Credit Reports, Credit Scores & Rebuilding For The Future

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Posted in Credit Repair
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

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Understanding How Credit Reports Work

Credit reports and credit scores weigh heavily on the minds of consumers, especially when they need to borrow money for a house or a car.  Another common worry is how their credit report and credit score might be affected if they choose to file for bankruptcy or a consumer proposal.  To get answers to these questions and to better understand the inner workings of a credit report, I talked with Eric Putnam, Managing Director of Debt Coach Canada and a former lending professional of 27 years in the consumer credit field.

What Are Credit Bureaus?

Eric explained that there are two credit bureaus in Canada – Equifax and TransUnion – that gather information to compile credit reports and credit scores.  These bureaus are regulated by the Provincial government and fall under the Ontario Consumer Reporting Act.  They are essentially large databases that use information from lenders, consumers, and public records of actions like bankruptcy, consumer proposal or a court judgement to assemble their reports.  Eric warns us that it is important to know that there are two databases because lenders decide which bureau they will report to.  This means that information from one bureau may be more complete than the other and this is something to consider when examining your credit report.

Eric emphasizes the main point about credit bureaus stating that,

You’re not the credit bureau’s customer.

Simply put, credit bureaus are there for the benefit of the banks.  Your report will let a lender know whether you present a risk and if the loan your requesting is worth giving to you.  Aside from borrowing money, your credit score does not affect you.

What Is A Credit Report?

Knowing which credit bureaus monitor Canadian credit is important when it comes to getting your credit report and ultimately, your credit score.  During our conversation, Eric explained that a credit report  is as it sounds, a history of your credit, the good and the bad.  So what kind of information is included or not included in this history?

  1. Inquiries – Personal information to identify your credit.  Your name, date of birth, address history, employment history, and any applications for credit that you have made in the last 2 or 3 years.
  2. Trade Lines – Credit history reported by your lenders.
  3. Registered Items – Judgements, bankruptcies, consumer proposals, debt management plans and registered liens will show on your credit report as set out in the Personal Property Security Act (PPSA).
  4. Statements – As a consumer, it is your right to update your story through statements and a brief explanation of your situation.
  5. Mortgages – In Canada, mortgages are not shown on credit reports.  Mortgage lenders do not want to share information with their competitors that might affect future sales.

 Credit Scores – The Good, The Bad, And The Ugly

One of the biggest worries for consumers tends to be, “do I have a good credit score?“.  Eric explains that a credit score is a number between 350 and 900 – 900 being perfect – that is constantly changing depending upon the information being reported and financial trends at that time.  According to Eric, “the average credit score in Canada is generally 700 and higher, but roughly about 30% of Canadians have a lower than 700 credit score.”  However, even with these statistics, Eric divulges that,

[Not] in my 30 plus years in the business have I ever seen a 900 credit score…it’s very difficult to get it much higher than 800 to be honest.

Taking these numbers into account, my next question for Eric centred around the calculations that go into building a credit score.  He explained that they run what is known as a risk profiling system whereby 35% of the score depends on your payment history, 30% looks at the amount owing on an account versus your total credit limit. Eric warns us not to max out our credit cards and lines of credit and that the amount owing should stay below 30% of the total credit limit to maintain a good credit score.  For example, if your credit limit is $1000, you should only be using $300 of that available credit and paying it off right away.

A further 15% of the total score is attributed to the length of your credit history, 10% to any new credit applications, and the remaining 10% looks at the type of credit that you hold – revolving credit or installment credit.

With all of these factors, it may seem difficult to get your credit score back on track but with a little hard work you can rebuild your credit score and take back your financial future.

Take Action…Clean It Up

Eric gives us some practical advise for rebuilding our credit score if it is not quite where we need it to be.  He emphasizes that we need to

look at what the issues are, come up with a game plan, reach out to professionals for guidance, whoever they may be, and don’t try to be an expert in this.

Step 1 – get your free credit report from BOTH TransUnion and Equifax once a year.

