How can I re-establish my credit

After you have been released from your debts by completing a bankruptcy or consumer proposal, re-establishing your credit in Canada can be achieved most quickly if you follow this 6-step plan:

Complete your Insolvency ASAP

The sooner you are finished, the sooner it will disappear from your credit report. Complete all of your duties as soon as possible. (Note: In some cases you may be able to make your payments faster to help shorten your time period.)

Start Saving Money

It is a simple fact of life in Canada that banks lend money to people who don’t need it, not to people who urgently require cash. To borrow again you need to prove that you can handle money and the best way to do that is to show that you have some savings. Savings will be the foundation for your future borrowing. (Note: You can continue with the monthly payments you were making to the bankruptcy or proposal, but instead make them to your own savings account!)

Get a Copy of Your Credit Report

Equifax and TransUnion are the 2 largest credit bureaus in Canada. Contact these bureaus to get a copy of your credit report and check it for any errors. If you find any, such as debts appearing that were included in your insolvency, notify the credit bureau immediately.

Get a Secured Credit Card

Start rebuilding your credit with a secured credit card. Use your savings to place a deposit and you will then get a credit card with a similar credit limit. It shows up on your credit report as a normal credit card, and now you have a credit card for use when required.

Get an RRSP. Use more of your savings to put money in an RRSP. If you invest $1,000 in an RRSP, the bank will probably be willing to lend you another $1,000 to contribute to your RRSP. That $2,000 you contribute could generate a refund at tax time that would be almost enough to pay off your loan. Your credit report would then show a paid-off loan, which looks great on your credit report, and you’d have $2,000 invested in an RRSP.

Keep Saving

You will soon have enough for a down payment on a car, and if you save long enough, the down payment on a house.
Credit re-establishment is possible. It may take a year or 2 of frugal living, but by saving money you can gradually regain the ability to borrow once again. Use it wisely!

Excerpts from the Bankruptcy Canada website

How much credit is affordable

Having a lot of debt or having a good credit rating does not always mean that you are a good credit user. There are safe limits for debt and they are based on your monthly net family income. This proportion will determine whether you are able to afford the monthly payments.

If your income is less than the poverty line in Canada, which is $20,676 for a single person or $41,351 for a household of four, according to 2011 data by Statistics Canada. Feb 20, 2017, you may never be able to afford to use credit. The use of credit will make future cash less available and will cause a greater strain on the family’s budget. The more you are committed to paying towards debt the less money you will have for necessities.

If, however, you have a reasonable income, you need to look realistically at how much credit can you use before the debt payment is so tight that you and your family are struggling to manage your personal finances. Below are percentages of take-home pay estimates that would be needed for payment on non-mortgage debt with indicators of potential risk.

10% or less = Ideal
11-15% = Safe
16-20% = Manageable (20% limit)
21-25% = Caution – exceeding manageable limit
26-30% = Attention – credit problems may occur
31-35% = Danger – credit problems likely to occur
36 + = Extreme danger – credit problems certain

Getting Rid of Debt

It is easy to overlook interest charges on your bank account and credit card. Rarely do we actually check to see what we have already paid in interest over the past year.

A warning sign of overspending is not opening bills and avoidance of money discussions with your partner. Before you know it, you are in debt, stressed out and unhappy with life.

Don’t bury your head in the sand. It’s time to face your financial problems. What you really need is a structured plan. Begin by assessing the debt load. Make a list of assets, income, savings and debts. Calculate how much income you will have coming in during the next 6 months and figure out how much you will need for essentials (housing, transportation, food, etc.). Now make a realistic plan that allows you to pay off your debts in small amounts and seek professional advice from a licensed Insolvency Trustee.

Obtaining and using credit

Responsible use of credit helps prevent debt problems.

Credit is a way of getting goods and services now and paying later, but it can lead to an endless cycle of debt.

Obtaining credit is the same thing as receiving a loan. The borrower must repay the funds, with or without interest, before a fixed date or he may be required to pay additional interest. Different companies have various repayment methods.

Credit Cards

A credit card can be a very useful financial tool that makes everyday life easier. One of its advantages is that it allows the holder to enjoy something immediately while distributing payments over time. It also enables people to establish a good credit rating so they can borrow more significant amounts in the future. A card can act as an emergency source of money and having a preset spending limit may keep people from spending more money than what they can afford.

It’s important to use credit cards wisely. There is always the danger of theft, fraud and administrative error, but the biggest danger comes from not paying off credit cards right away. Unpaid balances can grow very fast once high credit card interest rates are factored in. Rates of 19% and higher are not uncommon.

The best way to use credit cards is to pay them off every month. Otherwise, the interest charges add up quickly. Take a look at the following example to see how this can increase the actual cost of credit purchases.

Interest

The interest on borrowed money is the price people pay to have immediate access to money they don’t have. For example, people rarely have enough cash to buy their first house. That is why they go to a financial institution to borrow the required funds. In exchange, the institution charges a type of fee, called interest, on the borrowed money. It is one of the ways in which banks and financial institutions make money. Borrowers get the money to buy their homes, and every month they reimburse a part of the borrowed sum plus interest.

