One of the more pressing concerns that many of the people I meet with have is how their choices will affect their credit rating. Specifically, how does a Consumer Proposal affect a credit rating?
What is a Credit Rating?
First, let’s talk about what a credit rating is. Each ‘trade line’ (place you owe money to) has a separate rating attached. There is a letter (R for revolving, like a credit card, I for Installment, like a loan), and a number. A zero means your account was just opened or there is no activity, 1 shows that you pay on time. 2 is 30 days late or one payment missed, and 3, 4, and 5 represent 60, 90, 120 days late, or 2, 3, 4 payments missed. As far as I know, no one uses 6 (150 days/5 payments) anymore.
R8 is used only if a car is repossessed.
R9 represents accounts that have not been paid in some time, or situations where the person owing the money can’t be found. It also represents the rating you get if a debt is part of a bankruptcy.
R7 is for things like consumer proposals. It is a better rating than bankruptcy, but obviously not as good as paying exactly on time, as agreed.
If you file consumer proposal in Ontario, your rating for each debt included in the proposal will either stay where it is or be moved to an R7 rating. Once the proposal is complete, the rating on all items in the proposal will move to R7 if not already there, and will stay on for 3 years after your final payment.
One thing many people are not aware of is that you can pay a proposal more quickly than you’ve agreed to. For example, you may file a proposal based on your current situation at $200 per month for 60 months to total $12,000. If your income goes up and you wish to pay $300 per month for a while you will finish early. The three years the R7 rating stays on your report starts when you are done!
Credit Rating Versus Credit Score
Another thing to know about is credit scores – this is the thing banks use to determine whether to lend. A credit score is made up of many things, including payment history, length of time using credit, number of accounts and inquiries. Each ‘trade line’ plays a part in the total score. If you file a consumer proposal you could actually have a different credit score than someone else in a consumer proposal just based on the things such as car payments, old paid off debts, etc.
A Consumer Proposal Means An Improvement in Your Circumstances
So, here’s the bottom line: if your credit has been harmed by non payment already, a consumer proposal may actually improve your score. If your credit is good today, filing a proposal should have a less negative impact on your score than a bankruptcy. Depending on the length of your proposal, it can also be off your report more quickly, since bankruptcy stays on for at least seven years, 14 years if you’ve been bankrupt before.