Step 2 – Go through both reports, make sure you understand them and make sure that they are correct and up-to-date.

There are other things that you can do to rebuild your credit score such as getting a secured credit card and paying it off right away.  You can also sign up for the Credit Builder Plus program that helps consumers re-establish their credit.

In step 2 we learned that checking your credit report for errors is an important part of the process to improve your credit score.  So what happens if you find an error?  What should you do?

Disputing An Error

Your credit report should come with a dispute form for any errors that may have been made by lenders or the bureau itself.  Although there are no Canadian statistics, 20% of Americans had errors on their credit report removed in 2012.  Eric points out that disputing an error is an easy thing to do and that

you don’t have to pay anybody to do it.  In fact, I encourage people not to.

When you send in the dispute form, your claim gets investigated by the bureau with the same lenders that reported that data.  If the bureau cannot get a clear explanation for the data, the information should be removed from your credit report within 60 days.

Follow up!

Eric implores that consumers should not just file a dispute form with the bureau and expect that the error will just go away.  Follow up on your claim to make sure that it arrived and has been processed.  Request that a new report be sent to you, showing  that the error has been removed.

Bonus Segment: Bankruptcy and Your Credit Report

All too often, people do not want to file a bankruptcy or a consumer proposal for fear that it will affect their credit score.  If you are at the point where lenders will not let you borrow money because you are deemed a high risk, the reality is, your credit score is already low.  Eric explains that people need to look at the big picture and see beyond where they are at today.  He thinks that people should be

looking at their financial goals, their financial plan, thinking about their own future, their own children’s futures and how their debt is affecting their overall daily lives as well as long tern financial opportunities.

So how do bankruptcies, consumer proposals, and debt management plans affect your credit report?

  • Debt Management Plan – Automatic R7 or I7 rating and stays on your report for 3 years.
  • Consumer Proposal – Automatic R7 or I7 rating and stays on your report for 3 years.
  • Bankruptcy – Automatic R9 or I9 rating and stays on your report for 6 – 7 years depending on the credit bureau.

The R in the rating stands for revolving credit and I stands for Installment type debt.  Ratings work on a 1-9 ranking score, 9 being a written off or bad debt.

Although this sounds like a long period of time for these ratings to remain on your credit report, it is important to think long term when it comes to debt solutions.  Cleaning up your debt mess is an important part of rebuilding your credit score.  Eric encourages us to deal with our debts and “put the past in the past” to accomplish our financial goals.

Resources Mentioned in the Show

FULL TRANSCRIPT Show #21 with Eric Putnam

rebuilding-for-the-future-transcriptDoug Hoyes: Welcome to Debt Free in 30, the show where every week we talk to industry experts about debt, money and personal finance. I’m Doug Hoyes.

Today we’ve got a great show for you because we’re going to talk about probably the area that I get the most questions on by a wide margin. And that’s credit reports and credit scores. Everyone’s worried that I, oh if I deal with my debt and I have to go bankrupt or do a proposal or get a loan it’s going to somehow affect my credit score and then I won’t be able to borrow again in the future and it’s going to be horrible.

Well, there are certainly issues with that and there is certainly a ton of misinformation when it comes to credit reports and credit scores. So, I’ve asked an expert to come on the show with me. So, let’s get started. Who are you? Where do you work and what do you do?

Eric Putnam: Hello Doug thanks for having me on today. My name is Eric Putnam I’m a managing director of Debt Coach Canada, the health club for your wallet and a former lending professional with 27 years in the consumer credit field.

Doug Hoyes: Excellent, well thanks for being here Eric. And I am familiar with Debt Coach Canada because in fact I have had you and your team in to talk to my professionals, because even though we’re in the area of dealing with debt all the time we’re certainly not experts when it comes to things like credit reports and whatnot. And you’ve certainly provided a lot of practical information for my team so we can advise our clients. Why don’t you give us a quick overview of what exactly is Debt Coach Canada? What do you do? What’s Debt Coach Canada all about?

