If you need debt relief and wish to regain your financial freedom, the consumer proposal (CP) may be the answer. The consumer proposal is introduced as a means to decrease your existing debts and then settle the remaining debt balance over a five-year period.
A state of insolvency can prove challenging, but consumer proposals provide a way to manage debts and alleviate your financial burden without harsh impact on your credit score. Once debts are reduced, the next step is to work on improving your credit. To work towards improved financial status, we examine the impact of outstanding debt on your credit, the process of a consumer proposal and ways of building good credit.
How Outstanding Debt Impacts Your Credit Score
Credit is commonly referred to as your overall credit history and as determined by the financial bureau. A creditor can issue a report to the financial bureau concerning outstanding debts. It is your credit report that reveals such outstanding debt. Depending on your debt, you are assigned a rating or “credit score.” This will provide other creditors with an indication of your financial risk when looking to take out future credit. Such ratings allow a creditor to learn about your debt repayment patterns and the time taken to settle such debts.
Getting to Know Your Credit Rating
According to the credit bureau, your credit score is reflected on the following scale:
- R1 – Timely payments.
- R2 – Payments are late by 30 days.
- R3 – Payments are late by 60 days.
- R4 – Payments are late by 90 days.
- R5 – Payments are late by 120 days.
- R6 – The rating is not commonly applied.
- R7 – This indicates a consumer proposal or the presence of a debt management plan. This rating is used to enter into negotiations with creditors to settle your outstanding debts.
- R8 – This rating reveals a secured creditor that has implemented measures for repossession of assets to be managed as collateral. It will be issued on a credit report as it involves a legal strategy in which a process of repossession occurs. This leads to an R9 rating.
- R9 – During this stage, individuals may declare as bankrupt, the collection of bad debts or debts considered uncollectible.
Upon issuing a consumer proposal, you will still have outstanding debt that will impact your credit score. To work on your credit rating, you need to take the following steps towards debt relief.
How a Credit Score Impacts Your Financial Health
Whether you need a mortgage to buy a home or seek financing, you may come across many obstacles if your credit score is not up to par. Lenders often restrict specific services and products on credit to those with a poor credit history. If you have a low credit rating, you will have to seek alternative finances to cover the necessary costs. The most common scenarios affected by credit ratings include home loans, credit cards, car financing and related services.
Which Entities Need to Assess My Credit Rating?
Any type of lender will be required to examine your credit rating before services or products on credit can be approved. The following entities require a credit rating evaluation before approval is issued:
A Mobile Network Provider
When taking out a phone, internet or related contract, your mobile service will determine your eligibility based on your credit.
A landlord will assess your credit history when determining affordability and a deposit on property.
Your insurer may request a credit rating when assessing a monthly or annual premium.
A Future Employer
An employer will examine your credit history when assessing your fit for a particular position.
A Utility Provider
A utility company may request a credit score check concerning a deposit on utilities.
If your credit rating is required for a specific financial request, but the request is outside of a traditional financial organization, you have to grant permission for them to proceed. All persons who have made an inquiry into your report will be issued on the report.
What are the Alternatives?
For those with a low credit rating, you do have choices. Many providers understand the needs of those with debt and have created solutions to suit your needs.
As debt management is one of the best ways to improve your financial status, you could be issued with a secured credit card. This will function similarly to a traditional credit card; however, you must make a deposit to receive a specific credit limit. This allows you to develop a financial repayment and practice sound financial management for improved credit ratings. Many lenders view this in a very positive light.
What About a Consumer Proposal?
A consumer proposal will help you avoid the possibility of bankruptcy. It can help you protect your financial status depending on your debt sum. The total of your debts should not exceed $250 000 without including a mortgage. To qualify for a CP, a fixed income is viewed favorably; however, financial contributions from friends or relatives can serve as an agreed upon CP payment.
Working On Your Credit Rating with a Consumer Proposal
When you seek a consumer proposal, it can assist with debt relief and contribute to an improved credit rating. While consumer reports do not change a score overnight, with your efforts, it can be significantly improved. To achieve a positive credit rating, you need to adhere to a few best practices during the CP process.
What is the Time Taken to Develop a Healthy Credit After a Consumer Proposal?
While you may not want to, the best way to rebuild your credit rating is to loan money and start a strict repayment plan. Before reaching out for a credit card or loan, always develop a financial plan you can stick to.
Prepare a Suitable Budget
When you work towards a consumer proposal, you will receive a copy of your income expenses as listed by the LIT or Licensed Insolvency Trustee. This serves as a great way to develop a healthy budget to achieve financial success, but you must be strict with your repayments. A budget assists in creating a savings for set expenses and other costs incurred through the month. Always keep money aside to support your financial needs should unexpected events occur.
We recommend $1000 in savings to address an emergency situation.
Once you have some finances in place and a budget you can work with, you can start improving your credit.
Achieving an R1 rating is a possibility with diligence and determination.
A Look at Major Credit Forms:
The First Credit Form is Revolving Credit
Revolving credit or open credit will include credit cards or a specific credit line. Your payment history will be reflected each month according to a scale from 0-9. The 0 is indicative of a lack of payment. Before payment is obtained, the numbers will rise based on the number of days passed.
To obtain your secure credit card, it is important to approach a reputable institution and to discuss your consumer proposal process. The secure credit card application requires a deposit that is set as your credit limit on the card. By starting with a smaller sum of around $500, you can best control and manage your expenses and repayments. We suggest repaying the card in full within a 21 day period as this prevents high interest charges.
Use your card on a routine basis and make monthly repayments to work towards strengthening your credit rating.
The Next Type is Installment Credit
This form of credit is secured by an agreement with your lender for payments to be made over a specific term. This line of credit is applied in cases of home loans or asset loans but can relate to any conventional loan solution. Lenders will provide credit for the purchase of a vehicle; however, this vehicle will serve as collateral. You must make a specific payment every month. These payments are issued as proof to the credit bureau. Timely payments will improve your credit rating.
You can also apply for GIC loans or the RRSP as these provide a sound interest rate and banks are more lenient issuing the funds for such loans.
Only two years after settling your proposal, you could receive a mortgage based on obtaining healthy credit scores.
With your effort and determination, focus on settling your payments on time. From utilities to bills, always create a management plan for your debts.
Focus on saving your money. When you build your saving plan, the bank offers improved interest rates.
What is the Price of Checking My Credit Rating?
Canadian law states that a Credit Bureau must issue a copy of documents pertaining to your credit report, that is free. This can only be obtained by sending a written request to the bureau and can take a few days to receive the report. The report contains your score and some financial information. Going online offers a faster alternative to receiving this report. Always check your information carefully. Errors in your score must be determined and reported.
How You Can Overcome Debt Today!
With Basik Money, we provide a free initial consultation. Our certified and experienced professionals will address your queries with the attentiveness and expertise our clients deserve. With locations in British Columbia, Ontario and Saskatchewan, we can assist you with the process of a Consumer Report and the steps to achieving your financial freedom.