How to rebuild your credit after a bankruptcy or a consumer proposal?

For most people, the decision to file a bankruptcy or proposal is not an easy one. The fear of the impact on one’s credit rating is a big factor. While the impact in the short term is undeniable, a bankruptcy or proposal is often the fastest, and sometimes the only way, to eliminate excess debts and thus the best way to rebuild your credit rating in the medium term. Indeed, even if the mention of bankruptcy remains on your credit report for 6 years for Equifax and 7 years for TransUnion, the impact is often not worse than what was your rating prior to filing. Thereafter, simple actions will help you rebuild your credit.

Your credit report contains 2 components: a credit rating for each of your debts (R-1 to R-9 or I-1 to I-9, depending on the type of debt) and your score which is the equivalent of your over-all average in your high school report card. To understand how to rebuild your credit, it is important to understand what factors influence your score. 

The 4 factors that influence your score:

1. Your payment habits (35%)
2. The utilization rate of your line of credit and credit card (30%)
3. The age of your accounts (15%)
4. Your new credit requests (10%)

Let’s take a closer look at these 4 most important factors that influence your credit report.

1. Your payment habits (35%)

Firstly, if you have gone bankrupt but have continued to pay your car loan without any arrears, you will have a perfect credit rating (I-1) which counts for 35% of your score. This rating will therefore have a positive effect on your score and the closer you get to the end of your loan, the more weight this positive impact will have on said score. Conversely, if you have late payments on car loans or your mortgage during your bankruptcy or proposal, the negative rating will remain on your file for 6 years and have a negative impact on your score. Finally, a negative credit rating for a debt of $500 will have the same impact on your score than the same rating for a debt of $5 000. Do not neglect a “small” debt just because you consider it “unimportant”.

2. The utilization rate of your line of credit and credit card (30%)

Secondly, if you had a habit of maintaining high balances for your credit cards or line of credit prior to your bankruptcy or proposal, the fact that they will have been eliminated by your bankruptcy will erase the negative impact this factor had on your score. Keep in mind that it is better to always have a card or line of credit with a high limit but a low balance than the other way around. The reason behind this rule is that a high, unused balance, proves that you have the potential to be indebted but choose not to.

3. The age of your accounts (15%)

Thirdly, the age of your accounts counts for 15% of the score. Old accounts allow your creditors to more easily assess your repayment habits. Thus, the longer the history, the better your score will be. The score takes into account your oldest account plus the average age of all your accounts. Keep your oldest account active and avoid opening too many new ones.

4. Your new credit requests (10%)

Fourthly, new credit applications account for 10% of your score. It is therefore very important not to apply for a loan or credit card if you believe you might be refused. Also, never make repeated demands to different creditors in the hope that one will accept. All credit applications appear on file for 3 years and can have a negative impact on your credit score if they are considered too frequent (e.g. more than 2 per year). An appointment with your financial institution representative to obtain advice before filing for an official loan request might be a good idea. Always check your credit file before asking for a loan to make sure there are no errors and, in case of doubt, it is preferable to wait until your financial situation is more stable and your chances on obtaining the loan are better.

Loan applications should be avoided at all costs immediately after the end of your bankruptcy. Patience will reward you. Although each situation is unique, the negative effects of a bankruptcy or proposal will normally be present for up to 2 years after the end of the process.

In conclusion, the bankruptcy or the proposal will have an impact on your credit report, but this option is sometimes the best or only way to eliminate your debt and have a balanced budget. Sometimes, procrastination will only perpetuate your financial difficulties and delay your return to financial health.

If you have questions or would like to have more information on your personal situation, you can talk or meet with an advisor or book an appointment. It’s free and confidential.