Eric Putnam: Well, basically we’re a financial coaching education group. We started in 2005, initially meeting people face to face in our office in Oakville. And since then it turned into an online platform delivering our services coast to coast.

Financial coaching covers a broad base. But part of that is the necessity of knowing what happens in the credit world both in a positive note and how to manage your credit appropriately. But also how to correct any errors and make sure things are appropriate on your credit report. It’s very important for financial success.

Doug Hoyes: Excellent, and that’s what we’re going to talk about today. And for anybody who’s listening I’m going to put a link in the show notes so that you can find Debt Coach Canada. The website for Debt Coach Canada I believe is debtcoach.ca. Is that correct Eric?

Eric Putnam: Yes, it is Doug.

Doug Hoyes: debtcoach.ca and of course the show notes are on our website at hoyes.com and I’ll put links to everything Eric and I talk about today.

So, let’s get started with some really basic stuff. What is a credit bureau? Is it some kind of government institution? What exactly is a credit bureau? How do they work?

Eric Putnam: Okay, well to begin with there are two credit bureaus in Canada, Equifax and Trans Union. They’re both subsidiaries of American parent firms that have been around going on 40 or 50 years, give or take depending on which one you’re talking about. They’re regulated federally under the Privacy Act and provincially each government in Canada, Provincial government, regulates the credit bureaus.

In Ontario they regulate under the Ontario Consumer Reporting Act. Basically what it is, is a large data base, various data picked up on a monthly basis by the lenders uploading information, as well as from public records, the bankruptcy cases for example, judgments through courts and what have you. And what a lot of people don’t know is that it’s the lenders who chose which credit bureau to actually report the data to. So, it’s important that you know that there are two different databases and the data may not be the same in each of them.

Doug Hoyes: That’s a key point. If I go to my dentist and don’t pay my dentist, he might report me to one of my credit bureaus but not the other. So, I could have different information on both credit bureaus, that’s what you’re saying.

Eric Putnam: That is exactly correct.

Doug Hoyes: Okay, so what information then is on a credit report? If I was to get a copy of my credit report, what would I see on it?

Eric Putnam: Well, to begin with identification information, things like your date of birth, address history, employment history, history of all your credit applications going back generally two to three years, depending on which credit bureau we’re referring to. Those are referred to in the industry as inquiries. History of all activity reported by the lenders and that’s referred to as trade lines.

And as I said earlier, the lenders themselves choose when and which credit bureau reports to add it to. So, some report to some of them, some report to the other and some report to both. You have no control over that. That’s up to the lenders; they’re under contract with the credit bureaus. You just mentioned something, a collection that could have been signed to a third party collection agency, public records such as judgment, insolvencies, bankruptcies, consumer proposals, registered leans, right from when a bank puts a lean on a vehicle for instance, that should be showing under the PPSA regulations in Ontario.

It could also be a statement that you’ve uploaded through their forms that’s available through their websites explaining any issues that you’ve had or causes or problems that you’ve had in the past. You have a right as a consumer to actually share that information so that lenders when they’re checking your credit report can see your story. Generally it should be kept to a 50 to 100 word maximum. But it’s very important that you know as a consumer that you have that right to also put your story on there.

Doug Hoyes: What about my mortgage, Eric? Is that going to show up on my credit report?

Eric Putnam: Actually that’s a very important point. Unlike the U.S, in Canada mortgages are not shown, generally speaking, on credit reports. And the reason for that, coming from the mortgage industry myself, which I found very interesting, is that it’s well known in the financial services industry that the lender who holds your mortgage generally is going to get more services sold to you. So, they don’t want to share your mortgage history with their competition to prevent the other lenders from soliciting you for a mortgage transfer, it’s all about sales, Doug.

Doug Hoyes: All about sales. So, well I think that’s kind of a key message here. So, what you’re telling me is the credit bureau is number one, it’s not a government organization, it’s a private organization. And it’s a business and that business primarily is funded by the lenders. It’s the banks who are paying for this information and therefore the credit bureaus really exist to help the lenders. Is that an accurate statement?

Eric Putnam: Exactly correct. As a consumer, you have rights but you’re not the credit bureau’s customer.

Doug Hoyes: Very important. You’re not the credit bureau’s customer.

Okay, so we talked about the raw information that’s on a credit report, explain to me this whole concept of credit score because everyone’s really worried oh my credit score’s bad. I need a better credit score. I need a high credit score so I can get a loan, whatever. Exactly what is a credit score, how is it calculated? What can you tell us about credit scores?

Eric Putnam: Well to begin with credit scores have been around for about 40 years but have only been used widely in Canada since the mid 90’s. I can remember back in the day of actually being introduced to the credit scoring systems of Equifax and TransUnion when I worked in the banking business. It’s basically a numeric number between 350 and 900, 900 being perfect.

The average credit score in Canada generally is 700 and higher but roughly about 30 percent of Canadians have a lower than 700 credit score. And how it’s basically used for mortgage purposes today, a lot of people don’t know this, but the government came out in 2009 and for the first time ever brought in a minimum credit score requirement of 600 for the primary applicant on any mortgage applications that are insured by Canada Mortgage and Housing Corporation.

So, credit score can, for all intents and purposes, be used by lenders as an arbitrary way of saying the first step is you’ve got to pass that hurdle of having a minimum credit score and each lender uses their own algorithm and then basically come up with their own scoring mechanism based on the data that’s in your credit report.

And it varies dramatically from lender to lender and is used even by the same lenders. You can actually have internal credit scores different if you were applying for instance a credit card, a car loan or a mortgage. Each department could be using an internal scoring system based on the same credit report and coming up with three different sets of numbers.

Doug Hoyes: Wow, so what are the components that go into calculating a credit score? What kind of things are they looking at?

Eric Putnam: Risk profiling system basically starts with your payment history which represents about 35% of your score. So, for instance if you had any late payments, that will be included in that. 30% is your ratio of how much you owe compared to how much your limit is on a credit card or a line of credit. So for instance, let’s say you have a $10,000 credit limit and you owe at a given point in time $9,000, you’re using 90% utilization, which is not good. It should be kept below 30% typically is what we recommend.

The next one, the next big hurdle is 15% is how long you’ve actually had a credit history on the credit bureau. The last two are if you’ve applied for anything relatively new, that’s 10% and the remaining 10% is the type of credit, meaning a combination of both revolving and installment credit. So, it’s basically very heavily weighted on payment history and your utilization, 35% and 30% appropriately.

Doug Hoyes: So, paying your bills on time and not using too much of your available credit. So, okay I would like to talk about some practical things related to credit scores, getting loans, how you can improve your credit score. But before we do that, we’re going to take a quick break and then come right back with Eric Putnam from Debt Coach Canada. My name is Doug Hoyes. You’re listening to Debt Free in 30.

Welcome back, this is Debt Free in 30. My name is Doug Hoyes and my guest today is Eric Putnam of Debt Coach Canada and we’re talking about credit reports and credit scores.

Before the break Eric you said that your credit score is based largely on your payment history and the amount of credit that you’re using. So, if you’ve got a long and good credit history, that’s going to be good. If you’ve got a credit card with a $10,000 limit and you never go over $2,000, that’s going to be a lot better than if you’re always maxing out. Can you give us some practical examples? I like this show to be practical and focused on some real life examples. I don’t know, talk to me about car loans. That’s something that everyone out there gets at one point in their life. How do credit reports and credit scores impact on my ability to get a car loan?

Eric Putnam: Okay, that’s a really good example of everyday use. Many lenders have minimum cut offs again for personal loans. It varies from lender to lender. I know that one particular bank; they have a minimum cut off of 650 for any kind of a personal loan application.

