The consumer proposal might be an ideal way to overcome your debt, but it can damage your credit ratings. Your credit score is closely connected to your credit report since the report contains all your missed or late payments. However, it is deleted from your credit reports three years after paying off all your debts according to the proposal or six years after it was filed, whichever comes first.
What is a credit rating/credit report?
A credit rating assesses how well they fulfill their financial commitments according to a person’s payment history and present debt status. One of Canada’s largest and most popular credit bureaus, Equifax calculates your credit score on a scale of R1 to R9. An R1 rating means you make payments without delays, whereas an R9 rating means you have bad debt or are declared bankrupt. You will have an R7 rating if you have filed a consumer proposal. This rating also reflects the debts to be paid at the end of a debt consolidation loan, voluntary deposit at Court, or any similar arrangement, like a consumer proposal.
Understanding your credit rating history
Two agencies in Canada report and record your credit history. TransUnion and Equifax are the credit bureaus that compile the individuals’ credit reports and credit scores for government and private lenders.
- TransUnion: Chicago-based TransUnion will remove a consumer proposal from your credit history either three years after finishing the proposal or six years after the defaulting of the account. Whichever comes first will be applied.
- Equifax: Atlanta-based Equifax will withdraw a consumer proposal from your credit report three years after paying all your debts or six years after filing the request; whichever comes first will be applied.
What effect does a Consumer Proposal have on your credit?
Even though it is temporary, there are multiple ways in which a consumer proposal affects your credit. When a Consumer Proposal is filed and approved:-
- You will likely receive an R7 credit rating on your credit report.
- The proposal will show two sections of your three-year credit rating – the legal and public records sections.
- Your creditor will indicate that your account has been incorporated in a consumer proposal.
- The filing date is documented and is then updated upon the proposal completion.
- Occasionally, your creditors may indicate bankruptcy on your credit report instead of a consumer proposal. You can request to rectify this.
Does Consumer Proposal remain on the credit report all the time?
Positive credit information, such as making payments on time, remains on your credit report for ten years with Equifax and twenty years with TransUnion Canada. Negative credit information also stays on your credit report for several years. A Consumer Proposal does not remain on the credit report all the time. It can stay on your credit report for up to six years from the date you file it. One of the advantages of a Consumer Proposal is that if you pay it faster, then the duration of time it appears on your credit report is shortened.
- A consumer proposal completed in five years will be withdrawn from your credit report a year later, which is equal to six years from the date you filed it.
- A consumer proposal completed in two years will remain on your credit report for an additional three years from the date you finished the payment, which is equal to five years.
- A consumer proposal paid instantly as a lump sum will be removed three years after completing the proposal.
This is just the opposite of Bankruptcy, which remains on your credit report depending upon the number of times you have filed it. If you have filed a Bankruptcy for the first time, it remains on your credit report for six years, whereas if you file for bankruptcy three times or more, then it remains on the credit report lifelong.
How to rebuild your credit?
There are multiple ways to rebuild your credit after filing a consumer proposal:
- Applying for a Secured Credit Card that relies on your bank account deposits.
- Make sure to repay every payment without further delay.
- Paying in higher amounts whenever possible and not giving a minimal charge.
- Avoid opening new accounts before the existing ones are paid.
Many are concerned about a consumer proposal’s consequence on your credit. Also, most of them are unaware of the credit counseling sessions that give a debtor the resources and strategies they will require to repay the consumer proposal and follow a better financial life. At Dana MacRae, Licensed Insolvency Trustee, we will walk you through the entire process and help you have a better economic life.