82 – How to Rebuild Your Credit After a Consumer Proposal or Bankruptcy

Wayne Kay 00:04
Welcome to the Debt Matters podcast, where we help Canadians find solutions to their debts with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay. 

Today we’re going to talk about how to rebuild your credit after a Consumer Proposal or a Bankruptcy. When you file a Consumer Proposal or a Bankruptcy, how does that affect your credit in the future? Now, when we talk about rebuilding your credit, what are some of the things that you can do and why is it important? And how long does it typically take to rebuild your credit?

All that more coming up with my guest today, Mary-Ann Marriot from Allan Marshall & Associates Licensed Insolvency Trustee with offices in Alberta, New Brunswick, Nova Scotia, Prince Edward Island and British Columbia. Mary Ann, thanks for being here.

Mary-Ann Marriot 00:53
Oh my gosh, my pleasure. Looking forward to this topic.

Wayne Kay 00:57
Well, this is a great one. A lot of people get into financial problems and then finally you magically make them go away with either a Consumer Proposal or a Bankruptcy. Very quickly, the difference between them.

Mary-Ann Marriot 01:13
A Consumer Proposal is an offer to your creditors. They get to vote and decide if they’ll accept it. And Bankruptcy is essentially a forced offer.

There’s no vote. They will get what they are legally entitled to, which may be nothing, and maybe something depending on the circumstances.

Wayne Kay 01:27
And so after this happens, what happens to a person’s credit?

Mary-Ann Marriot 01:34
Yes, I love that question, and I am so passionate about credit bureaus and just this whole topic because people know so little about it. And the answer is, it depends on where you are when you go through the process.

So, for example, if your score is really low, and for some people it is. I mean, they’ve completely tanked out their credit score and then they go through a proposal or Bankruptcy. And ultimately it is just what I call – stops the bleeding. 

So it stops the score from continuing to plummet and then gets you to the point where it can start to turn around or if your score is high. And believe it or not, I’ve had people come in and they have 800 scores, 750 scores, and they’re going through a proposal or Bankruptcy. So they’ve managed to keep their score up. They’re going to have less of a hit because their score is higher when they go through the process.

Wayne Kay 02:23
And how do you find out about your score, again?

Mary-Ann Marriot 02:26
Yes, the two main credit reporting agencies in Canada are Equifax and TransUnion. You can get the information from them. However, it can be a little bit challenging, but they all have third party sites that will offer it.

So the two most common ones in Canada are Credit Karma. They give you TransUnion information, and Borowell, they give you Equifax information and you can sign up for both of them online. You can download the app and you can get your score and your credit report instantaneously.

Wayne Kay 02:58
And this is important for when you go to buy things, they look at your credit score, even for something like insurance. I’ve noticed they’ve asked, can we check your credit score?

Mary-Ann Marriot 03:09
Yes. Don’t even get me started on that one. But I’m here, so you got me started. I’m going to speak to it. Yes, everything’s tied to it nowadays.

It’s disturbing, it really is. I do have a pet peeve with that. And they say that if you have a stronger credit score, you will get a discount. But what has happened, and I personally witnessed this a few years ago, is that there’s a rate, but if your score is lower, the rate goes up. So it’s just a nice little spin on it.

And I think that’s really unfair because I think people don’t understand their credit scores and credit reports. And as a result, they may not be optimal and it may not be an indication that this person is in a bad place financially. So I don’t like these kinds of cut and dry scores, low insurance costs, you more kind of thing.

Wayne Kay 03:56
Well, and what I find annoying about it is the people who have a great credit score and piles of money in the bank and are doing super well, they get the best deals. And the ones who really need a break, they don’t. And it’s not fair.

Mary-Ann Marriot 04:10
Yes, I completely agree. I call it the kick you when you’re down scenario, because if you’re struggling, you pay the highest rates, you pay the most fees. It really does keep people stuck.

Wayne Kay 04:22
So when you go through a Consumer Proposal or Bankruptcy, does your credit rating plummet?

