Have you been struggling with debt and are considering your options on how to get your finances under control? You’ve probably heard of a consumer proposal, but are worried about its impact on your credit score rating. Read on to learn everything you need to know about consumer proposals and credit scores before moving ahead.
What is a consumer proposal?
A consumer proposal is a debt relief strategy that allows you to consolidate all your bills into a single payment. You may be able to reduce your total debt owed by up to 70% or 80%. As such, it is often considered as a preferable alternative to filing for bankruptcy.
You can file a consumer proposal through a Licensed Insolvency Trustee (LIT). They can negotiate with creditors on your behalf for a settlement, and a large part of your debt is likely to be forgiven.
Does a consumer proposal affect your credit score?
A consumer proposal does tend to have a negative effect on your credit score rating. However, the negative effect is less drastic compared to bankruptcy. If you’re unsure whether you need a consumer proposal, look into other options like debt consolidation or credit counselling. Do your research to decide which option is best suited to your specific situation. You can reach out to us for a consultation and we’d be happy to help you through the process.
If you’re approved for a consumer proposal, you will receive an R7 rating on your credit report.
What is an R7 rating?
Equifax uses a scale from R1 to R9 for credit scores. An R1 score shows you make regular, timely payments, and an R9 means bankruptcy. An R7 indicates that you’ve come to an agreement with the creditor to pay back some of what you owe, but are unable to pay everything. While this is closer to the poor end of the scale it is still a better option than bankruptcy.
How long does it affect your credit?
Your credit will be affected for a minimum of 3 years. This will affect your ability to apply for loans or any other form of borrowing. If you do need to apply for any financing in this duration, you will likely be offered credit at very high-interest rates.
It is recommended to avoid taking on any new credit or debt while paying off a consumer proposal.
How long does it stay on your credit report?
A consumer proposal will stay on your credit report for 3 years after you’ve finished paying it off. If you are able to finish paying off your consumer proposal in 3 years, the R7 rating will stay on your credit report for a total of 6 years. This being the case it makes sense to pay it off as quickly as possible. Once you pay it off, you receive a certificate verifying that you have fulfilled all the terms of the consumer proposal.
How to remove a consumer proposal from your credit report?
The sooner you pay it off in full, the earlier it drops off your credit report. There are many ways to try paying off your proposal early.
You can make extra payments occasionally, or put something extra towards your monthly payments whenever possible. If you are able to, you can also pay off the proposal in a single lump sum payment. As your debt can often be reduced by up to 80%, you may be able to pay this off much quicker.
This is especially true if your new monthly payment is more manageable. This will also allow you to free up some money to start building an emergency fund. If you are able to do so, you may not need to apply for credit at higher rates in case of emergency. You can instead use your emergency funds, thus saving your credit from future damage.
How to rebuild your credit after a consumer proposal
The most effective way to rebuild your credit is consistency. Make payments on time and in full before the due date. Doing this regularly can improve your credit rating over time, as it shows reliability. You need to make sure you do not miss any payments, as this can quickly impact your rating.
If you’re trying to improve your score after a consumer proposal, it is especially important to make timely payments and remember your bill due dates. Something as simple as setting up recurring calendar alerts can help keep you on track!
The goal is to show creditors that you are dependable, reliable and can be trusted to pay your bills on time.
Does a consumer proposal ruin your credit?
A consumer proposal can have a severe negative effect on your credit score rating. It is not a first option by any means for people considering debt relief options. However, if you’re at a stage where you are considering filing for bankruptcy, a consumer proposal might be worth looking into. Compared to bankruptcy, the effects on your credit are less severe.
Can I get a credit card during a consumer proposal?
It is possible to get a credit card during a consumer proposal. However, the chances of approval are less. In case you are offered credit, the rates you will be offered are likely to be very high. This is because whenever you apply for credit, the lender will do a credit check on you. When they do this, the consumer proposal will show up, and your credit score will be low.
Can I get a credit card after a consumer proposal?
It is possible to get a credit card or a line of credit after your consumer proposal, but you might still have to pay higher interest rates. After your credit improves over time, you may be able to qualify for better rates.
An alternative worth considering is applying for a secured credit card. Usually, you may need to offer collateral in exchange, like a security deposit or a GIC. This is usually a refundable deposit that you will have to make only once while opening the account. A secured credit card can help you build your credit after a consumer proposal.
Does a consumer proposal affect my credit for mortgage or renting?
A consumer proposal does not usually affect your existing mortgage or rental unit. However, you may face some consequences when applying for a mortgage renewal or applying for a new rental unit.
Would a consumer proposal affect my existing mortgage?
A consumer proposal would not usually affect your existing mortgage. You would be able to renew your existing mortgage quite easily. The only difference is you would not really be able to negotiate for a reduction in interest rate or move to another bank.
Another thing to keep in mind is your cash flow. Often, lenders will want you to pay the consumer proposal from the loan proceeds. If you have enough cash on hand, you may be able to do so.
Can I get a new mortgage if I have a consumer proposal?
