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Understanding the Impact on Your Credit

August 2, 2016

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One of the most commonly asked questions when we meet with individuals looking for assistance with their finances is “what will happen to my credit rating?”.

When filing a consumer proposal, a bankruptcy or going through credit counselling, it is true that your credit will be negatively affected. However, it is important to keep in mind that this is not something that defines who you are nor something that can’t be repaired with time.

Credit Score Research

Another way your credit rating might be negatively affected is if you get in a situation where you do not pay your debts when and how your creditors want you to do so.

What is a credit report and score?

There are two primary credit reporting agencies in Canada – Equifax and TransUnion. These credit reporting agencies collect information about you, your lending history, payment history, credit availability, along with other information from your creditors. This information is compiled into two formats – your credit score and your credit report. This information is then made available to any of your prospective lenders.

Your credit report is a written summary of your borrowing history. This report will include information about each account you have had over time, including details about maximum limits, balances owing, payments made on time and payments missed.

Your credit score is a number given to your file, between 300 and 900, that is mathematically calculated based on your payment history. The maximum score is 900, with 300 being the lowest score. If the number is low, lending institutions may view you as a higher risk borrower than someone with a higher score.

How do debt management solutions affect credit?

Each debt management solution has a different effect on your credit. Additionally, each credit reporting agency lists the following information, each with various lengths of time:

EQUIFAX:

1st Bankruptcy – 6 years from your date of discharge

Multiple Bankruptcies – 14 years from your date of discharge

Consumer Proposal – 3 years from your date of completion

Credit Counselling – 3 years from your date of completion.

TRANS UNION:

1st Bankruptcy – 6 years from your date of discharge

Multiple Bankruptcies – 14 years from your date of discharge

Consumer Proposal – 3 years from your date of completion

Credit Counselling – 2 years from your date of completion.

Lenders often offer credit limit increases based on borrowing history. When these offers are presented, we often forget that the offer is not based on what we can afford, rather, based on our previous payment history. It is important to consider future cash flow needs when deciding how much credit should be available to each of us.

Our advisors realize that considering future cash flow needs may not always be possible. We understand that there are situations in our lives that are unpredictable or unexpected that can cause us to over-extend the use of credit made available to us in order to make ends meet or get by.

If you are feeling overwhelmed by your current financial situation, or feel that your minimum credit card payments are more than you can handle, our advisors can help you understand your options and assist you in regaining financial control.

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