Mary-Ann Marriot 04:31
Yes and no. So it does, but again, if it’s really low already, it dips, it doesn’t really plummet. But basically, what happens? Let’s use an example of a proposal. Let’s say you’re up to date on all your things and you file a settlement to your creditors. So you’re up to date.

Everything’s reporting is up to date. You’re managing by the skin of your teeth and not eating. And so what happens is, when you go through this, you stop paying, so all your accounts start reporting as delinquent. 

So that’s going to drop your score pretty quickly and by quite a lot. For some people, it’s just a dip because they’ve already not been paying the stuff already in collections, but ultimately it will bottom out. So that’s what I try to encourage people to just stick with it, that, yes, your score is going to drop. But the idea is we want it to bottom out and stop dropping, and then we can start doing what it takes to get it to start coming up again.

Wayne Kay 05:24
Right, so rebuilding your credit,  can you explain that?

Mary-Ann Marriot 05:29
Yes, absolutely. So, first of all, rebuilding your credit really means two things and it depends on how you look at it from the lender’s perspective. It means that you meet their criteria and I’ll talk about that in a second. And from the individual’s perspective, it means achieving some type of credit worthiness.

So they might sound like the same thing, but I’ll pull those out. We talk a lot about credit score, and people think rebuilding your credit means that you have a good, healthy, strong credit score, which it does. Scores range from 300, and if you’re in the 700 – 800, you have a pretty good, healthy score. However, it’s only one piece. You also need – I call it credit worthiness.

You need to have a good credit score. You need to have a good debt ratio, which means how much money do you owe based on your income? And this is where a lot of people fall short. They have an excellent score, they’re doing a great job juggling, but they owe $100,000 in unsecured debt that they really can’t manage long term. 

And then the third piece is income stability. You have to have a good, steady income. And that’s what lenders look at. They don’t just look at your credit score. They look at your debt ratio. They look at your job situation, your income stability.

So they look at all three. And I think it’s really important for us to understand that when we’re looking to rebuild our credit.

Wayne Kay 06:57
So if we’re going to take the step when somebody’s gone through a Consumer Proposal or Bankruptcy and they’re going to start rebuilding, you have to keep an eye on all of those things, and especially the debt to cash ratio.

Mary-Ann Marriot 07:11
Yes. And what happens in a proposal or Bankruptcy? You trade one for the other. So when you come to see me, you have a terrible debt ratio, you owe too much debt to your income, and your score may be high or low, it just depends. But what happens is you go through a proposal or Bankruptcy, we’re helping you get your debt ratio back in check because when you finish, you’re going to have a better debt ratio. Your score is going to take a hit in the meantime. So you’re trading one for the other.

And then that’s what we focus on. Now that the debt ratio is in line, let’s look at getting the score back where it needs to be.

Wayne Kay 07:45
Okay. And typically, how long does that take if you keep it in check?

Mary-Ann Marriot 07:50
Yes. And that really does depend, and it definitely depends on whether you’re going through a proposal or Bankruptcy. It’s really difficult. It’s not impossible to reestablish credit while you’re going through either of them, but it’s really difficult to get any traction until you complete the process. 

And because a proposal is traditionally five years, and a Bankruptcy can be anywhere from nine months to three to four years, depending on the circumstances, generally speaking, it’s easier to start to reestablish credit in a Bankruptcy than a proposal just for that reason alone.

Wayne Kay 08:26
Okay. And I think you mentioned people come to see you for these situations. That’s an important thing that we do want to mention that if people are saying, well, everything she’s talking about is pretty much where I’m at. My score is horrible. I owe way too much money, I’m not sleeping, I’m stressed out. Well, then they can get a hold of you through the website.

Wecanhelp.ca. I’m going to give all the details at the end, but this is what the show is about. It’s helping Canadians who are actually in bad financial places and they need help.

Mary-Ann Marriot 09:00
Absolutely. And getting the right information The two things I hear most often are, I wish I’d contact you sooner because people suffer in silence way too long. 

And the second is, specifically with our company I hear a lot is – you explain things so well and you gave us such great information because it’s a holistic approach. It’s not just about, like, say it’s not just about getting the debt ratio in line. The other piece is, what do we do now to help you get your credit score on track? So it’s really accomplishing both of those.

