How do I rebuild my credit after a consumer proposal?

By Becky Western-Macfadyen, financial coaching and education manager at Credit Canada

As told to Kelsey Rolfe.

Here’s the answer to this week’s reader question.

“I want to rebuild my credit and I need a credit card. I was on a consumer proposal but I wasn’t able to finish it. Could you share any ways to rebuild it?”
—Nada

The impact of consumer proposals and bankruptcies on credit scores

Falling on hard times is incredibly stressful, but bad credit history is not a life sentence. It can be repaired with the right actions. Keep in mind that rebuilding your credit is a marathon, not a sprint; it generally takes about 12 to 18 months of consistent positive behaviour to see significant changes on a credit report, although small improvements can certainly appear sooner.

Going on a consumer proposal means making a deal with creditors to pay less than what’s currently owed over a certain period of time at no interest. The trade-off is that it reduces your credit history, which therefore impacts your credit score. The consumer proposal is removed from your credit report three years after you pay it off.

If you cannot complete your proposal due to further hardship, it can significantly extend the time to rebuild your credit score. When a proposal fails or is annulled, those original debts and interest come back and the negative mark remains on your credit report longer than if you had been able to complete the proposal. In that case, reaching out to a credit counsellor is vital to explore your options and stop any further damage.

Note: You cannot file a second proposal if your first proposal is open or annulled. However you can pay the debt off if your financial circumstances allow it, or move on to a bankruptcy, which commonly lasts about nine months and costs roughly $1,800. Once you’re discharged from bankruptcy, your debts are closed. It remains on your credit report for seven years. It’s a longer path than the consumer proposal.

The steps can you take to rebuild your credit

There are five factors in the formula for a credit score. 

1. Payment history: 35% 
2. Credit utilization:  30% 
3. Credit history: 15%
4. Hard inquiries and records such as collections and bankruptcies: 10% 
5. Credit mix: 10% 

How to improve payment history

There are certain levers that are within your control. Make sure you’re your paying bills on time, even if it’s just the minimum balance, because consistency is key. 

How to improve credit utilization

With credit utilization, keep your credit balances low. The sweet spot is to use less than 30% of your total credit limit (including credit cards and lines of credit). Obviously if you’ve maxed it out, it’ll take you some time to bring it down. But once you have, try to prevent yourself from going over 30% again. 

To regain control of your finances and create the space to pay down debt, we at Credit Canada recommend the ABC method. 

• A stands for analyze, where you look at exactly what money is coming in and where it’s going, because you can’t fix what you haven’t measured. 
• B means brainstorm, where you find creative ways to cut costs or increase income to fuel your credit repair. 
• C is change, so pick one or two actions you wrote down and just commit to them immediately. Some strategies we tend to see are babysitting or house-sitting, selling things on Facebook Marketplace and cancelling digital subscriptions.

How to improve credit history

This is within your control: keeping your old accounts open. The length of your credit history matters. So, you may have a card that you’ve had for years but you don’t use it a lot. Just keep it. Don’t cancel this card because that’s acting as an anchor in your credit history. 

How to improve your credit mix

Credit mix means variety. So that’s not a “Do you have five credit cards?” question. It’s more: “Do you have one or two credit cards, a car loan and a line of credit?” The more variety in the types of credit you can access helps your credit score, as long as you’re not maxed out on all of them. Multiple types speak to accountability and trustworthiness. In the eyes of a creditor, they see a person who can manage having different kinds of credit and is therefore more trustworthy and less likely to default. 

Choosing the right credit card to boost your credit score

While a poor credit score can hinder your ability to get a standard credit card, it doesn’t bar you forever. A secured card is often the best bridge, because that allows you to create a positive payment history even when traditional lenders decline you. The difference between a secured credit card and other credit cards is you put a security deposit down.

Think of it like paying first and last month’s rent. You still have to pay rent every month (your credit card payments), but the deposit covers the landlord (credit card company) should you miss any payments. The lender of a secured credit card holds the deposit as collateral, so that you can establish a good history with them by making credit card payments. Eventually that should trigger some positivity on your credit report, and then you’ll qualify for an unsecured card.

Lastly, check your credit score regularly

Make a habit to check your credit score at least twice a year to be aware of what’s going on, including how your actions are making an impact. You can find out your credit score directly with TransUnion or Equifax, or check your score with your financial institution (many include it in their banking apps). These soft credit checks don’t impact your score.

If your score unexpectedly dips and you’re doing everything right, check that your credit report is accurate. For example, you could be a victim of identity fraud. That’s such a big thing, and you want to be aware of it.

When you work hard to rebuild your credit score, you want your efforts to show. 

Kelsey Rolfe is an award-winning freelance journalist based in Toronto. She has written for The Globe and Mail, Financial Post, Canadian Business, The Logic and others.

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