There are two components to a credit rating; your combined credit score, which is an accumulation of data and information, and your individual credit rating or ranking supplied by each of your creditors. These can vary from creditor to creditor and depend on your performance and their separate or individual experience with you.
INDIVIDUAL CREDIT RATINGS
In Canada, each creditor assigns you a credit score on a scale ranging from 1 to 9. 1 is the best rating and 9 is the worst. They usually also assign a letter in front of the number, for example, “Revolving” credit is scored as R 1 to R9, and “Installment” credit is scored as I1 to I9. The letter is of little or no significance when determining the value of the score. A description of each of the ratings is as follows: (in this scenario, we have used Revolving Credit, with an “R” value)
- R1 – You pay promptly and on time
- R2 – Your payments are 30 days past due
- R3 – Your payments are 60 days past due
- R4 – Your payments are 90 days past due
- R5 – Your payments are 120 days past due
- R6 – Not usually used by creditors
- R7 – You have filed a consumer proposal with a Trustee or a consolidation order is in place
- R8 – Primarily used by a creditor who has taken action to recover their property or realize on their security, i.e. car repossessed or seizure of other property
- R9 – A bad debt considered uncollectible or needing enforcement, or their debt has been compromised by a bankruptcy
Your overall credit score is not only affected by how much you owe, but the various ratings your creditors give you. The more R1’s you have, the higher your overall credit score.
CREDIT SCORE RATINGS
In Canada, the credit score ranges are based on payment history and outstanding debts. The credit ranges in use are 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 less than 500.
WHAT IS THE AFFECT OF A CONSUMER PROPOSAL?
Once you file a consumer proposal, and it is registered with the Government, the credit bureaus are notified and your credit rating will be revised to an R7. If a creditor already has you rated at an R9, your rating will not improve until you complete the terms of your proposal.
Upon completion of your proposal, you will receive a Certificate of Full Performance. A notification that you filed a consumer proposal will remain on your credit report of an additional three years. The credit bureau does not monitor the completion of an individual’s proposal. It is important that you file a copy of your Certificate of Full Performance with both credit bureaus in Canada, so that they are aware that you have completed your proposal, and the three year clock starts.
SHOULD I WORRY ABOUT THE IMPACT ON MY CREDIT RATING?
If you are in a situation where you are considering a proposal, you are most likely either worried about falling behind or have fallen behind in your payments. Many people, in order to make their minimum payments, have been “robbing Peter to pay Paul”, by moving money around and taking cash advances. Even though your credit rating may not yet be affected, there is a significant risk that if you don’t do something, and formulate a plan to deal with your debts in some fashion that your credit rating will deteriorate rapidly.
While a consumer proposal is at first generally considered a negative event, those that complete a proposal almost always say they should have filed it sooner, because the stress, pressure and hassle of juggling debts disappeared right away.
If you are worried about collection calls, garnishees, and your situation is deteriorating, a consumer proposal is a great alternative for many Canadians and an option that lets you sleep at night. You can repair your credit, but you may not be able to repay your entire debt load in a time period that will also let you “live your life”.
We are happy to provide you with some free, confidential, and professional feedback on your specific situation. Please do not hesitate to contact one of our Trustees who will explain the process and allow you to make an informed decision.