Posted by Bill on
As an Insolvency Counsellor I have counselled literally thousands of individuals and business operators over the years on the principals of good money management. The problem is that I usually don’t see these people until after they have become insolvent or have reached a point where they need to file a Consumer Proposal (Orderly Repayment of Debt) or perhaps they are being forced into bankruptcy.
So, I thought it might help our site visitors if I wrote about restoring credit; what works, and what never works.
Unpaid Credit Cards:
Perhaps you have defaulted on credit card payments. A Collection Agent has been assigned to your account and is demanding payments. Let’s say you have not paid for 6 months or more and they are threatening to garnish your wages, or sue you. At this stage you have an “R9” rating at the Credit Bureaus which is the equivalent of being bankrupt. That’s right, it is the same as if you had filed bankruptcy, but it gets worse.
Suppose you pay all your credit card debt off by sending your money to the collection agent, your R9 rating will not change for 6 years. You will have paid everything and still look like you filed bankruptcy.
Collection Agents are reluctant to tell you that and some even go so far as to tell people that their credit will automatically be restored when the debt is paid. This of course is absolutely false, and just so you know, no collection agent can garnish your income without first taking you to court except for the Government Agencies.
There are other options available – to find out more talk to one of our counsellors.
Re-Establishing Your Credit Rating
If you have already filed a Consumer Proposal or an Assignment In Bankruptcy your credit rating is as poor as it gets. You have been told you need to re-establish your credit and to start that process most trustees suggest you get a “Secured Credit Card” or alternatively, a “ Pre-Paid Credit Card”.
Technically a “secured” credit card is a line of credit secured by Real Estate or some other asset such as a GIC. A pre-paid credit card is a Debit Card that looks like a Credit Card only it has a monthly fee attached and a deadline for payment of that fee each month. That fee causes the activity to be reported to the Credit Bureau each month and as long as you pay the fee on time you will have a good report generated each month at the Bureau.
If you are late or fail to pay, then you damage your credit again. A lot of hotels and car rental businesses will not accept a pre-paid credit card so if you are planning to use your card for those purposes, ensure that what you are getting is a “secured credit card”.
NOTE: As far as mortgage financing goes a card that is less than $1,000.00 in value is pretty much a waste of time as far as credit-worthiness goes. Lenders also want this $1,000.00 card to have at least one full year of good history before recognizing it as a start to re-established credit.
Putting Your Savings to Work
I counsel people to save a contingency fund of a minimum of three times their monthly expenses. NB. Add your rent/mortgage; heat; hydro; food; transport; et cetera and multiply that times three. This should be available for a rainy day and whenever it is drawn down it needs replacing immediately.
You may kill two birds with one stone simply by placing this contingency fund on a pre-paid card (Maximum $5,000.00). Use the card for gas or transit. Restore the amount used each month along with the service fee and you will have valid credit rebuilding activity each month. You also know where your emergency money is if you suffer an injury or sickness and your income is reduced or cut off. As long as you pay the service fee and rebuild your limit you will be getting quality brownie-points at the Bureau.
Another credit rebuilder is leveraging your money. Save up and purchase Canada Savings Bonds, (minimum $5,000.00). Use the bonds as security to borrow $5,000.00 from the bank and purchase $5,000.00 for a Registered Retirement Savings Plan (RRSP). The bank will give you the loan for an RRSP because you have security (The Bonds). The RRSP’s will reduce your tax liability and your regular monthly savings can now go to pay off the bank loan. As you pay the loan the bank reports your payment history to the Credit Bureau.
Do not pay the loan off faster than agreed as you want the maximum number of months recorded at the Bureau. End result, you have re-established yourself as a credible borrower and responsible individual worthy of being trusted with credit. You may have gathered that this process takes more than one year.
If you keep your financial affairs in check you will be getting offers from banks and credit card companies in short order. When your credit is restored don’t let yourself get buried in debt again – borrow only for large ticket items such as a car, mortgage, or serious maintenance.
One final word to the wise;
When you hear an ad that says “Call Now” or “Limited Time Offer – the first 10 callers get a bonus”, etc. ignore them. The same limited time offers run endlessly. Stick to your budget.
I will talk about Mortgage Arrears and reinstatement of defaulted mortgages when the bank refuses to take your money and insists on you paying their lawyer directly – know your rights!!!
William (Bill) Lutton. PLL
BIA Insolvency Counsellor & Licenced Mortgage Agent.
disclaimer: The contents of this post is based on circumstances current at the time of the post and are intended for general knowledge. For more specific answers to your questions about your own circumstances use our contact form or post a comment below. NOTE: For a FREE, confidential analysis of your situation click here.
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