It is possible to apply for a new mortgage while you have an ongoing consumer proposal, but you will likely be offered very high rates. Some lenders are also likely to delay approval till you make headway through paying off your consumer proposal. Some may even wait till you have fully paid it off.
If you must apply for a mortgage, try to have a substantial down payment available to show reliability and creditworthiness. You may even want to apply for a secured credit card to show that you are attempting to improve your credit. The general recommendation is to wait for your consumer proposal to end, and for your credit score to show relative improvement before applying for a mortgage.
Would a consumer proposal affect my rental applications?
Depending on whether your prospective landlord does a full credit check, the consumer proposal may affect your ability to rent. If the place you’re applying to stay at does not do credit checks, you may find it easier to find a new place to rent.
If they do, you may be able to reach out and explain the circumstances to your potential landlord or property management company. After that, it is up to them whether to take a chance and rent out to you. It might be best to apply to places that don’t run full credit checks while the consumer proposal stays on your credit report.
Would a consumer proposal affect my employment?
No, it should not. The Bankruptcy and Insolvency Act which oversees consumer proposals, states that employers shall not “dismiss, suspend, lay off or otherwise discipline” someone who has consumer debt simply for having consumer debt. It is effectively illegal for an employer to dismiss you for having a consumer proposal in Canada.
If you work in a licensed profession, you may have to report it to your regulatory body.
If you’re applying for new jobs, some professions may require credit checks. You may not qualify for those till the R7 rating drops off your credit score. This means you cannot qualify for these roles for around 3 years after you finish paying off the consumer proposal.
How to handle the effects of a consumer proposal on your credit report
When you have an ongoing consumer proposal, and 3 years after it’s fully paid off, you will have an R7 rating on your report. It might affect your ability to get a new loan or credit.
A common approach to show reliability is to get a secured credit card, which you pay in full and on time every month. This consistency is valuable proof when you want to show that you are genuinely trying to improve your financial health.
How to handle the effects of a consumer proposal on your employment
Some professions require checking your credit score rating before hiring. If that’s the case for you, you may face difficulties while looking for new employment. It is recommended to switch career tracks in such cases, at least till the consumer proposal drops off your credit report. It is important to do your research and make an informed decision about your specific situation.
If you work as a licensed professional, you may need to disclose the consumer proposal to your licensing body or regulatory authority. Check your specific license terms for details on whether or not a consumer proposal affects your ability to work in that particular licensed profession. Designations like accountants, insurance brokers, investment advisors, lawyers, CPAs, CFPs, real estate agents and HR professionals may need to report the consumer proposal to their licensing bodies.
Fortunately, a consumer proposal does not affect your existing employment, so you would be able to keep your existing job. If you’re looking for a new job, most industries and employers would not look into your credit report unless relevant to the job description. In case they do, they would see that you have a consumer proposal. Hence, it would be ideal to disclose this information to them before they find out themselves during a background check. Unless you’re working directly in a fiduciary or security-related capacity, a consumer proposal is unlikely to affect new employment.
How to handle the effects of a consumer proposal on your mortgage
Fortunately, a consumer proposal does not usually have an effect on your existing mortgage or rental unit.
A mortgage renewal would be a fairly straightforward process, however, you would likely, lose your ability to apply for a better interest rate or move your mortgage to a new bank.
If you are applying for a new mortgage, try to have a higher percentage of down payment to show creditors you are trustworthy. Another approach is to take out a secured credit card on which you make regular, timely payments. This shows that you’re actively trying to improve your financial situation. Showing proof of income and cash flow may assure lenders that you are capable of paying it back. Even with this in place, keep in mind you are likely to be offered a relatively higher interest rate for your mortgage.
TIP: After the consumer proposal drops off your credit report, take a few months to rebuild your score to a better rating, preferably within the good to excellent range. Once you do so, you may be able to negotiate a better rate with your lender.
How to handle the effects of a consumer proposal on rentals
For existing rental units, your consumer proposal does not affect your contract or situation. As long as you are able to continue making payments on time, it should not pose any issues with your current accommodation.
If you’re applying to rent a new unit, prospective landlords often do credit checks on applicants. Some rental applications even include a section where you need to disclose what debt you have and the amount involved. It may be relatively easier to try and find accommodation at places that don’t look at your credit score rating, at least until the consumer proposal drops off your report.
Private buildings and/or condos often have more stringent measures in place. Overall, larger property management teams are more likely to consider extenuating circumstances, as compared to a private building or a private landlord (for example a basement unit, or a suite in someone’s home).
TIP: If you do have a reasonable explanation for it, and can show that you are working hard to better yourself financially, it might be a good idea to get ahead of it and volunteer an explanation. This is especially relevant if the rental application includes a section on debt disclosure. If the landlord finds you trustworthy and honest, they may be more likely to consider giving you a chance. Additionally, if you have previous positive landlord references, it goes a long way for future applications!
Have more questions about consumer proposals or other debt solutions, contact one of our experts for a free consultation.