I just recently did an analysis for somebody for a presentation that we used and I will give it to you simply. $15,000 car loan, 4 year repayment scheduled, the applicant with a credit score of 720 would be approved at 0% down, this is a used car at 4.8%, giving them a payment of $344 a month. Same people but the only thing difference in their life is that their credit score is now 590, they would need 10% down and the interest rate would jump from 4.8 to 16 and a half percent and their monthly payment by about $85 a month. Exact same people one more time, as an example, much lower credit score of 490, down payment becomes 20% down, 29% interest rate and a $531 payment. So, if you take the person with a good credit score of 720 compared to the low end of 490, that same car Doug, ends up costing $8,991 dollars over four years more interest.

Doug Hoyes: Wow, so having a good credit score is critically important. And the best person you’re using in your example, that person with the 720 credit score, you said in the first segment before the break that the perfect credit score in Canada is 900. So, 720 isn’t the greatest credit score in the history of the world. That’s just a good credit score is what you’re saying.

Eric Putnam: It’s just average. It’s basically an average. There is nobody in my 30 plus years in the business have I ever seen a 900 credit score.

Doug Hoyes: It just doesn’t happen.

Eric Putnam: It’s very difficult to get it much higher than 800 to be honest. And also it’s not a static number Doug, something that I should have mentioned earlier. It’s a number that’s based on that particular day when the lender or the consumer pulls the information. So, the score today could be dramatically different from the score a month from today, good or bad.

Doug Hoyes: So, it’s constantly changing. It’s constantly being updated.

Eric Putnam: Based on the data that’s in your report.

Doug Hoyes: Gotcha. So okay, you’re telling me then if I’ve got a credit score of 490 then I might as well not even bother going to finance a car because I’m going to have to have a big down payment and I’m going to be paying 29% interest. Whereas if I can get my credit score into the average range around 720 then all of a sudden I’m going to qualify for little or no down payment at reasonable interest. So, I guess the obvious question then is: what are some practical, tangible ways that I, as a consumer can take, to improve my credit score?

Eric Putnam: Well, to being with, my personal opinion is that if you have issues on your credit report you need to take action, as we call it, clean them up. Look at what the issues are, come up with a game plan, reach out to professionals for guidance, whoever they may be, and don’t try to be an expert in this. Frankly there’s a lot of information that can be very confusing but there are ways to get yourself educated, which I would be happy to share with you at the end of this presentation that we’re going through.

But the point I’m trying to get to here is, start with what is on your credit report, meaning you need to get your free reports from both bureaus, get them, go through them, make sure you understand what’s on them and make sure the information is correct. There is an appropriate way as well for that information to be – if there’s errors, to have them resolved.

Doug Hoyes: Okay, so step number one is you’ve actually got to get a copy of your credit report.

Eric Putnam: Which I encourage people to do for free, once a year.

Doug Hoyes: Okay and that’s another key point because I see all these ads all over the place that I can do this credit monitoring thing and it costs $20 a month. Or I can get my credit report for $50 or something like that. You’re saying, no what I want to do is get a free one. Is that correct?

Eric Putnam: Yeah, actually on the credit bureau’s themselves, they don’t make it easy to find the free reporting link. But by law they’re required to give you a copy once every 12 months for free.

Doug Hoyes: Once every 12 months for free.

So, what we’ll do in the show notes over at hoyes.com is I’ll put a link to both credit bureaus. Inside their site where you can actually get the forms, get the information to get your credit report for free so you don’t have to navigate through it.

And you’re absolutely right. When you go to their website, the first thing you see is, here’s – click here for $49.95 and we got the whole program for you. So, you’re saying no, get the free one, that’s the starting point, from both agencies, both TransUnion and Equifax because they both could have information. You get them, you look at them and if there’s obvious errors on them, let’s start with that. So, there’s obvious, an obvious mistake, there was a debt that was never mine, there was a debt that I paid off long ago, what’s your advice then on how you can have errors removed from your credit report once you’ve already got your free copy of a credit report.

Eric Putnam: Okay, on that note, there is no data available in Canada but there was a report done by the U.S Federal government in 2012 that indicated about 20% of the American population had errors resolved on their credit reports after they went back to the credit bureaus and pointed these out.

In Canada there’s no data so it’s anybody’s guess. But there is a dispute form that you can get completed. The credit bureau’s themselves have to investigate it with the people that provide the data, to ensure whether the information is correct or not. And if they cannot get clarification, by law, the information is supposed to be removed within 60 days. And then it’s very important that you also follow up with them. Don’t just send it in, the dispute form, but make sure you diarize it and follow up and get a copy of your report sent back to you indicating these errors have been resolved.

Doug Hoyes: So, get a copy of your credit report. And when you get that free credit report, it’s going to come with –

Eric Putnam: An explanation.

Doug Hoyes: And it’s going to come with a dispute form. Am I correct on that?

Eric Putnam: Yes, it’s supposed to come with a dispute form, correct.

Doug Hoyes: It’s supposed to. So, you can just look at it, fill it out and say okay this is wrong, here’s why I think it’s wrong. Provide whatever proof you’ve got, send that into them. And then, like you say, you’ve got to wait a month or whatever, follow up to make sure that they’ve actually corrected the error on your credit report. So, that’s something that you can do yourself.

Eric Putnam: Correct. You don’t have to pay anybody to do it. In fact I encourage people not to.

Doug Hoyes: Okay, that’s very important. So, there you go. There is some practical advice you can fill out the dispute form yourself. It doesn’t cost anything; you don’t have to hire anyone to do that for you.

So, let’s say I’ve got my credit report, there are no obvious errors on it but my – maybe I’ve had some issues in the past. Can you give us one tangible thing that the average person could probably do to improve their credit score? Is utilization the number one thing you’d focus on?

Eric Putnam: Well, for instance one thing that has been recently brought forward in the industry is even cell phones even report now on people’s credit reports or at least Bell, Telus and Rogers are reporting monthly cell phone charges.

Now when you think about it that is not technically credit but they are advancing you, as long as it’s not a pre-paid phone, they are advancing you month to month credit for usage of your phone on a contract. So, cell phones are one thing that definitely report now. The other side of that coin, if you don’t pay your cell phone bills, it will negatively affect your credit score as well. So, it’s important you know that.

Secured credit cards are an option for people after having some serious challenges. The starting point, you know, generally you can get them $500 give or take, put a deposit on the table and start using them. Put your gas on it; put your monthly cell phone charges on your credit card. Pay it off every month so you’re not paying any kind of interest charges.

Ourselves, we build a program in conjunction with a financial institution called Credit Builder Plus that is designed specifically to help people proceed down the line to getting an insured mortgage. And it’s a total program that’s available at creditbuilderplus.ca that frankly has assisted hundreds of people in Ontario qualify for a mortgage. It’s a step by step process. It depends on what your goals are and each person has to look at their own needs Doug.

Doug Hoyes: Okay and so what we’ll do is I’ll put a link in the show notes to, you said it was creditbuilderplus.ca

Eric Putnam: Correct.

Doug Hoyes: And that’s a program that’s offered by Debt Coach Canada I assume, that helps people progress along the path. So, well I think that’s some very good practical advice then.

So, what we’re saying is get a copy of your credit report, see what’s on it. If there’s errors, you can fix them yourself and things like paying your bills on time, even something like your cell phone bill which may not be a huge bill every month. But a lot of them are now reporting to the credit bureau. So, having that information current and up to date and not being behind is very important. And then you also mentioned utilization. You want to not use all the credit that you’ve got. If you’ve got a credit card with a $10,000 limit, pay it off every month; try not to go over $2,000 or $3,000 a month on it, that’s going to help your credit score. So, that’s great. Those are some very practical things. I appreciate that Eric. I’m going to put some notes in the show notes at hoyes.com so people can find all this information. Thanks for being with me today.

Eric Putnam: Thanks for having me Doug.

