Consumer Proposals are one of the most useful debt solutions available if you need a sensible way to tackle a burden of debt that threatens to overwhelm you. But many people worry about the affect it will have on their credit rating. But what is a credit rating and why do people worry – often unnecessarily – about what can happen to it?
What Are Credit Ratings?
Three thousand years ago, financial lenders used clay tabs to keep track of who owed them money but there was very little to help them keep track of how likely a debtor was to pay back what they had owed when they promised to. Today our credit rating system does that job.
It helps lenders estimate the credit worthiness of a borrower based on their lending history– have they ever had a Consumer Proposal, been made bankrupt or defaulted on a payment? Are they carrying too much debt? Each credit event is listed.
The lender then ‘scores’ that borrower against a wish-list of what they consider a perfect creditor to be, with points added or deducted for various factors such as:
- The amount of credit the borrower has
- Their spending patterns
- Their current level of debt
- Any defaults they have made on credit payments
- The interest rate they are being charged
How Are Credit Ratings Collected?
Lenders do not hold all this information themselves. Instead credit reference agencies collect the information and lenders ask them for it when a borrower applies for credit. However, even if the information collected reflects the fact that the borrower has a good credit history, it doesn’t mean they will be granted credit.
How Do Lenders Use Credit Ratings to Assess Consumer Proposals?
Lenders are not looking for someone who borrows little and pays everything back in full. While it sounds odd, such a person won’t be considered the ideal customer. More and more financial institutions use credit ratings to see if there is the potential to make money from the borrower.
For example, one lenders ideal customer might be someone who owns their own home, carries a balance on one or two credit cards but who always pays what they owe on time.
They would be considered a good bet to lend money to because they would generate money for the lender in interest payments, and there is a good chance they will not default.
But there could come a point when that borrower turns into a bad risk if they cannot keep up their payments.
What Effect Do Consumer Proposals Have On Credit Ratings?
There is absolutely no doubt that Consumer Proposals have a negative affect on credit ratings as its a sign you have asked a professional to manage your creditors, and you will therefore be considered a bad risk by lenders.
However, it is important to consider just how your existing debt will be affecting your credit rating in the first place. If you are applying for a Consumer Proposal you are probably having serious financial problems anyway which will be apparent to a lender from your credit score.
You may have defaulted on payments already, or it will be clear that your debt payments are very close to exceeding your income so it will only be a matter of time before you default.
If you do manage to keep going by using all the credit you can obtain, eventually you will run up against a wall where you have used up all your available credit and cannot get any more. You will have hit a point where your credit score reflects you are in trouble and the lenders will refuse your applications.
This is often the point most people are at when they start to investigate getting a Consumer Proposals.
What Happens To Credit Ratings After A Consumer Proposal Is Complete?
For several years afterwards the Consumer Proposal will be on your credit record for lenders to see and getting credit will be very hard. This might not bother you – you might have decided to stay as far from credit as possible after it ends.
However, if you want to obtain credit in the form of a mortgage for example, you will need to spend time rebuilding your credit record.
But for many, the loss of a credit rating doesn’t compare to the massive benefits of a Consumer Proposal. No more stress, no more creditors hassling you and best of all after four years a happier debt-free future to look forward to.
CONSUMER PROPOSAL EXAMPLE
Example Unsecured Debts
|2||Credit card 1||$6,812|
Your Monthly Repayments Would Be
a Consumer proposal $748
(total contractual repayments)
a Consumer proposal $295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances.