Obtaining a loan or credit in a banking institution seems to be a given in our society.However, for some consumers, getting a loan for a car or a home is a real headache.
Your loan and interest rate are determined by your credit rating. What about when you have financial difficulties and apply for a consumer proposal, what is the real impact of it on your credit rating?
Calculation and results of the credit rating
Your credit rating will determine the amount that the financial institution will lend you to make a loan for the purchase of a house or the rental of a car, for example. Your credit rating will also determine the rate of interest you will receive for your loan. The credit rating is between R1 and R9. The R1 rating is the ideal rating; it’s the best rate to have. R9 is the rating assigned to a consumer who is in a bankruptcy situation. It is based on the frequency of your payments on your credit cards and your existing loans. Any missed payment will be accounted for and included in the calculation that determines your credit rating.
The management of your debts is, therefore, an important factor in determining your credit rating. In a consumer proposal situation, your credit rating is found at credit score R-9 for the total duration of the proposal, therefore for a maximum of 5 years. Consequently, the proposal has a big impact on your credit rating. On the other hand, an R-9 credit rating is only applied for the duration of the proposal, unlike bankruptcy.
Indeed, bankruptcy applies an R-9 credit rating to your file not only during the term of your bankruptcy but also for the 7 years following your discharge. With R-9 being the worst credit score and cutting you all out of credit possibilities, the consumer proposal is advantageous because it reduces the time of the R-9 rating. The consumer’s proposal is, therefore, better for your credit rating, unlike bankruptcy. Following the release of your consumer proposal, your credit rating will go back to an R-7 rating for 3 years; the rating commonly referred to as the « recovery rating.» The « recovery rating » is the rating used to prove yourself to credit bureaus. A « recovery rating » will allow you to obtain loans under certain conditions and will not necessarily put a stop to financial institutions in obtaining some form of credit anyway.
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How can I raise my credit rating following a consumer proposal?
It is your responsibility as a result of your consumer proposal to reduce the impact of your consumer proposal by using the R-7 « recovery rating » to prove to financial institutions that you can manage your credit. You must first send proof of your release to the credit bureaus. These will change your credit rating from R-9, the insolvency rating, to the R-7 credit rating (the recovery rating). At this point, you will be responsible for rebuilding your credit. Financial institutions may be more reluctant to lend money to you even when your credit rating is recovering. You can then their prove your goodwill by using several methods. You can first use a co-signer for your loan or an endorser who will guarantee your loan with the financial institution.
You can also get a credit card with security like one of your asset (car, house, etc.) as a guarantee of payment or a rechargeable credit card. However, In Ontario, if an asset would be exempt under the Executions Act, it cannot be used as collateral. The most common form of a secured credit card is with a cash deposit – the institution keeps the deposit in an account, and usually, about a year later, the debtor can qualify for an unsecured credit card and can cancel the card and get their deposit back. The rechargeable credit card is efficient as it allows you to put the amount you want on the card, it ensures that you will not make credit abuse. Some institutions will agree to give you a credit card with a higher interest rate than usual. You must not become demoralized following a consumer proposal because the impact on your credit rating is much lower than in a situation of bankruptcy and for a much shorter duration.
The important thing in all loan situations to raise your credit rating is to make timely payments of any loan that has been contracted. The one-time payment to complete your obligation will increase your credit score even after a consumer proposal, an advantage that should not be underestimated. Also be sure to check your credit rating with the credit bureaus every year to avoid mistakes and get your credit rating up as quickly as possible. Another factor that can help with your credit rating is to ensure that cell phone, internet and cable bills are paid on time. Even if they are late by a day, it can have a negative impact on their credit ratingUnlike bankruptcy, the consumer proposal has only a limited impact on your credit rating. Contact an advisor for tips on how to improve your credit rating and regain your freedom of borrowing.
Ginsberg-Gingras
Licensed Insolvency Trustees
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