. The longer your credit history, the better your score.
Keeping your older credit card accounts active by making occasional purchases with them helps extend your credit history. However, be mindful of potential inactive fees or annual fees associated with these cards. In some cases, it may be more beneficial to close the account, so evaluate your options carefully.
Limit Your Number of Credit Applications and Credit Checks
Another critical factor in your credit score is the frequency of credit applications. Each time you apply for credit, the lender typically conducts a hard check on one of your credit files. These credit checks have a small impact on your credit score, and multiple applications in a short period may signal financial distress to potential lenders.
Understanding Your Credit Score and How It May Affect Your Loan Application
Your credit score is what new lenders check before they approve a loan. It’s provided by private credit reporting agencies who collect information on your repayment history from your previous lenders. Good repayment histories lead to high scores and the ability to borrow more. Poor histories, including late payments, collections, bankruptcy and consumer proposals lower your score and can result in a loan being refused. Your overall credit score is something like your “grade-point-average” from school. Each interaction with creditors forms part of your overall score.
In Canada there are two major credit reporting agencies: Equifax and Trans Union Canada. You can request your credit score at:
Equifax
Trans Union Canada
Some credit-reporting agencies report the lenders’ rating of each of your credit history items on a scale of 1 to 9. A rating of “1” means you pay your bills within 30 days of the due date. A rating of “9” means that you never pay your bills at all or that you have made a consumer debt repayment proposal to the lender. A letter will also appear in front of the number: for example, I2, O2, R2. The letter stands for the type of the credit you are using.
“I” means you were given credit on an installment basis, such as for a car loan, where you borrow money once and repay it in fixed amounts, on a regular basis, for a specific period of time until the loan is paid off.
“O” means you have open credit such as a line of credit, where you borrow money, as needed, up to a certain limit and the total balance is due at the end of each period. This category may also include student loans, for which the money may not be owing until you are out of school.
“R” means you have “revolving” credit, where you make regular payments in varying amounts depending on the balance of your account, and can then borrow more money up to your credit limit. Credit cards are a good example of “revolving” credit.
The most common ratings are “R” ratings. These are known as North American Standard Account Ratings and are the most frequently used. The “R” indicates that the item being described involves revolving credit. If you always pay on time, it will be coded an R1. If an amount was written off because you never paid it back, it is coded R9. The R ratings are a coding system that translates “on time”, “one month late”, “two months late”, etc., into two-digit codes.
North American Standard Account Ratings: “R” Ratings
Equifax Rating are as follows:
R0: Too new to rate; approved but not used.
R1: Pays (or paid) within 30 days of payment due date or not over one payment past due.
R2: Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.
R3: Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due.
R4: Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.
R5: Account is at least 120 days overdue, but is not yet rated “9.”
R6: This rating does not exist.
R7: Making regular payments through a special arrangement to settle your debts.
R8: Repossession (voluntary or involuntary return of merchandise).
R9: Bad debt; placed for collection; moved without giving a new address or bankruptcy.
NOTE : Other rating indicators that might be found on a report are “I” for installment credit or “O” for open credit line.
Conclusion
The decision to file for bankruptcy or a consumer proposal should not be taken lightly. While these options may reduce your credit score during the insolvency process, they offer an immediate opportunity to eliminate debt and empower yourself for long-term positive effects on your credit rating. Struggling unnecessarily with debt for extended periods limits your ability to acquire assets and secure future financial stability.
Remember that rebuilding your credit after bankruptcy or a consumer proposal takes time and discipline. It won’t happen overnight, but by following these strategies consistently, you can gradually improve your financial situation, regain your creditworthiness, and pave the way toward a brighter financial future. Don’t let past financial challenges define your future – take control and work towards a fresh start on your path to financial freedom.
