How to Rebuild Your Credit After a Consumer Proposal

There is a sense of accomplishment when you complete a consumer proposal and pay off your debts.

Through the financial counselling sessions that you must complete before being discharged, you’ll learn the fundamentals of budgeting, spending, and using credit responsibly.

But these sessions barely scratch the surface, and Licensed Insolvency Trustees are limited in what they can do to help rebuild credit.

The good news is if you’re in a consumer proposal or bankruptcy, there are many ways to start rebuilding your credit score right from the start.

How to rebuild your credit after a consumer proposal

A consumer proposal lets you start again with no debts, often at a reduced amount. Therefore, you must rebuild your credit profile before being accepted for most forms of credit.

A good credit score tells creditors that you can responsibly borrow money and pay it back when due.

Here are ten ways to rebuild your credit after a consumer proposal.

1. Pay off your consumer proposal

If you can pay off your consumer proposal ahead of schedule, it drops off your credit report faster.

2. Monitor your credit report

A credit report is a record of your credit history that lists any factors that affect your overall credit health.

Equifax and TransUnion can hold different information about you, so get a copy of your credit report from both credit reporting agencies.

If you notice an error, correcting it can improve your credit rating. Mistakes are common after a consumer proposal.

Common mistakes include:

• Accounts reported as being in bankruptcy or an R9.
• Owed balances or late payments for accounts included in a consumer proposal.
• Collection action for accounts in a consumer proposal.

Once your consumer proposal is complete, you’ll get a Certificate of Full Performance. If you send it to Equifax and TransUnion, you will give your credit score a 40-55 point boost.

There should be no balances for the debts you have included in your proposal.

A consumer proposal stays on your credit report for at least three years after completion.

3. Obtain new credit

Did you know that taking on new credit during or after a consumer proposal can raise your credit score?

Your credit history is the third most important factor when calculating your credit score, accounting for 15% of your total credit score calculation.

Having no credit hurts your credit score, and using new lines of credit wisely can help improve it.

You can access better credit products with a credit score of 650 or above. Anything below likely means paying a higher interest rate with subprime lenders.

How many new lines of credit do I need?

Establish two or more reputable lines of credit as soon as your financial situation allows. Examples include:

• Secured credit cards
• Credit cards and loans with low interest rates
• Car loans
• RRSP loans

Adding multiple types of credit will improve your credit score faster than just one line of credit. However, applying for too many loans at the same time can make lenders think you’re in financial trouble.

Keep your balance within 30% of your credit limit. Use your credit cards regularly, and pay off the balance before your statement arrives.

4. Add different types of credit

When you manage a mix of credit accounts responsibly, it positively influences your credit score.

A credit card, loan and mortgage are better indicators of a responsible borrower than simply having credit cards.

Talk to your financial institution about tailored credit-building products. Multiple products with one creditor can make it easier to access other products further down the line.

Credit card issuers offer cards tailored for people looking to rebuild their credit scores. However, these can result in higher interest rates.

Start with a secured credit card because approval is much easier. It is also possible to get a car loan in a consumer proposal.

Some financial products, such as prepaid credit cards, don’t help your credit score. If you already have a mortgage, making payments on time will boost your credit profile.

5. Don’t make too many credit applications

When a potential lender looks at your credit report, a hard inquiry is noted, which can remain on your credit report for three years.

Multiple hard inquiries in a short period can indicate to lenders that you are a risk. But the good news is inquiries only have a small impact on your credit score.

Soft inquiries—such as requesting your credit report and checks for employment, insurance and rentals—don’t affect your credit score.

Some credit products, like credit cards, are recorded as separate inquiries, so don’t make too many applications at once.

Car loans and mortgages are different; multiple inquiries in a short time (14-45 days) are treated as one inquiry. In other words, only one inquiry will affect your credit score.

6. Don’t rely on credit cards

If you obtain a credit card, use it sparingly and pay the balance every month. Reliance on credit cards is unhealthy, so only use one if you can afford to pay it back.

7. Beware of subprime credit

Subprime credit describes financial products offered at rates above the prime rate.

If your credit score is below 650, you will only be able to get loans from subprime lenders.

Subprime lenders, such as payday loan companies, offer short-term loans with high interest rates and often disguise their loans as installment loans.

Be mindful of the interest rate before applying for subprime credit, as it can cause more harm than good.

8. Pay your bills on time

Payments on time are the most crucial factor in boosting your credit score.

Lenders want evidence that you can borrow money and pay it back on time. If you don’t, it will take a period of consistent payments to repair the damage.

Payment history is recorded for all financial products, even small accounts such as utility bills.

Using automatic bill payments is an easy way to make sure payments are made from your bank every month. Make sure you have enough money to cover the costs, or you will pay a charge.

Aim to pay credit balances a few days before your statement is generated. Use phone reminders or a calendar to track when payments are due.

9. Improve your credit utilization ratio

Using all the credit available to you on a line of credit can damage your credit score. Keeping a lower balance will make your credit score rise.

Credit utilization describes your used credit versus the total credit available on your credit products. So, if you have a credit card with a $5,000 limit and use $2,500, your credit utilization is 50%.

To keep the credit utilization ratio in the safe zone, follow these tips:

• Pay down balances and use less than 30% of your available credit.
• Make more than the minimum monthly payment on your credit card.
• If a line of credit is near its maximum limit, use other lines to spread out the balance.
• If you increase your credit limit on a credit card, your credit ratio improves.
• Adding a new credit product increases the overall available credit.

10. Plan, budget and save

Work out a budget based on your income and expenses to avoid damage to your credit. Track what’s going in and out of your bank account, schedule bill payments, and live within your means.

There are many benefits to saving money:

• You have an emergency fund when you need it.
• You can use savings if you are behind on a loan or your consumer proposal payments.
• You can make a down payment to help you pass a credit application.
• You can use savings to pay your proposal early, letting you improve your credit score faster.

When you complete the consumer proposal, use a separate savings account, RRSP or RRSP, to save the money you were paying each month.

If you use an RRSP (Registered Retirement Savings Plan), you can benefit from tax savings and start building a nest egg for your retirement.

Additionally, you may be eligible for an RRSP loan, which can boost your credit score if you make payments on time.

Wrapping up

There is no quick fix for improving your credit score. If you have unmanageable debt, a good credit score is worthless. Your priority should be to get out of debt.

Thankfully, a consumer proposal can help you pay off your debts and improve your credit faster than you could on your own.

If you want to learn more about filing for bankruptcy or entering into a consumer proposal, discuss your options with a Licensed Insolvency Trustee.

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