How Does A Consumer Proposal Affect Your Credit

If you are swimming in debt and feeling like you are in over your head, a consumer proposal in Canada might be an option you are considering. It is a popular alternative to bankruptcy, offering a way to pay off a portion of your debts while keeping the rest manageable. But before jumping into it, you probably want to know: How does a consumer proposal affect your credit rating?

Your credit rating is a big deal—it affects everything from getting approved for a car loan to securing a rental, so understanding the impact of a consumer proposal on your credit is key. Let’s break it down so you can get a clearer picture of what to expect.

What Is a Consumer Proposal?

In a nutshell, a consumer proposal is a legally binding agreement between you and your creditors. It is designed to help you reduce your debt load — sometimes up to 80% — by allowing you to pay back a portion of what you owe over a set period, usually five years.

Filing a consumer proposal starts with an initial consultation with a Licensed Insolvency Trustee (LIT). From there, your LIT will work with you to draft a proposal that fits your financial situation and present it to your creditors. Once it is approved, you will begin making monthly payments to settle your debts over time.

A consumer proposal can be a good option if your debt is piling up, but you are not quite at the point where bankruptcy feels like the only solution. It also lets you keep your assets, like your house or car, and make manageable payments toward your debts. But, like all things, there are pros and cons to a consumer proposal. In this case, there is a trade-off: it does have an impact on your credit rating.

Why Understanding Credit Impact is Important

When it comes to any debt relief option, whether it is bankruptcy, a consumer proposal, or debt consolidation, knowing how it will affect your credit rating is important. After all, your credit rating determines your ability to borrow money, rent a place to live, or even get certain jobs.

What is a Credit Report?

Your credit report is like a report card that details your borrowing and repayment history. It includes information like how much debt you have, whether you have missed payments, and if you have filed for bankruptcy or a consumer proposal. Credit bureaus like Equifax and TransUnion keep track of this data and update your report regularly.

A consumer proposal will show up on your credit report, and knowing how it is recorded will help you understand its long-term impact.

What is a Credit Score?

When you review your credit report, it will often generate a credit score for you as well. Your credit score gives a quick insight into your financial reputation with one single number. Lenders, landlords, and even employers sometimes use your score to gauge your trustworthiness. The higher the score, the more reliable you seem in the eyes of people who might lend you money or offer services. In Canada, credit scores range from 300 to 900, with 600 or above usually considered “good.”

Several factors influence your credit score, including:

• Payment history: Have you been paying your bills on time?
• Credit utilization: How much of your available credit are you using? Less is better, like staying under 30% of your total credit limit.
• Length of credit history: The longer your accounts have been open and in good standing, the better.
• New credit inquiries: Opening too many new credit accounts at once can lower your score.

How Consumer Proposals Are Reported

Credit bureaus do not differentiate between consumer proposals and bankruptcies when initially filed. Once you file a consumer proposal, it gets noted on your credit report. Typically, it will be marked with an R9 rating which denotes whether a debt is “bad debt” or a bankruptcy. This is when you have made some sort of formal debt settlement. It can affect how creditors view your financial situation.

When you successfully complete your consumer proposal, it will get an R7 rating. This means that the account holder, which in this case is you, has made agreed-upon payments through a debt relief program such as a consumer proposal.

As for how long a consumer proposal stays on your credit report, it is usually there for three years after you have completed the proposal. So, if it takes you five years to pay off your consumer proposal, you will still have that mark on your report for another three years after your final payment, for a total of eight years.

How a Consumer Proposal Impacts Your Credit Score

Let’s talk about what happens to your credit score when you file a consumer proposal.

Immediate Impact on Your Credit Score

Filing a consumer proposal does affect your credit score right away, and yes, it can cause a significant drop. The moment your consumer proposal is filed, credit bureaus are notified, and your score can take a dip.

The average drop depends on where your score was to begin with, but it is not uncommon for it to fall by 100 to 150 points or more. Your creditworthiness takes a hit because you are telling lenders that you cannot pay back your debts in full, even though you are working out a plan to handle them.