Doug Hoyes: Great, thanks Eric. We’ll be right back to wrap it up. You’re listening to Debt Free in 30.

Announcer: You’re listening to Debt Free in 30. Here’s your host Doug Hoyes.

Doug Hoyes: Welcome back, it’s time for the 30 second recap of what we discussed today. My guest today was Eric Putnam of Debt Coach Canada and he explained how credit scores are calculated and how a good credit score can greatly reduce your cost of borrowing on a major purchase, like a new car. Pay your bills on time and keep your utilization low to improve your credit score. That’s the 30 second recap of what we discussed today.

So, what are my thoughts on credit scores? I agree that you want a good credit score if you plan to borrow money. But let’s not lose sight of the flip side of that statement. If you aren’t borrowing money, your credit score generally doesn’t matter. We’ve discussed it before. Credit scores are for the bank’s benefit, not yours. So, don’t obsess over your credit score. Yes, if you need to borrow for a car or a house, a credit score is important but saving money and living frugally is much more important to your overall financial wellbeing and that’s where you should place most of your efforts.

That’s our show for today. Full show notes with links of how to get your free credit reports are available on our website at hoyes.com. Thanks for listening, until next week I’m Doug Hoyes. That was Debt Free in 30.

Announcer: Thanks for listening to the radio broadcast segment of Debt Free in 30, where every week your host Doug Hoyes talks to experts about debt, money and personal finance. Please stay tuned for the podcast only bonus content starting now on Debt Free in 30.

Doug Hoyes: We’re back for the bonus podcast segment here on Debt Free in 30. My name is Doug Hoyes and Eric Putnam of Debt Coach Canada has agreed to stick around for a bonus segment. There were a couple of points we didn’t get to in the radio only broadcast section of Debt Free in 30.

So Eric, in my business, and of course as you know I’m a bankruptcy trustee, I do consumer proposals, I get a lot of people who say you know, I don’t want to do anything. I don’t want to go bankrupt or file a proposal or even get a consolidation loan or anything because I’m afraid that’s going to make things worse on my credit report and on my credit score. So, how do you respond to people like that?

Eric Putnam: Well, I think that they have to basically got to draw a line in the sand and look at where they’re going, not just where they are.

So, what I mean by that is looking at their financial goals, their financial plan, think about their own future, their own children’s future and how their debt is affecting their overall daily lives, as well as long term financial opportunities.

Personally I’ve seen people with credit scores of over 700, close to 800 points, technically being insolvent and struggling to make ends meet, living literally pay cheque to pay cheque and half their income is going to service high interest rate debts, which made no sense to me and frankly they should have reached out and got some professional assistance from people like you, Doug.

Doug Hoyes: Well, and that’s one of the great ironies of it. You can have a great credit score and be in a lot of trouble. Because as you said in the radio only portion of this show, credit scores, credit reports, are there for the benefit of the lenders, not for the benefit of the consumer. And so if you’ve got lots of debt, you perhaps have your utilizations under control but you’ve still got a lot of debt. You’re making all your payments on time because you’ve robbed Peter to pay Paul, take a cash advance from one thing to pay the other. Your credit score might look pretty good but that doesn’t mean you’re not in a mess.

So, okay give me some more input here then. If I do do something like, I don’t know, credit counselling, a debt management plan, consumer proposal, bankruptcy, how do those kind of things impact on my credit score?

Eric Putnam: Well, first off let’s talk about from top to bottom. A debt consolidation loan, if you can apply for one and get an interest rate that’s lower than what you’re currently paying on credit cards, to consolidate your bills, God bless, by all means try that and see what the answer is.

If you’ve gone beyond the perspective of getting a reasonable interest rate, do not apply for a 32% consolidation loans from a finance company. Look at other options and they could be things like as you mentioned earlier. And as you’ve interviewed some guests recently on your show, credit counselling is an option. It will affect your credit score, dramatically.