Calculating interest on a credit card bill:

Amount due: $5,000
Elapsed time $5,000 × 19%
$5,000 × 19% $950
$950 / 12 months $79.16
$79.16 × 1 month $79.16

The amount that is owed went from $5,000 to $5,079.16 because of the interest charged.

How much interest do we pay?

An interest rate is the amount paid for a loan, expressed as a percentage of the borrowed sum. It is determined when the loan is made. It can remain the same, at a fixed rate, until the loan is paid or it can be a floating rate, which moves up and down based on the interest rate set by the Bank of Canada. Interest rates are usually fixed annually but compounded monthly, which is known as compound interest.

Setting financial goals

Morataya Corp. Debt Solutions can help you plan to reach your financial goals.

It’s important to set financial goals for your future and to break them down by time frames. For example:

  • Short-term goals – Within the next year
  • Intermediate goals – In 2 to 5 years
  • Long-term goals – In 5 years or more

Examples of Financial Goals

  • Know where your money is going
  • Manage to live on your current income
  • Pay your bills on time
  • Pay off your debts
  • Allocate funds for emergencies
  • Maintain or improve your standard of living

Create a special fund for irregular expenses:

  • Vacations
  • Birthdays/holiday gifts
  • Car tires/vehicle maintenance
  • Special family events
  • Back to school expenses
  • Summer camp

Establish a regular savings program for long term goals:

  • Buying a home
  • Children’s education
  • Buying a car
  • Retirement investment program, RRSP
  • Increase your net worth

Which are the first signs of financial difficulties

  • You are turning to credit to cover monthly expenses.
  • You frequently make use of the overdraft on your banking account.
  • You are only paying the monthly minimum for credit cards accounts.
  • You are asking for new loans in order to pay the old ones.
  • Are you behind on your rental expenses, mortgages or utilities?
  • Your creditors are threatening to sue you.
  • Your salary is being garnished.
  • Money problems are causing instability in your family.
  • You frequently feel tormented because of your money problems.

If any or all of these apply to you, it is strongly recommended you seek professional advice from a Licensed Insolvency Trustee. The sooner you assess your financial situation the more solutions you will have available and the faster you’ll be able to resolve your debt problems.

Possible solutions available may include:

  • Information and advice regarding debt subject and budgets
  • Possibility of obtaining loans for consolidation of debt if you act on time
  • Direct arrangements with creditors
  • Credit counseling
  • A Consumer Proposal (a formal payment arrangement)
  • Bankruptcy protection

Money Management

What is a family budget?

A family budget is a management tool that allows you to optimize the use of your resources so you can achieve your goals and satisfy your needs. In other words, it is a way of organizing your expenses according to your income so that you can fulfill your obligations.
A budget is a way of managing your finances regularly by keeping track of where your money comes from and what you do with it. This planning also indicates whether you are living within your means.

What are the advantages of preparing a family budget?

  • Understand your income and expenses.
  • Find ways to reduce unnecessary expenses.
  • Look for new sources of income such as a new business or investments.
  • Identify the areas where the most money is being spent and see if there is any money being wasted.
  • Determine your debt amount.

Creating a family budget will help you identify what you are spending your money on, show you what your saving capacity is and help guide you towards better money management based on your goals.

11 Money Management Guidelines

  1. Plan
    Plan for the future including retirement and children’s education and for major purchases such as a house, cars, vacations, etc.
  2. Set Financial Goals
    – Set short, mid and long-term financial goals and determine how to achieve them. The “how” is the most important part of the goal planning.
  3. Know Your Financial Situation
    – Determine your monthly living expenses, irregular expenses and monthly debt service payments and make a budget.
  4. Keep a Record of Daily Expenses
    – Be aware of where your money is going and identify areas where spending adjustments need to be made.
  5. Develop a Realistic Budget
    – Follow your budget as closely as possible. 
    – Evaluate your spending month to month. 
    – Compare actual expenses with planned expenses. 
    – Adjust budgets as required.
  6. Don’t Allow Expenses to Exceed Income 
    – Avoid paying only the minimum on your credit cards. 
    – Don’t charge more every month than you are able to repay to your creditors. 
    – Try to keep a zero balance in your credit cards
  7. Save 
    – Save at least 10% of your net income for yourself. 
    – Accumulate a minimum 3 months net salary for an emergency fund. 
    – Save for irregular expenses such as car and home maintenance, gifts, vacations, etc. 
    – Take advantage of current income tax rules which allow for tax-deductible savings for retirement plans (RRSP, TFSA).
  8. Pay Your Bills On Time 
    – Maintain a good credit rating. 
    – If you are unable to pay your bills as agreed, contact your creditors and explain your situation
  9. Understand the Difference between Your Needs and Your Wants 
    – Identify what your needs are. 
    – Money should be spent for wants only after your needs and savings goals have been met. 
  10. Use Credit Wisely 
    – Use credit for safety, convenience and planned purchases. 
    – Determine the total you can comfortably afford to purchase on credit before you buy. 
    – Don’t allow your credit payments to exceed 20% of your net income. 
    – Do not borrow from one creditor to pay another.

Get Financial Protection
Make sure you have enough insurance protection for potential financial losses.  You don’t want to find yourself in a financial crisis.