FRANÇOIS GILBERT – Licensed Insolvency Trustee (LIT)
Anyone with a high debt-load knows how stressful it is to try and keep up with payments. If for some reason, you are unable to pay then you now must deal with service interruptions, collection agencies and impending legal action. Missed payments also impact your credit rating, which may affect your ability to qualify for credit cards, loans, and other credit products in the future. Your current financial status may be stressful now, but it can also be creating future stress as your options become more limited.
We often get questions about the impact of insolvency on a person’s credit. People want to know how to fix their credit after long periods of unpaid debt, and how to qualify for new credit opportunities. It is important to know that rebuilding your credit takes time and requires commitment. The first step is simple… get out of debt! A consumer proposal will give you the opportunity to start fresh and get out of debt. From there you can start fresh and begin to rebuild your credit. In this article, we will explain your credit rating and give you the best tips to rebuild your credit quickly.
How Does “Credit” Work?
Your credit history is a collection of recorded entries including debts that you incur and payments you make to various creditors. Equifax and TransUnion are the two major credit reporting agencies in Canada. Any creditor can report a debt to these agencies. Many services like credit cards, cellular networks, utilities and payday loans are automatically reported. Your credit report includes your credit history, as well as statistics indicating how likely you are to make payments on time. Each agency also calculates a score based on multiple factors or key indicators.
Understanding The Ratings
Credit bureaus use the following scale to assign their credit rating:
- R1 – Payments are made on time.
- R2 – Payments are 30 days late.
- R3 – Payments are 60 days late.
- R4 – Payments are 90 days late.
- R5 – Payments 120 days late.
- R6 – This rating is not typically assigned.
- R7 – This rating signifies that debt consolidation/management, most often a consumer proposal, has been filed and that debts were settled for less than what was originally owed to creditors.
- R8 – Assets have been repossessed by creditors. Usually, legal action follows and this rating changes to R9.
- R9 – Bankruptcy has been declared, bad debts have gone to collection, or deemed non-collectable.
What is good about an R7 rating is that it shows the credit bureau that you have paid your debts in their entirety.
What happens when your credit score is low?
The most common concern with a low credit score is the challenge it can pose if you wish to apply for financing or credit. You are generally considered as higher risk by lenders, and they may be unwilling to lend to you. If you are hoping to mortgage a home, finance vehicle, or obtain a credit card, you may have to consider other options.
It can also be helpful to anticipate where else your report might be requested:
- Landlords – If you are renting, many new landlords may request a credit check as part of their initial screening process.
- Cell Phone Companies – Cell networks may check into your credit report to see if you qualify for special offers.
- Insurance Companies – Some companies may review your credit history in order to help determine their premiums.
- Utility Companies – Based on your credit scores, a utility company may request that you make a higher deposit.
- Employers – When applying for a new position, certain employers may want to review your credit history.
No one can access your credit history without your authorization and valid justification for the inquiry. A note will always be made on your report if it has been accessed, so you will always be able to see the details of that request.
Options for Obtaining Credit
If you have a low credit rating, you are not alone. And, there are solutions designed to help you out. In particular, secured credit cards are a great alternative. They work the same way as a credit card, but you are required to put down a deposit. Your credit limit is based on the amount of your deposit. This is a great way to begin to rebuild your credit. It is also possible to have a third party co-sign for financing or a credit card as security for the lenders. You will not be as restricted in this case, so exercise caution with your spending.
For most Canadians, consumer proposals offer the most affordable and credit-friendly alternative to bankruptcy. With a consumer proposal, you can get out of debt and start fresh. So long as your total debts do not exceed $250,000 (excluding a primary home mortgage) and you have the finances to make regular payments, a proposal may be the best debt solution for you. At Fontaine & Associates, a Licensed Insolvency Trustee (LIT) will evaluate your finances and assist you in deciding if a consumer proposal is the right debt solution for you.
What is the best way to rebuild credit?
A consumer proposal does not “fix” your credit score – that part is up to you. What a proposal does do is give you a fresh start to rebuild good credit. The financial decisions you make from the moment you file your proposal onwards will be reflected by your credit score. If you are wondering how long it takes to rebuild good credit, the answer varies. Although the goal of a consumer proposal is to achieve debt freedom, you will need to begin borrowing again in order to rebuild your credit. For those who have struggled with spending in the past, it is absolutely essential to adopt healthy spending habits and find new ways to manage finances in order to maintain good credit. It is just as important to rebuild your credit as it is to set yourself up for financial success. Establish a clear plan for your finances before signing up for that new credit card or loan. We recommend that you:
#1 – Budget
When putting together a consumer proposal, your Licensed Insolvency Trustee (LIT) will put together a statement that outlines your income and expenses. You can request a copy of this and use it as a guideline for your monthly budget, and follow that budget. This will help ensure that you account fixed and variable costs and do not overspend. It is also beneficial to set aside a minimum of $1,000 for unforeseen circumstances and emergencies. With your new budget in place and a cushion for rainy days, you are ready to rebuild your credit. It is possible to begin building good credit during a consumer proposal, but your rating will remain unchanged until your proposal has reached completion.
Types of Credit
- Revolving Credit – can be accessed at any time (i.e. credit cards and/or line of credit) and is known as ‘open credit.’ You can obtain a secured credit card during a consumer proposal. You will be required to put a deposit on the card. Start with a lower limit of $500 and include monthly payment into your budget. By paying off the full amount on the card every 21 days, you can keep your interest rates from rising. As you continue to use your card regularly, you will begin to see your credit score improve significantly.
- Installment Credit – this type of credit is arranged between you and a lender for a term loan. It is most commonly seen for home mortgages or vehicles loans and often costs more if you have a lower credit rating. A secured loan will require collateral, lowering your potential risk to the lender. This type of loan typically costs less and allows you to improve your credit. Your payment history will be reported to the credit bureau monthly, improving your credit with regular payments. Pro Tip: You can also boost your credit by applying for RRSP or GIC loans, which are generally easy loans to get, as banks get a good interest rate on them.
It is possible to qualify for a mortgage within two years of completing a consumer proposal, provided you have built good credit through two lines of credit or more.
- A consumer proposal gives you a fresh start, but it is up to you to ensure that all your payments are made on time, including cell phone bills.
- Your banking advisor will take your savings and assets into account when determining your interest rates, so it can be highly beneficial to have savings in the bank.
Obtaining Your Credit Report
A free copy of your credit report can be requested yearly from either of Canada’s top two credit bureaus, Equifax or TransUnion. Keep in mind that you can only request a free copy of your report via mail and it can take several weeks to arrive. You can pay for an instant access version of the report. This report also provides more information about your credit history, which can help you identify any possible errors. It is a good idea to check your report on a yearly basis for accuracy – errors can happen and can go unnoticed.
Find the right debt solution for YOU.
At Fontaine & Associates, we know that most people will experience financial difficulties in their lifetime. We understand that every situation is different and our knowledgeable Licensed Insolvency Trustees find the right debt solution for you. Call 1-877-241-6018 to connect with the office nearest to you and book your free consultation.
Licensed Insolvency Trustee (LIT)
Francois obtained his CPA accounting designation in 1995, his CIRP insolvency designation in 1998 and became a Licensed Insolvency Trustee (LIT) in 1999. He has been working in the field of insolvency since graduating from University of Ottawa in 1991 and has been with Fontaine & Associates since 2002. Prior to that, Francois was working in the Ottawa office of PwC.
Francois has been helping individuals solve their debt problems now for over 20 years by providing advice on credit counselling, consumer proposals and personal bankruptcies. He also has extensive experience in business restructuring.
When he is not at work, Francois spends most of his time with his wife and kids doing outdoor activities and he also volunteers with local non-for-profit organizations in the Ottawa area from time to time. He is an avid musician and plays the keyboard, mainly for his own enjoyment.