But hey, like all options you need to look at everything. So, credit counselling depending on the amount of debt you owe might be a viable option. It will be rated as an R7. All debt that gets included in your debt management plan through a credit counselling agency will be rated as R7 and it will stay on your credit report as such until three years after you’ve completed your debt management plan, depending on the credit bureau.

A consumer proposal may be a more viable option, depending on the amount of debt you owe and if you’re technically insolvent or you need solvency legislation. But a trustee can go through that with you. It will also be rated exactly the same as a credit counselling program. It will be rated as an R7 and it will also have the exact same time line in the sense that it will be staying on your credit reports for three years after you finish. So, there’s no difference in that regard, as credit counselling.

And lastly a bankruptcy, frankly you’re the expert on that Doug. But from a credit reporting perspective it’s rated as an R9 once you file a bankruptcy or an I9. R means revolving credit, just a clarification and I is referred to as installment or monthly payment type debt. A 9 is just a numeric number we need to account has been written off to bad debt. For all intents and purposes, if you’ve been running three months behind on any debts, that will be rated as an I4, if you’re 90 days late. Lenders are going to basically take the same look at your credit as if you went through a credit counselling program or even a proposal or bankruptcy in a lot of cases. These ratings stay on your credit report for up to 6 years, Doug.

Doug Hoyes: So, you’re talking if I go bankrupt, once the bankruptcy is over if it’s a first time bankruptcy, the note about the bankruptcy is going to stay there for six years.

Eric Putnam: Six years for bankruptcy, three years for proposal, three years for credit counselling.

Doug Hoyes: Okay, so whether it’s credit counselling, a debt management plan a consumer proposal, you said the impact on my credit report, my credit score, is essentially the same. It’s going to be there as an R7 for three years after all the payments are done.

Eric Putnam: Correct. And it’s also viewed by the lending industry, the banks if you will, my former employers, exactly the same. It doesn’t matter if you did credit counselling. It doesn’t matter if you did a proposal or a bankruptcy, for all intents and purposes, you’re considered to be a high risk until you’ve started to rebuild and stabilize your finances down the line.

Doug Hoyes: And rebuilding involves saving some money, having some money for a down payment or a security deposit if you’re financing a car and re-establishing your credit. So, one of the things you mentioned earlier was a secured credit card. So, that would be one way to gradually begin the process.

Eric Putnam: Correct. And I encourage people to do that even while they’re still in credit counseling or a proposal. Most lenders would have difficulty issuing a secured credit card if you’re in a bankrupt state.

However having said that, it’s very important for people to know that in any of those cases, credit counselling, proposal or bankruptcy, any credit that you’ve obtained either before or while you’re still in one of those programs, if you’re applying for an insured mortgage, meaning that it has to be guaranteed if you have less than 20% down payment by law by CMHC or one of their competitors. You’re going to find that that credit that you’re rebuilding is not actually counted as rebuilt credit. You actually have to start rebuilding once you finish whatever program you’re in to resolve your past challenges.

Doug Hoyes: So, the sequence of events would then be, I finish my proposal and then what?

Eric Putnam: Then you can basically start focusing on the future. Put the past in the past. Obviously that’s what the whole purpose of dealing with a proposal is. And then basically move forward to move towards your goals. And yes a secured credit card, nothing wrong with getting one of those while you’re in a proposal [unintelligible 29:12] to buy a home you need to deeper than a $500 credit card. It’s just not sufficient enough to get a mortgage.

Doug Hoyes: Gotcha. Okay, well I think those are some really good practical tips again and I’m glad you clarified how the different legal procedures like debt management plans, consumer proposals, bankruptcies impact on your credit score.

So, I appreciate you sticking around for the bonus segment, Eric. Again, what I’ll do is I’ll put all of these details and links in the show notes and obviously we didn’t even scratch the surface. There’s lots of other things to cover so I suspect I’ll be having you back for a future show. But for today, I appreciate you joining me Eric.

Eric Putnam: Thanks very much, Doug.

Doug Hoyes: Great, thanks very much, Eric.

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