Filing for bankruptcy in Canada has some serious financial repercussions. However often, by the time you file for bankruptcy your credit score is not very good. Specifically, your credit score will go through several changes during the period of bankruptcy. So what happens to your credit rating during bankruptcy?
First, it will fluctuate, then go down. But by being proactive, you can learn how to deal with the changes properly and start planning for your financial future with the right steps. We will discuss what happens to your credit rating after filing for bankruptcy and effective solutions you can do to start improving and rebuilding your credit score for the future.
How long will bankruptcy affect my credit score?
Your bankruptcy will be listed on your credit report anywhere from 5-10 years. During this 10 year period, it will be challenging to obtain new credit. But, there are things you can do to improve your credit score.
Two main credit rating companies keep track of your credit score. Equifax will keep your credit score on file for up to 6 years after receiving your bankruptcy discharge for first time bankruptcy. TransUnion keeps it on file for 6 to 7 years, depending on which province you live in.
How to Rebuild Your Credit Score During Bankruptcy
1. Pay bills on time
It is essential that during the period of bankruptcy to pay your bills on time. That includes cell phone bills, hydro, internet, electricity, and rent. It’s time to get organized and place all the due dates on a calendar, so you can start budgeting around your bills due dates. When you get into the hang of paying your bills on time, lenders will see you are managing your payments regularly. You can also set up automatic payments so bills are not missed. If you are setting up such payments remember you must manage your bank accounts to avoid NSF fees.
2. Get a contract cell phone
During bankruptcy, it might be tempting to get a pay-as-you-go cell phone, as you think you’re saving a little money. But getting a new cell phone with a 1-2 year contract can help you rebuild your credit score and is beneficial in many ways. Pay as you go minutes can end up a bigger payments per month.
The cell phone company will report your monthly payments to Equifax or TransUnion, and this shows lenders that you’re paying your bills on time. By paying your cell phone in full every month, it establishes healthy financial management.
3. Apply for a secured credit card
Along with getting a cell phone on contract, applying for a secured credit card like Visa or Mastercard can help you reestablish your credit rating. Here’s how it works: You put a deposit of $500 or more if they give you a credit limit of $500.
By putting down a deposit on the secured credit card, once your bankruptcy is discharged, your credit limit considers your cash deposit a form of good standing. This is because it shows you didn’t spend it.
Since Visa and Mastercard credit cards report your credit standing to Equifax and TransUnion every month, this will help rebuild your credit history. Your credit score can start increasing if you pay your balance off in full every month. Credit card companies can be difficult to deal with so see if the bank you are dealing with already has a secured credit card option.
4. Keep a positive balance in your account
Be sure to keep track of your bank account amounts and never go below a zero balance. For example, if you have authorized monthly payments to pay your bills, be sure there is money in your bank account when they debit your account.
It’s important to avoid a negative balance as having overdraft and NSF Fees affects your credit score. Avoid overdrawing your account, as this signified financial trouble to the credit bureaus.
5. Don’t apply for credit too often
During bankruptcy, you might be tempted to apply for new credit cards; however, this tells lenders that you are in financial trouble. The more you apply, the more your credit score decreases. It will leave a “soft” inquiry on your credit rating and once declined; your credit score will be affected. Try to wait 6 months between each new application to avoid a drastic dip in your credit score.
6. Build up your savings
Open a savings account, like a Tax-Free Savings Account (TFSA), and contribute to it every month. As little as $25-$50 a month will build during the time of bankruptcy. Similar to opening a secured credit card and having a cell phone on contract, contributing to a savings account establishes financial responsibility.
7. Live on a strict budget
Create a budget based on all the bills you need to pay and don’t go over it. Items like food, gas, and entertainment can be budgeted every week. As well, look for deals or discounts like Groupon, which can help you save money on outings or services that you would normally pay full price. When thinking of a purchase, decide if it is a “want” or a “need”, wants can wait!
8. Avoid payday loans
We advise staying away from payday loans, as they have sky-high interest rates that are virtually impossible to pay back. They also don’t help with rebuilding your credit score. If you find you don’t have enough money to live on a budget, then make the minimum payments on your bills and spend less on items on your budget.
9. Open an RRSP
Opening an RRSP (Registered Retirement Savings Plan) before filing for bankruptcy can result in the funds to be used towards your debts. However, once you receive your discharge, you can start contributing to it again.
Similar to a secured credit card and Tax-Free Savings Account, when lenders see that you are contributing funds to an RRSP, it represents financial responsibility. Remember, the more money you contribute to an RRSP, even in small increments, you can get a higher income tax return.
Filing for bankruptcy will affect your credit rating. But if you follow the steps outlined in this article, you can develop a regular payment schedule that credit bureaus will be able to see.
Through these small, but crucial steps, lenders will see that you are becoming financially responsible. If you require additional bankruptcy counselling on how to improve your credit rating in Toronto, the GTA, or Southern Ontario, we’re here to assist you.