Rebuilding Credit After A Consumer Proposal

Rebuilding credit after a consumer proposal is a relatively easy and straightforward process.

We’ll provide you with some strategies next, but first, it’s important that you understand how the credit rating system works in Canada.

How Lenders View Your Credit Score

Approximately 90% of Canadian lenders use what is called a FICO credit score. This is a U.S. based credit scoring system which oddly enough, is not the same credit score you see on your Equifax, Trans Union, Borrowell or Credit Karma account. And nobody quite knows why this is.

In fact, you will be unable to access to your FICO score on your own – you need to provide your lender permission to conduct a “hard” credit check of your credit file as if you’re applying for a loan. A hard credit check could negatively impact your credit score.

Here is how your FICO score is calculated:

• • Your payment history comprises 35% of your FICO score. It includes which of your accounts were paid on time, the amounts owed and the length of any delinquencies. Also included are any adverse public records such as bankruptcies, judgments or liens.
  • Data about your debts comprises 30% of your FICO score. This data includes the number of accounts you owe money on, the type of debt and its total amount. Also included is your credit utilization rate.
  • The length of your credit history comprises 15% of your FICO score. This factor includes the length of time your accounts have been open and how long it’s been since they’ve been active.
  • The types of credit used comprise another 10% of your FICO score. Having a greater variety of differing types of accounts such as credit cards, mortgage payments and retail accounts is more beneficial than holding fewer.
  • The last 10% of your FICO score is made up of data related to new credit applications such as the number of recent credit inquiries, and how many new accounts have been opened. Opening up too many accounts in too short of a time period is interpreted as a sign of risk and will lower your score.

Strategies for Rebuilding Credit After A Consumer Proposal

With the above in mind, here are strategies for rebuilding credit:

1. 1. You should obtain a secured credit card after your consumer proposal has been approved by your creditors. It most cases, your consumer proposal will be automatically approved 45-days after its filed by your Trustee with the Office of the Superintendent of Bankruptcy.
   2. Use your credit card consistently while you’re paying off your proposal– use it for everyday purchases and pay off the balance in full at the end of the billing cycle. By doing this, you’re re-establishing your payment history, which is 35% of your FICO score. Doing this over a long period of time will gradually increase your credit score since the length of your credit history contributes to 15% of your FICO score.
   3. If your goal is to eventually apply for a mortgage to purchase a home after you’ve completed your consumer proposal, you should be aware that lenders generally use a 2/2/2 rule: 2 years discharged, 2 new credit accounts, $2,000 minimum credit limits with good repayment history. The easiest way to start is to obtain a secured credit card as mentioned in Point 1 above. Because your credit utilization rate is a major factor in your credit score, try to get card with a moderately higher credit limit (e.g. $2,000) – using a card with too low a credit limit will be of limited use in rebuilding your credit score.
   4. Once you’ve established a track record with your secured credit card, you’ll be getting offers from credit card and loan companies after you’ve completed your consumer proposal. Don’t accept too many offers in too short a period of time, since data related to new credit applications contributes to 10% of your FICO score.

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