Building Healthy Debt and Credit Habits to Maintain Financial Health
After finally completing your bankruptcy or consumer proposal, it probably feels like the weight of the world has been lifted off your shoulders. However, when you’ve been given a clean slate, it’s important to keep it clean by developing healthy debt and credit habits. This will allow you to maintain your financial health for years to come.
Often, this can be easier said than done. This article will provide advice for maintaining good credit and financial habits after a bankruptcy or consumer proposal, while also explaining the impact they have on your credit health.
The Impact that Bankruptcy and Consumer Proposals Have on Credit
Filing a consumer proposal or bankruptcy will inevitably have a negative effect on your credit score, just as it would if you simply stopped making payments. For both bankruptcies and consumer proposals, your credit score will continue to be impacted as long as it is on your credit history. Your bankruptcy will be reported on your credit record for a period of seven years after your discharge with TransUnion Canada, and six years after your discharge with Equifax Canada, for a first bankruptcy, and up to 14 years, after discharge, for subsequent filings. A consumer proposal remains on your credit record for a period of three years after the consumer proposal has been completed.
An R1 credit rating is healthy – it means you make all your payments on time. When you file an assignment in bankruptcy, your credit score goes down to an R9. For a consumer proposal, it will go down to an R7 or lower. This means it will be more difficult to improve your credit score quickly until your bankruptcy or consumer proposal has been stricken from your credit history – but rest assured, it is still possible!
How to Maintain Good Debt Habits After Discharge/Completion
Setting realistic and attainable short-term goals is a great way to form and maintain sound financial habits, especially in the first few months and years following your bankruptcy or consumer proposal. It’s important to start small – a mistake many people make is setting goals that are too lofty or unrealistic, which can do more harm than good.
Whether you plan on cutting back on certain expenses or putting some money in a high-interest savings account every month, you’ll soon find yourself making tangible and visible progress. This will have you feeling proud and motivated to continue. Writing down these goals and reviewing them frequently is a great way to hold yourself accountable and inspire hope throughout the process.
Avoid Obtaining More Bad Debt and Rebuild Your Credit with a Secured Credit Card
The most important thing to remember when moving on from a bankruptcy or consumer proposal is to live within your means. It is important to begin rebuilding your credit as soon as possible, but you don’t need six credit cards with astronomical limits to do that. Start with a single credit card with a small limit that you can easily manage, and only spend what you have. This way, you can pay it back right away without worrying about accruing large amounts of debt and ending up back at square one.
If you are an impulse shopper or are worried that having a credit card will be too tempting to resist, you could always opt for a secured credit card. A secured credit card is backed by a cash deposit, which acts as collateral on the account in case you can’t make a payment on time. This will allow you to continue rebuilding your credit without worrying about falling behind again.
Build Up Your Savings
When you’re in debt, up to 15 per cent of your monthly income usually goes toward repayments. This makes it incredibly hard to save – but with your fresh start and little to no debt to pay, it’s important to get a head start on building yourself a comfy nest egg. This can be useful for a rainy day, a financial emergency, or even to finally start planning the family vacation that seemed impossible before.
When your bankruptcy or consumer proposal is finally complete, one of the first things you should do is open a high-interest or tax-free savings account. Every month you can put a small amount toward your savings, which would have otherwise gone to repaying your debts. Then, no matter what the world throws at you, you can be confident that a financial emergency won’t set you back to a point that is overwhelming.
Taking the time to build a budget and stick to it is a fundamental aspect of financial health. When your consumer proposal or bankruptcy has been discharged, you should immediately begin tracking your spending for at least 30 days. This will ensure you’ve factored in all your regular bill payments, groceries, leisure spending, and other expenses without leaving anything out.
At the end of that 30-day period, work with your spouse or housemates to summarize your spending into key categories:
- Housing and utilities
- Food and clothing
- Other expenses
Continue doing this every month. Don’t forget to consider your new income and separate essential and non-essential spending. Make sure everyone in your household is on board, and if you find yourself struggling to meet your essential expenses, you may need to set a stricter budget.
Chances are, you attended a number of mandated credit counselling sessions during your bankruptcy or consumer proposal. Although you no longer have to attend these sessions, staying in touch with your credit counselor is probably a good idea. They will be able to help you plan for your newfound financial freedom, organize a budget, and move forward confidently to avoid making the same mistakes.
Don’t Be Afraid of Good Debts
While it’s possible to live completely debt-free, it’s not necessarily realistic. Although buying on credit can be a double-edged sword, it is also important to begin rebuilding your credit after a bankruptcy or consumer proposal. Very few people earn enough money to pay in full, up front, for large purchases such as a home, a car, or post-secondary education. This is why it’s so important to know the difference between good and bad debt when buying on credit or taking out a loan.
Good debt is an investment that will generate long-term income or grow in value over time. This can be anything from taking out a student loan or a mortgage. These loans typically have a very low interest rate compared to other types of debt. In the long-term, good debt is beneficial to your financial health and will help you rebuild your credit score.
When you’re given a fresh start after a bankruptcy or consumer proposal, it can be all too easy to fall back into the bad habits that had you feeling financially overwhelmed in the first place. With a few simple changes of habit and a little accountability, you’ll not only be able to keep your head above water, but you’ll be thriving and enjoying a quality of life you never thought possible.