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Credit rebuild - harder than you think

on Thu, 02/02/2017 - 18:42

Headlines on Canadians getting deeper and deeper in debt had been on more frequently in the last few years. Living expenses had risen quite a bit, carrying cost are higher, interest rate is lower only to get us into a bigger debt! 

Along the way, the capabliliy of us repaying our debt is diminishing. Partly due to some of us lost our jobs or contracts but haven't got a new gig yet; sudden (unplanned) expenses among the family, etc. 

I am not too sure since when Canadians take bankruptcy very light. I am running into more people who are in bankruptcy or in a consumer proposal more than ever. According to the Office of the Superintendent of Bankruptcy Canada's number, total number of people filing for bankruptcy and consumer proposals had increased another 5.1% in November 2016 from the previous month. 

We need to understand credit rebuild is a long process, and it needs a lot of effort. 

Why do we need credit?
We all need credit. For emergency, for investments, for wealth creation - I called that. 
If and when you have enough money to buy everything you need/want in cash, you don't really need credit but you might still want credit. Apple, the tech giant, has over $200 billion cash-on-hand is reportedly issuing bonds to raise funds... that means, having money doesn't mean you don't want credit. 

Credit is built base on a record of how you repay. If you never owe anyone or any company, there is no way anyone can foresee how well you repay. 

How to manage your credit is the key to building good credit. Paying on time is essential. Don't utilize the maximum amount on your credit is another. 

Understanding how credit works
North America is a world build on credit. People think as long as they do not owe anyone, they have good credit. Chances are, if they have never owe anyone, they do not have credit. Credit is something you need to build, over time. 

Over the years, I have seen a lot of clients or prospects having hard time and went bankrupt or went for consumer proposals. I, as a financial advisor, totally oppose these options. My viewpoint: if you merge yourself in debt, you have to work yourself out of debt, wiping if off will only get you out of the payment obligations but you will never learn how to manage your finances and the likelihood is, you will get in debt again (bankruptcy resulted from business failure or marriage breakdown is another thing altogether). 

Believe it or not, majority of "credit counselling" services out there do not help you with your credit. They take your debt and negotiate on your behalf (you could have done that yourself), but the trade off is your credit have to be destroyed first. Since they "can't" negotiate a better "deal" when you are paying, they "advise" you stop paying your creditors before the negotiation happens. 

Stop paying the creditors doesn't mean you have a relief on payments though because then now you have to start paying them instead. Once you build a sizeble amount with them, by the time you would have been fallen very behind and gone into collection, they then take their share (or of course they will make sure they get paid first) and then negotiate and push the lender to accept what they can offer on your behalf. 

Some lenders consider consumer proposals the same as bankruptcies. And once you got bankrupted, no lenders are going to touch you for a good few years. Even RRSP loans (one of the easiest loan type to be approved, because you would have collateral), lots of lenders don't want to deal with you until 5 or 6 years after discharge...

Why do you want credit?
If and when you want to buy a property, but you don't have good credit (or no credit), you would be penalized by needing to pay higher interest rate. Imagine the difference of 2% on half million for 25 years... that's quite a bit of money... 

As a financial advisor, I always advise people to keep their spending under control and make sure they manage their credit well. The best way is always not to destroy it and have it rebuild...

My struggle who had been helping clients to rebuild credit (without charge... - since this is not really my focus), is to find out that what lenders see is not the same with what we, consumers, see on our credit report! Based on the communications I had with various lender, the report lenders pull from any credit reporting company (Equifax or TransUnion) are more "detail" compare to what you can get from 

those companies. No matter what you do, you, as a consumer, will NOT see what the lenders see!

As one of my clients say, it is not fair but what can we do as consumers?! We just have to play by the rules and the rules are usually built by big boys :(


Josh Rachlis's picture

Great article. Maybe you could help me consolidate my credit, and figure out some ways to make enough money to pay it off?

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