How To Rebuild Your Credit After A Consumer Proposal Or Bankruptcy

While bankruptcy and consumer proposals can release you from the pressure of creditors and debt, you’ll need to rebuild your credit score afterwards. We know this can feel daunting, which is why we’ve put together some handy steps you can take to help repair your credit score quickly.

Key Points

• Why is good credit important?
• How are credit scores calculated?
• How do you rebuild your credit score?
  • 1. Check your credit reports
  • 2. Make your payments on time
  • 3. Get a secured credit card
  • 4. Get an RRSP loan
  • 5. Stay within your budgets
• More credit score-building advice

Why is good credit important?

Your credit rating is more important than you may think, affecting your everyday life in multiple ways. Having a good credit score can help you with the following:

• Renting or purchasing a home
• Purchasing or leasing a car
• Getting phone or internet contracts 
• Accessing loans 
• Securing employment
• Gaining approval for insurance
  

These are some of the most important things we depend on every day, and it takes time to rebuild a credit score. So, the sooner you start, the sooner you’ll be back to where you want to be.

How are credit scores calculated?

Your credit score is calculated using 5 different factors. These are:

• Payment history – 35% 
• Level of debt – 30%
• Length of credit history – 15% 
• Types of credit used – 10%
• New credit accounts and applications – 10%

Each of these factors is weighted differently when calculating your credit score, which can range from 300 to 850 in most scoring models. The higher the number, the more financially trustworthy you’re considered to be.

How do you rebuild your credit score?

It’s important to build a new, positive credit history as soon as you can. But how do you do this? Our five simple steps below can help you make a start.

1. Check your credit reports

The first step to rebuilding your credit is making sure that the credit bureaus are reporting correctly. You can request a free copy of your credit report from the two major credit bureaus in Canada, Equifax and Transunion. While each provides its own report, and these reports differ to one another, they both will provide similar information on the following points:

• Personal information
• Consumer statements
• Tradelines
• Collection accounts
• Inquiries 

You should go through these reports thoroughly, checking for the kind of agreement that you made – bankruptcy or consumer proposal – the dates they went into effect, and the date you were discharged. 

You should also ensure your credit status is correct. With bankruptcy, you should see an R9 status. A consumer proposal should show an R7 status. Bankruptcy will remain on your credit report for 7 years (or up to 14 years if you have been bankrupt more than once). A consumer proposal will show for 3 years.  

Lastly, check that your personal details are correct. Although rare, clerical errors can occur which inadvertently make your credit score worse than it should be. If you notice any errors, report them to the credit bureaus and have them removed as soon as possible.

2. Make your payments on time

If you filed a consumer proposal, be sure to make your payments on time. If you miss three payments, your proposal is in default and your creditors can take legal action against you. If you are unable to make payments, you may be able to file an amended proposal to avoid default. Consistently paying your bills on time every month will make the biggest overall difference to your credit score.

3. Get a secured credit card

It may sound ridiculous to get a secured credit card after having just come out of bankruptcy or a consumer proposal. However, having no credit at all will damage your credit score just as much as having more than you can handle. This is where a secured credit card could help.

A secured credit card is a credit line guaranteed by a previous deposit. For example, to have $1,000 of credit, you would have to deposit $1,000 with the card’s bank. Since the bank reports to a credit reporting bureau, any payments you make on time will improve your report.

Not all secured credit cards are the same and can have high-interest rates and annual fees, so be sure to read the fine print before signing up. Finally, for each credit check by a lender there is a hit to your credit score, so be smart and do some thorough research before going ahead with an application.

4. Get an RRSP loan

If you haven’t been making your full contribution to your Registered Retirement Savings Plan (RRSP), you can take out a bank loan to make up the difference. Banks are usually more willing to extend RRSP loans. Not only will you increase your retirement savings, but making payments on the loan will also improve your credit rating.

5.  Stay within your budgets

None of the above will do any good if you aren’t staying within a budget. By staying within budget and not applying for loans to cover your everyday living costs, you are showing lenders that you are financially responsible. Not only will this have a positive impact on your credit score, but it will give you peace of mind that your financial issues are firmly in the past.

More credit score-building advice

The road to rebuilding your credit after a consumer proposal or bankruptcy can be a confusing one, but we are here to help. We have years of experience in guiding people through the bankruptcy and consumer proposal processes, so speak to one of our expert insolvency trustees if you have any more questions about rebuilding your credit score.