Impact of a Consumer Proposal on Your Credit Rating

How does a Consumer Proposal influence my Credit Score? Your credit rating consists of two key components: your overall credit score, which aggregates data and information, and your individual credit rating provided by each of your creditors. These individual ratings can vary from one creditor to another and are contingent on your payment performance and their unique experiences with you.

Individual Credit Ratings

In Canada, creditors assign a credit score on a scale from 1 to 9. A rating of 1 is the most favorable, while 9 is the least favorable. These ratings are often accompanied by a letter, such as "Revolving" credit scored as R1 to R9, or "Installment" credit scored as I1 to I9. The letter holds little significance in determining the score's value. Here is a description of each rating (using Revolving Credit with an "R" value as an example):

R1: You make prompt and timely payments.

R2: Your payments are 30 days overdue.

R3: Your payments are 60 days overdue.

R4: Your payments are 90 days overdue.

R5: Your payments are 120 days overdue.

R6: Not commonly used by creditors.

R7: You have filed a consumer proposal with a Trustee or a consolidation order is in place.

R8: Primarily used when a creditor has taken action to recover their property or security, such as car repossession or asset seizure.

R9: A bad debt considered uncollectible, requiring enforcement, or compromised by bankruptcy.

Your overall credit score is influenced not only by the amount you owe but also by the various ratings assigned by your creditors. The more R1 ratings you have, the higher your overall credit score.

Credit Score Ratings in Canada

In Canada, credit score ranges are based on payment history and outstanding debts, classified as follows:

Best: 800 – 840

Excellent: 720 – 799

Good: 680 – 719

Average: 620 – 679

Below Average: 580 – 579

Poor: 500 – 579

Worst: Below 500

Less than 2% of the population have scores below 500.

Effect of a Consumer Proposal

When you file a consumer proposal, it is registered with the government, and the credit bureaus are informed. This will result in your credit rating being revised to an R7. If a creditor has already rated you as an R9, your rating will not improve until you complete the terms of your proposal.

Upon successfully completing your proposal, you will receive a Certificate of Full Performance. However, a notification of your filed consumer proposal will remain on your credit report for an additional three years. It's essential to provide both credit bureaus in Canada with a copy of your Certificate of Full Performance to signal the completion of your proposal, allowing the three-year countdown to commence.

Should You Worry About the Impact on Your Credit Rating?

If you are contemplating a proposal, you are likely already concerned about falling behind on payments or may have already fallen behind. Many individuals, in an effort to meet minimum payments, engage in financial juggling, such as moving funds around and taking cash advances. While your credit rating may not have been affected yet, there is a significant risk that without a plan to address your debts, your credit rating will deteriorate rapidly.

Although a consumer proposal is initially considered a negative event, those who complete one often express regret that they didn't file sooner. The relief from the stress and hassle of managing debts is immediate.

If you are worried about collection calls, garnishments, and your financial situation deteriorating, a consumer proposal is a viable alternative for many Canadians. It provides peace of mind and allows you to regain control of your financial life. While repairing your credit is possible, it may not be feasible to repay your entire debt within a timeframe that allows you to lead a fulfilling life.

We are here to offer free, confidential, and professional guidance tailored to your specific situation. Please don't hesitate to contact a Consumer Proposal Administrator who can explain the process and help you make an informed decision.