Wayne Kay 09:34
Yes. And also you don’t want them to come back in the same situation, so you want them to be growing that savings and being better in the future. So it’s a good thing.

Mary-Ann Marriot 09:48
I tell them all, I love you. Don’t come back to see me again.

Wayne Kay 09:52
I think the thing is, a lot of us try to do it on our own, and I’m sure there’s a lot of common mistakes that people make when they try to rebuild their credit after one of these situations. What would those be?

Mary-Ann Marriot 10:07
The first one is not monitoring your credit score or report throughout the process. So the first thing I find is that generally people just don’t want to look at it. And I have people say that I don’t want to look at it. I know it’s terrible and I don’t want to look at it. 

But it’s really important that you do look at it. Even before you go through a proposal or Bankruptcy, it’s important to know where you are and what’s happening. Now, I understand why people don’t want to do that, but once you start going through the proposal or Bankruptcy, it’s kind of like you start a diet, for lack of a better term, or eating plan, and you want to see how you’re doing. So you step on the scale to see your progress.

It’s exactly the same thing. You want to check in, you want to see your score, but more importantly, you want to see who’s reporting what. Because a lot of times things get missed notice goes to a creditor, it doesn’t get input in the system. They send it off to a collection company. They never notify the collection company.

I’ve had more people coming out of a proposal or Bankruptcy or a year or two or three years later coming back saying, my credit score is terrible, what do I do? And they’ve lost anywhere from three to five or six years where they could have been doing something. So to me, the biggest common mistake is ignoring it and not keeping an eye on it.

Wayne Kay 11:28
I have to interrupt you for 1 second. How often should we check it?

Mary-Ann Marriot 11:33
So first of all, I’ll mention that you don’t lose points for checking it. So when someone monitors your report, there’s what’s called hard inquiries and soft inquiries. And when you check, it’s a soft inquiry, so it doesn’t impact your score. So I’ll just put that out there because a lot of people think if they check it a lot, it harms them. So what happens is if you sign up for this Credit Karma or Borrowell, they actually give you an update every month in your inbox.

So it’s right there, you just have to look at it and if anything unusual happens, you get an alert. And that is what I love about those two programs is it allows you to monitor it and it allows you to get notified if there’s anything out of sorts happening so you can catch it quickly and you can put a stop to it.

Wayne Kay 12:16
Do I want both of them or is one fine?

Mary-Ann Marriot 12:19
You want both because Equifax and TransUnion do not have mirror files, they won’t be identical. So unfortunately, it’s one of these things that’s like, why do we have two credit reporting agencies? But unfortunately we do, and you do have to monitor both of them to have a good handle on it.

Wayne Kay 12:35
And they were Credit Karma and Borrowell.

Mary-Ann Marriot 12:38
So it’s like, borrow and well, but only one w in there.

Wayne Kay 12:43
Okay, got it. Then we need to be following. Okay, so that’s one of the mistakes. What’s another common mistake that people make?

Mary-Ann Marriot 12:51
Yes, so the other one is doing nothing and having no credit is as bad as having bad credit. And so this is more for when you finish the proposal or Bankruptcy.

Again, people go, well, I’m done, it’s over with, my report will repair itself. And then two years later, they try to get a car, get a mortgage, and they realize they can’t, and they’re like, I don’t understand, I went through a proposal or Bankruptcy, but they didn’t do anything once they were finished. 

So when you’re finished the proposal or the Bankruptcy, you need to do some stuff. You need to check your credit report, you need to go through it with a fine tooth comb. You need to make sure everything is updated.

I will guarantee you it’s not all updated. You’re probably going to have to file some dispute resolutions to get it updated. And then the other piece is getting some type of new credit. Unfortunately, that’s where our system is set up. You need credit to have a credit score, so you’re going to have to get some type of credit, a small secured credit card where you give them a deposit.

