Mortgage FAQ - Credit & Bankruptcy
How does Credit Impact Bankruptcy?
Credit - A necessity
Your credit history is the #1 factor lenders look at when making decisions regarding your credit worthiness. Lenders (credit card companies, auto loan companies, mortgage companies etc.) will still give out credit to people who don’t have good credit history, but at a much higher rate.
The best thing you can do for your financial health is to keep your credit as up-to-date and accurate as you can. By paying all your financial commitments on time, you will appear to be a very low risk to other lenders, thereby resulting in a much lower interest rate on their products.
Most lenders check your credit worthiness by checking your credit bureau or report. This is a report put together by two major companies in Canada. Equifax Canada Inc. and TransUnion of Canada. The report is a history of how consistently you pay your financial obligations. Your credit report was first created the first time you borrowed money, or applied for credit. Banks, finance companies, credit card companies and auto loan companies report to Equifax and TransUnion on a regular basis. Your credit report is then updated periodically.
The type of information reported is: when the account was opened, if payments are made on time, if there are any missed payments, if the balance is over the limit, etc. By compiling this information into one report viewers get an accurate picture of your credit worthiness as determined by your credit history. People who have consistently met their financial obligations are much more likely to continue to do so.
- Your personal information such as your name, address, date of birth and Social Insurance Number.
- Your credit information such as your credit accounts, transactions and information showing if your payments are being made on time.
- A consumer statement where the consumer can have a brief comment about any information on your report.
- Public record information such as judgments and bankruptcies.
- Third party collections detailing any debts that have been sent to a third party collection agency for debt recovery.
- Inquiries to your credit report are all noted on the report including the requestor’s name and date the report was requested.
The most widely used portion of the credit bureau is the credit score, also known as the beacon score or FICO score. Scores range from 400 to approximately 900. The higher your score, the less of a credit risk you are to potential lenders. A score below 600 is a weak score, 600-650 is fair, 650-680 is average, 680+ is better than average and anything above 720 is excellent.
The score is calculated based on up to 5 main factors. Payment history makes up 35% of the score, and 30% is made up of amounts owed. Another 15% is the length of the credit history and number of inquiries and type of credit each make up 10% each.
So, while payment history and amounts owed are the main determiners of your credit score, something seemingly harmless like applying for too much credit can hurt your score.
The first thing to do when thinking about your credit would be to request a copy of your credit report. You can go directly to Equifax and request a free copy of your report. The most important ally in credit is information. By knowing where you are now, credit-wise, you will know where you want to be and allow you to set some goals to getting there.
Some things that can lower your score are:
- Bankruptcies
- Delinquent payments
- No recent credit card balances
- Numerous recent credit inquires
- Legal judgments against the borrower
- Too many or too few revolving accounts
- Limited credit history (too short in length)
- Balances on credit that are near the maximum
- Numerous new accounts opened within a 12 month period
- Too many lenders running your credit reports
When you get a copy of your report, check it carefully for any errors. The smallest error may be affecting your credit score. If you notice an error, you can contact Equifax and they will help you to resolve the issue.
Fixing, or improving your credit score takes time.
- Pay all of your bills on time. The greatest indicator of credit worthiness is your credit history. If all payments made every month consistently, future lenders will see you as very low risk.
- Keep your account balances to a maximum of 75% of the available limit. By doing so, lenders will see that you are responsible with the credit that has already been granted to you.
- Don’t apply for any new credit unless it is really necessary. Having too many inquiries on your credit report can make it appear as though you are going through financial difficulties and may be overextending yourself by taking on more debt than you can repay. Also, be very careful when giving out your personal information as identity theft is at an all time high.
Banks and mortgage brokers, including Mortgage Rate Canada, can offer more products, larger loans and sometimes better interest rates to individuals with average to excellent credit scores. Mortgage Rate Canada will do it’s best to get every applicant a mortgage, but on occasion, if a credit score is too weak, unfortunately, an approval cannot be secured.
Your credit and credit score are very important so ensure you take all the necessary steps to protect it.
What is Bankruptcy?
Bankruptcy is when an individual or a business is more than $1000.00 in debt and is not able to meet their debts as they are due.
There are 3 main categories of bankruptcy: bankruptcy, proposal, and receivership.
Receivership is only applicable to companies.
Bankruptcy is where the assets of the individual or company are liquidated to pay back the creditors. Creditors are the people or companies that are owed money.
Proposal is where an offer is made to the creditors in an effort to settle the debt.
To become bankrupt, an individual must meet with a Trustee. The Trustee will aid the individual in preparing a statement of affairs, which is a list of all assets, creditors, income and expenses and all other pertinent information. Once you have filed for bankruptcy, most creditors are unable to contact you regarding your outstanding debts. Certain assets are allowed to be kept during bankruptcy, but it varies from province to province.
During the 9 months of bankruptcy, you will need to report your income and expenses to the Trustee on a monthly basis. Depending on your income and number of dependents, you may be required to pay the Trustee payments, which are then disbursed, to the creditors.
Proposal is also done through a Trustee
An offer is made to the creditors detailing a debt repayment plan. The offer needs to be better for the creditors than if you declared bankruptcy. Typically, there is a meeting of the creditors approximately 3 weeks from the date of the proposal. The proposal has to be approved by at least 66.6% (2/3) in dollars and 50% plus one in number of eligible creditors who vote. The proposal also needs to be approved by the court.
As part of the proposal it is shown to the creditors how much they will get through proposal versus bankruptcy. Once the proposal is accepted by the creditors, all creditors are bound to it, regardless if they voted to accept it or not. Secured creditors will still be able to go ahead and enforce the security they hold. If the creditors do not approve the proposal, the individual is immediately deemed bankrupt.
If this is a first-time bankruptcy, typically they are discharged after 9 months. The bankruptcy stays on your credit bureau for 6 to 7 years. If this is not the first time you have declared bankruptcy the record will stay on your credit bureau for 14 years. Proposals stay on your credit bureau for 3 years after the proposal is completed.
How can credit be re-established?
The most important thing after declaring bankruptcy is re-establishing credit. Although your credit report shows that all your pre-bankruptcy debts are cleared, most lenders will not issue someone credit after a bankruptcy.
The easiest way to re-establish credit is to get a secured credit card. This is where a bank will hold a minimum of $1,500 of money deposited in an account as security against the credit card. The card would have a credit limit equal to the amount deposited with the bank and is then used as you would a regular credit card. The bank will then report the activity to the credit bureau.
Assuming payments are made on time, all the time, you will begin to re-establish your credit. Patience and persistence are essential in re-establishing credit, but the results are well worth the effort.
Contact Mortgage Rate Canada for assistance in obtaining a secured VISA card.