What Happens to Your Credit Score When Filing a Consumer Proposal?

July 4, 2019

If you’re considering filing for a Consumer Proposal, you might be asking — what will happen to my credit score?

Before measuring the impact of a Consumer Proposal on your credit rating, it’s important to first consider the state of your credit now.

Your credit score is a number from 300 to 900 that tells lenders how likely you are to pay back a loan. It is used to determine risk and acts as a report card for your financial history. A score on the low end of the range means that you are seen as a higher-risk client and you might not be eligible for loans at some lenders or may only qualify for higher interest-rate loans with less favourable repayment terms.

In Canada, credit scores are administered by credit reporting agencies Equifax and TransUnion.

Your credit score is based on a number of things from your credit report, including:

How many times you apply for credit.
Collections, bankruptcies, and proposals.
How much credit and debt you have.
The proportion of your balances to credit limits.
The length of time your credit is open.
Payment habits.
And more.

Where payment habits are concerned, late payments and defaulted items stay on your credit report for six years from when you resolve them. So, if you have a bad credit history, the damage may already be done.

Having poor credit can be a vicious cycle. If you are always borrowing from one credit card to pay off another, this is not good credit. And eventually, this cycle will catch up with you.

When you file for a Consumer Proposal, your credit score falls to the lowest number and must be rebuilt. This rebuilding is the critical part.

After a Consumer Proposal, your first credit product will likely be secured – such as a secured credit card or loan. This is where the product has security equal to your limit — for example, a credit card that uses your car as collateral if you don’t pay the balance.

How you manage this credit is key. If it is a credit card, do not use up the limit and pay what you owe in full each month. If it is a loan, make sure you plan for the payments and pay them on time and in full.

A Consumer Proposal is completely off your credit report in three years from when it is paid in full, but lenders will start working with you within one-to-two years of re-established credit after a Consumer Proposal.

When you’re weighing the impacts of a Consumer Proposal on your credit score, you need to consider where you are at now. If your credit score is already low, a Consumer Proposal added on will not make much of a difference — and may give you a better chance of rebuilding by eliminating unsecured debts.

But if you have a high credit score and filing for a Consumer Proposal would sink it, then you may want to first consider other options that don’t have as big of a consequence to your credit report.

At Fuller Financial Solutions, we help you explore each of your debt management options, including filing for a Consumer Proposal, and work with you to determine the impact to your credit score.