One of the most common questions that we are asked by people researching debt relief options is “how will this affect my credit report?” This statement is usually followed by, “I have perfect credit and I don’t want to lose it by filing bankruptcy or a consumer proposal.” Are you having those same thoughts?
Before answering the first question, I’d like to explore the second phrase, if I may.
People often confuse a clean credit report with a good credit report.
A clean credit report shows that you are making all of your required payments. You haven’t defaulted on any of your debt. You are in fact a good “payer”. A clean credit report is very important because it will impact the interest rates you may be charged and whether or not a lender will request security or a co-signer for your borrowing - but it is only half of the story.
A good credit report shows that your total debt falls within the normal range of borrowing and that you meet the lender's criteria to be approved for additional credit at reasonable rates. The factors that make up a good credit report are much more complicated than “I’m making my payments”.
When someone tells me they have “perfect credit” the first thing I ask is, “Have you applied to your bank for a line of credit or loan to deal with your debts?” Invariably the answer is, “They won't approve me because I have too much debt."
I am sorry to tell you, but if you cannot be approved for new credit then you don’t have perfect credit. By refusing your new credit application the bank is telling you that you have too much debt.
Having sorted that out, let’s look at what your credit report might look like today.
Credit Report Rating System
All of the different credit items that you have are rated individually on your credit report.
- A rating of 1 means you are making all of your required minimum payments. A ranking of 2 means your payments on that particular debt are one month late.
- A rating of 3 means you are two months late and so on. Each lender has their own policy as to when they will assign an account to a collection agency. In practice, most lenders treat any ratings 4 or worse as a seriously derogatory issue.
- You’ll never see a 5 or 6 on a credit report because most lenders refer your file to collections once you fall three months behind (a rating of 4 for that debt on your report).
- I’ll skip 7 for a moment and come back to that.
- A credit rating of 8 is used if a lender comes and takes their security for a loan. For example, if a car company repossesses your car then the debt will show as an 8, but not for very long. 8’s very quickly become 9’s. Ignoring bankruptcy for a moment, a 9 can also appear on your credit report when a debt has been written off, or when it assigned to a collection agency, or to a law firm.
So if you are meeting all your monthly payments you probably have a 1. However as we just saw, this does not mean you have access to any further credit.
If however, like most people considering talking to a bankruptcy trustee, you have missed a few payments or are frequently late, your lender probably reported this information to the credit bureaus and you have a ‘mark’ against your credit.
So far we have covered off a lot of ‘bad’ credit rating factors, before we have even considered filing for bankruptcy or a consumer proposal.
Right about now, most people are saying to themselves that “they don’t want to file for bankruptcy” because it will "destroy their credit”. Yet, as we have seen, their credit score is already in jeopardy and they probably can’t get access to new credit at reasonable rates.
So yes, bankruptcy and a consumer proposal do appear on your credit report. Technically, a bankruptcy is reported as a 9, and a consumer proposal, just like any other form of debt settlement, appears as a 7. Each will remain on your credit report for a specified period of time.
Initially filing for bankruptcy may appear to have the most detrimental effect on your credit report, but looks may be deceiving.
The question you really want to ask is not will filing bankruptcy or a consumer proposal affect my credit report, but rather what’s going to happen to my credit report if I don’t?