However, it is good to note that credit scores are not universal and can change from lender to lender. It is impossible to know how your credit score is calculated or how your actions can change it as credit bureaus and lenders do not share the actual formulas they use to calculate your score. This is why they should be used mostly as a reference.

Long-Term Effects on Credit

The good news is that while your credit score might take an immediate hit, it does not stay low forever. While it impacts your credit rating, it’s often already been affected by missed or late payments. However many people have been making minimum payments for some time, which helps maintain stronger credit scores.

As mentioned earlier, the consumer proposal stays on your credit report for three years after you have completed it, but you can start improving your credit score as soon as you begin making consistent payments.

Here is how you can rebuild your credit:

• Get a secured credit card: These cards are backed by a cash deposit and can help you rebuild your credit score while keeping your spending in check.
• Make timely payments: Your payment history plays a huge role in your credit score, so staying on top of all your bills—proposal payments included—will help your credit recovery.
• Monitor your credit report: Keep an eye on your credit report to make sure your proposal and other accounts are being reported correctly. You can always dispute something if the information is incorrect.

Addressing your debt through a consumer proposal benefits you in the long run, though it takes time. A consumer proposal helps you rebuild your financial life. By ending the minimum-payment cycle, you can responsibly acquire new credit. The two mandatory financial counselling sessions teach valuable money management and budgeting skills, helping you manage your finances and rebuild your credit rating.

The Impact of a Consumer Proposal on Your Employment

You might be wondering if a consumer proposal affects your credit when it comes to job applications, especially if you are working in the financial sector. Generally, a consumer proposal does not show up in regular background checks unless the employer specifically looks at your credit report.

However, if you are applying for a job where you handle large sums of money or work in finance, some employers may want to see your credit report.

Renting and Consumer Proposals

Renting a new place can also be affected by a consumer proposal. Some landlords will run a credit check before approving your rental application and seeing a consumer proposal on your credit report might raise some red flags.

The good news is that if you have a solid rental history and can prove you have been making regular payments, many landlords will still consider you a good candidate.

Future Financial Planning

Getting through a consumer proposal is a great opportunity to rethink your approach to money. Once you have made it through, it is essential to stay on top of your finances. That means creating a budget, sticking to it, and avoiding taking on unnecessary debt.

Other Debt Relief Options

Let’s quickly talk about other common options. While they may not be suitable for you as consumer proposals often are a better choice when dealing with debt, we want you to make an informed decision. We recommend reviewing all your debt-relief options with a Licensed Insolvency Trustee to see what the best option for you is.

Bankruptcy

Bankruptcy is the more severe option and has a bigger impact on your credit score than a consumer proposal. When you file for bankruptcy, your credit report will also get an R9 rating. However, it stays on your report for six or seven years after your discharge whereas a consumer proposal remains on your report for six years after filing or three years after completion.

Debt Consolidation Loans

Imagine rolling all your debts into one package with just a single monthly payment—that is what a debt consolidation loan does. It simplifies your finances, making it easier to manage what you owe. However, there is a catch: you will need to qualify for the loan, which can be tricky if your credit score has already taken a hit.

If you are already in debt and are struggling to make payments, getting another loan often is not the solution. Most often, you will not be able to qualify for the debt consolidation loan which is why we tend to recommend consumer proposals. However, if you are able to stay on top of those monthly payments in a perfect case scenario, this approach can help boost your credit score over time.

When deciding what debt-relief solution might be right for you, it is important to look at the whole picture and know just how your credit is affected. This is why we recommend working with a Licensed Insolvency Trustee to come up with a personalized plan for your unique financial situation.

How Farber Can Help

So, how does a consumer proposal affect your credit? While it does lead to an immediate drop in your credit score and stays on your report for a few years, it is not the end of the world. With the right financial habits, you can rebuild your score and get your finances back on track. The key is to understand the impact, make a plan, and start taking steps toward recovery.

If you are struggling with debt and want to explore your options, Farber is here to help. We can guide you through the consumer proposal process, explain how it affects your credit, and offer alternatives that might work better for your situation. Get in touch for a free consultation and take control of your financial future.

At Farber. we are here to offer you support and guidance. Connect with us today and sign up for a free consultation! Let’s get you back on track and in charge of your finances.