They give you a card so that you can start to use it. And then even with that, there’s a caveat: don’t max it out. Now, typically, people think, well, I’ll just get it and pay it off in full every month, and that’s great. However, our credit system is a little messed up, and you get some bonus points for leaving a balance. So I always tell everyone, pay it off in full, or don’t carry more than 30% of the available credit for a few months and pay it after the statement, but before the due date.

So if you go get groceries and then put the money on, you go get gas and put the money on. Unfortunately, you don’t get the same bang for your buck. Pun intended.

Wayne Kay 14:37
Okay, so you can do it. You can still pay it off every month, though, can you not?

Mary-Ann Marriot 14:43
Yes, absolutely. And I’ve told people, experiment because I know a lot about the credit reporting system, but I mean, there’s so many nuances. So I’ll say, get a card, pay it off in full every month, do that for three to six months, monitor your score, see how you’re doing. Then use it for another two or three months, leave a little bit of a balance on each month, and then see how you’re doing. 

Because ideally, you want to see how quickly my score is coming up. And then you choose the strategy that’s going to get you where you need to be in the time frame that you want to be there.

Wayne Kay 15:13
Right, okay, that makes perfect sense. Anything else that people do?

Mary-Ann Marriot 15:17
Yes, they apply everywhere because Mary-Ann said, go get credit. And so then they go, well, I’m going to apply for this credit card, and I’m going to apply for that loan.

And I saw this place, it helped me rebuild credit. And they go do a lot of applications, and then they get all these credit checks, which are now hard inquiries, and that is going to plummet your score as well. So you really don’t want to apply everywhere. You want to really have a focused, strategic approach. Where’s the best place for me to go do your research?

If it’s a secured credit card, look them up online, see which the best one is. Some have annual fees, some don’t. It doesn’t matter what the interest rate is if you’re going to pay it in full every month. But the annual fee might be a determining factor. So you really want to be strategic, and you do not want more than three inquiries in a year, and you don’t want them close together.

Wayne Kay 16:08
I’m allergic to fees.

Mary-Ann Marriot 16:10
Yes.

Wayne Kay 16:11
I don’t like them. It doesn’t make any sense for me to pay a fee to get a little less interest rate or more points. And I’m probably missing out because nowadays, we don’t buy things and think about the points we’re getting.

Mary-Ann Marriot 16:29
Absolutely. And, I mean, I’ve seen that so many times where someone has a points card and then they have a balance on it and they’re paying interest. They’re like, oh, I earned a free trip to Toronto. But if you look at your statements, you’ve paid $2,000 in interest in order to get that free trip.

Wayne Kay 16:46
So we really need to watch that as well. Absolutely. Final one.

.

Mary-Ann Marriot 16:53
I think really just the last one is – I kind of combined the last two. Not having a focused strategic approach, so winging it, just hoping it will repair itself as opposed to getting the help that you need, getting some support, getting some professional advice, and then taking the steps that you need. And then monitor it to see how you’re doing.

Wayne Kay 17:12
Perfect information. That’s exactly what we need to know, because I learned every time I talk to you. There’s all these key things that I keep forgetting that I’m supposed to be checking. So this has been great information. Any final words of advice you need to share with us?

Mary-Ann Marriot 17:27
The only thing that I would end up with is just your credit score is so important these days. As we talked about, it shows up everywhere.

Renting, getting a cell phone, your insurance rates. So I really want to urge people to pay attention, to monitor it, start the process, and then once you get in there, if it’s just completely confusing, just reach out to someone like me, credit counselor, anyone. Just to learn a little bit more about it. But I think it’s so important. That would be my soapbox moment. I would want to let everyone know.

Wayne Kay 17:57
And we sure appreciate it. Mary-Ann, thank you very much for this show. It’s wonderful talking to you.

Mary-Ann Marriot 18:02
Awesome. Thank you, Wayne.

Wayne Kay 18:04
Well, my guest today, Mary-Ann Marriot. To learn more or to schedule that free consultation with Allan Marshall & Associates Licensed Insolvency Trustee go to the website Wecanhelp.ca. And that’s it for today’s Debt Matters podcast. 

Make sure you subscribe wherever you get your favorite podcast from and of course, for more information, you can always check out Debtmatters.ca. Thanks for listening.