How does a consumer proposal affect your credit score?

There are two credit agencies in Canada; Equifax and TransUnion. They are public companies and not run by any branch of government.

Every time you take out a loan, credit card or borrow money from a financial institution, the lender reports the activity on these to one or both of the credit agencies.  They choose which one(s) they wish to use.  The purpose of these agencies is to maintain financial data on each individual as a resource for financial institutions to decide if you will be a good customer if they were to lend you money. I.e. are you a good credit risk and they will be repaid in full?

The credit bureaus keep information on payments made and whether they were paid on time or late. Each loan/credit card is assigned a risk rating with R1 being the highest (pays on time as agreed) to R9 (debt written off in a bankruptcy) An R5 debt rating is the lowest rating where payments are being made and current. A consumer proposal rates an included debt as an R7.

What is a Credit Score?

Based on your credit report, the credit agencies calculate a number called a credit score by using a complex computer algorithm. A credit score is not a measure of how financially successful you are, it is an indication on how responsible you are using credit. They range from 300 to 900; the higher the score indicating that you are more responsible. With a higher credit score, banks and lenders will be more open to lending you money and at lower interest rates. A lower credit score will indicate that you are less responsible with money and a bank may be unwilling or less willing to lend you money. It may also be at a higher interest rate to compensate them for the perceived increased risk.

Generally, when people visit a Licensed Insolvency Trustee they have been struggling financially for some time; likely obtaining and relying on higher amounts of credit and possibly missing some payments. As a result, the average credit score of someone filing a bankruptcy or consumer proposal is generally on the low to mid-range, depending on how long they have been struggling.

Filing a Consumer Proposal

Filing a consumer proposal with a Licensed Insolvency Trustee is a legal filing and will be noted on your credit report under the legal notices section. This will inevitably cause your credit rating to drop, however filing a Consumer Proposal should be viewed as a positive step towards fixing your finances and you have the opportunity to improve your credit rating as you move forward through the proposal term.

During your mandatory credit counselling sessions, the Licensed Insolvency Trustee will carefully explain to you how your credit score works and what actions you can take to improve it. If you follow their advice, you should notice a gradual improvement over time so you complete the Consumer Proposal with a healthier credit score for your new financial future.

Taylor Leibow Inc. are Licensed Insolvency Trustees and have been helping individuals and businesses with their financial and debt issues since 1947. If you would like to talk to Kathy Lenart or Jeff Lewis about your financial issues and how they can help you, reach out them at freshstartnow.ca