A consumer proposal is an efficient debt management plan to prevent total damage to your credit score. It ensures you avoid going bankrupt.
Just like bankruptcy, filing a consumer proposal will damage your credit rating. There is always a negative reflection on your credit score when you fail to pay your creditors fully plus the interest as per the usual agreement. Filing a consumer proposal earns you're an R7 rating. R7 credit rating implies that you have settled or compromised your debts through a consumer proposal.
Duration of a consumer proposal
The maximum period of a consumer proposal is five years (60 months), but the process can take as few as one payment. The R7 rating arising from the process can be included in your credit report for three years or not exceeding eight years. When you file a consumer proposal, the interest is stopped, and creditors can't take the additional collection or legal action against you thus allowing you to settle/compromise your debt.
Impact on rating
When you file a consumer proposal, your score is reviewed to an R7 and remains there until its completion. After completing the proposal payments, a note showing your proposal filing appears on your credit report for a further three years. It means your credit score is affected for up to eight years starting from the date you filed the proposal to your creditors, based on the period of repayment.
Is there a need for a consumer proposal?
It is more likely that your credit rating has gotten a beating by the time you consider filing a consumer proposal. Borrowers usually opt for it when they fear falling behind or are already behind on their payments and they are worried about wage garnishment and collection calls. It means that you have cleared your debt even though it has a negative impact on your rating. It is an alternative way of settling your creditors relieving you from the pressure that comes with wage garnishment and collection calls.
What is a credit score
A credit score is needed for you to be able to get a loan or credit. The reason behind this is because it will help financial institutions to determine your creditworthiness. They will also see every loan that you made and the payment history that you have. Find out more about it by reading the information below.
Credit scores are calculated based on the proprietary algorithm. This will include the person's outstanding debts, payment history, and the length of the individual's credit history.
Credit scores can range from 300 to 850. The higher the individual's score, the lower the risk. People who have lower credit scores are considered high risk, which will make lending companies ask for more requirements.
About Fico scores
Fair Isaac Corporation is the one who established FICO, and it is one of the most commonly used credit scoring systems today.
According to FICO, 90% of the most reputable and respected lenders today are making decisions according to this kind of credit scoring system. Get to know more about Fico scores by reading the information below.
How are credit scores calculated?
The weight of each of the five categories are; 30% of amount owned, 10% is for the new credit, 15% accounts for the length of credit history, 10% is the credit mix and the last 35% accounts for the person's payment history.
The FICO score takes into consideration positive as well as negative aspects of the credit report. The percentage or the weight of any of the categories mentioned above may differ from a person to another depending upon the information available in the credit report.
The FICO score takes all of the information from your credit report. However, the banks or any other lending institution might look at your income, type of credit and employment history when you apply for a loan or mortgage.
Once a certain lender asks for a client's credit report, they can also ask for the Fico score. Other sources say that your Fico score will include 35% of your payment history, 30% of your credit utilization, and 15% as to how long have you been borrowing.
Explanation of credit score ranges
It is important to know the category that you fall into when it comes to credit score for you to be aware. The range of a credit score can go from 300 to 850. Always remember that the higher your score, the higher the chances of you to qualify for a loan. There will also be instances where a financing company is okay with 650 scores, while the other is fine with a 750 score. It will all depend on the lender itself.
A lender or a bank will check your credit score if you qualify for the application that you are requesting. Here are some of the credit score ranges that you should know.
Bad credit score
People with a credit score below 579 is known as high risks. Foreclosures, poor payment history, and bankruptcies are the reasons why people fall into this category.
Good credit score
A good credit score ranges from 680 to 719. People with this credit score can expect approvals and interest rates that are better.
Very Good
A very good credit score ranges from 720 to 799. People with this credit score is known to be small risks, and they often get loan amounts that are higher than usual.
Excellent
An excellent score ranges from 800 and above. Financial freedom is expected to people with this score.
Other things you can do to improve your credit score
The credit score ranges from 300 (the lowest credit score possible) to as high as 850 (the highest credit score possible). Higher you credit score, greater are your chances of getting your loan or credit request accepted quickly.
However, if you are facing issues with your low credit score, following are some of the tips or techniques that you can use to improve your credit score:
You should start by minimizing your total debt. The increase in your total debt value is going to affect your credit score negatively.
You should also be very careful with your bills and other credit payments. If you pay them on time, this will gradually improve your credit score.
Have a closer look at your credit balances. You do not want to cross the credit limits because they deteriorate your credit score.