Can You Keep a Credit Card During a Consumer Proposal?

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The question “Can I keep a credit card during a consumer proposal” is a common concern among individuals while going through this legal process to eliminate unmanageable debt. As you navigate the complexities of a consumer proposal, it’s important to understand how credit cards are impacted. Can you continue using an existing credit card? Is it possible to obtain a new one? And how can you manage credit cards responsibly during this period?

Credit card debt is the most common type of debt in Canada. According to Nerd Wallet’s 2024 Canadian Consumer Credit Card Report approximately 55% of Canadian adults are currently carrying credit card debt, with the average amount owed being around $4,119. It’s also considered the worst kind of debt as credit cards carry high-interest rates, making it difficult to pay off the balance. If you only pay the minimum every month, you could be in debt for years, even decades because of the hefty interest rate on credit card balances.

If you’re struggling with unmanageable credit card debt and worry you’ll never break the cycle of minimum payments and high interest rates, a consumer proposal may offer a solution and help you get back on track financially.

Understanding Consumer Proposals

A consumer proposal is a legal process available in Canada that helps individuals who are struggling with a staggering amount of unsecured debt. The term ‘unsecured debt’ refers to a type of debt that isn’t backed by any asset. This means the lender provides credit without holding any collateral as security. Credit cards, overdrafts, lines of credit, payday loans, personal loans, overdue utility bills such as mobile phone bills are examples of unsecured debt that can be included in a consumer proposal.

Only a Licensed Insolvency Trustee can file a consumer proposal and will help you negotiate with creditors to pay back a portion of your debt over a period of up to five years. A proposal provides a legally binding agreement and a structured method to eliminate debt, helping you avoid bankruptcy.

A consumer proposal provides several benefits, including:

• Debt Reduction – You propose to pay back a portion of your debt, which may be less than the total amount owed.
• Legal Protection – Creditors are prevented from taking legal action against you during the proposal.
• Financial Relief – The monthly payment terms are set according to your ability to pay and do not change even if your financial situation improves,offering you some flexibility in managing your debt.

Credit Cards During a Consumer Proposal

The central question is whether you can keep an existing card or obtain a new credit card while in a consumer proposal. Here are some key points you need to know:

Existing Credit Cards

When you file a consumer proposal, all your existing credit card debts are included. As such, you will need to surrender any credit cards covered by the proposal, and the creditors will freeze or close those cards that you previously held. This means:

• Suspension of Use – You should avoid using these credit cards during the proposal period. Continued use of credit cards included in the proposal could be considered fraudulent and may result in legal issues.
• Account Management – Your Licensed Insolvency Trustee (LIT) will handle negotiations with your creditors, including credit card companies, during the proposal process. This may include negotiating a reduction in the balance or freezing interest rates on these accounts.

Existing Credit Cards With No Balance

Depending on the credit card company, you may be allowed to keep any credit cards that do not have outstanding balances at the date of filing the consumer proposal. However, it’s important to note that some lenders could impose a lower credit limit or may be hesitant to increase existing credit limits while you are under a consumer proposal. While you may keep these cards, taking on new credit or increasing your debt is generally discouraged during the proposal period.

Obtaining New Credit Cards

Getting a new credit card during a consumer proposal can be challenging due to the following factors:

• Credit Score Impact – A consumer proposal has a significant impact on your credit score. It puts an R7 rating on your history, which tells lenders that you are making regular payments through a debt management plan or consumer proposal with your creditors. Credit card companies often view individuals with an R7 rating as higher-risk borrowers. As a result, it may be difficult to obtain new credit cards, and if you are approved, they are likely to come with higher interest rates and lower credit limits.
• Application Process – When you apply for a new credit card, the issuer will examine your credit report, which will reveal that you are currently under a consumer proposal. This disclosure can significantly impact their decision-making process, making it more difficult for you to be approved for new credit. While you are still actively in a consumer proposal, lenders will consider you a higher risk for default, as the proposal indicates ongoing financial difficulties. They may view your current credit situation as unstable, leading to lower approval rates for new credit cards. Even if you are approved, you may face less favorable terms, such as higher interest rates and lower credit limits.
• Credit Limits and Interest Rates – If you manage to obtain a new credit card during a consumer proposal:
  • Lower Credit Limits – New credit cards are likely to have lower credit limits compared to what you had before the proposal. This is a precautionary measure by the credit card issuer to mitigate their risk.
  • Higher Interest Rates – Credit cards obtained during a consumer proposal may come with higher interest rates. This reflects the issuer’s increased risk in lending to someone in a consumer proposal.

Impact on the Consumer Proposal

Managing credit cards responsibly during a consumer proposal is crucial for several reasons:

• Compliance with Terms – Using a credit card responsibly and avoiding the accumulation of new debt are crucial for adhering to the terms of your consumer proposal. By carefully managing your credit card use, you show your commitment to resolving your financial obligations and staying within the boundaries set by the proposal. It is important to avoid taking on any new debt during this period, as doing so can lead to complications and potentially jeopardize the successful completion of your proposal.
• Rebuilding Credit – Responsible use of credit cards, such as making timely payments and maintaining low balances, can help rebuild your credit score. These practices demonstrate financial discipline and can positively influence your credit rating over time. However, it’s important to avoid any misuse of your credit cards or the accumulation of new debt, as these actions can hinder your progress and negatively affect your financial recovery. Consistently managing your credit cards well not only supports your efforts to improve your credit score and maintain a positive financial track record but also supports the overall goal of becoming debt-free and achieving long-term financial stability.

Strategies for Managing Credit Cards

If you need to manage credit cards while in a consumer proposal, consider the following strategies:

Make payments in full and on time

The most crucial strategy for managing a credit card while undergoing a consumer proposal is to ensure that you make your payments on time and in full. This approach demonstrates to lenders that you are capable of using credit responsibly and fulfilling your financial commitments.

Consistently paying your credit card balance in full each month is essential for rebuilding your credit. Although improvements to your credit score and rating won’t happen instantly, this disciplined payment behavior will significantly contribute to a positive change over time. Regular, full payments help build trust with creditors and positively influence your credit profile, paving the way for better credit opportunities in the future.

Consult with your Licensed Insolvency Trustee (LIT)

Before you apply for or use a new credit card, it is crucial to consult with your Licensed Insolvency Trustee (LIT). Your LIT can offer expert advice on how taking on new credit might impact your ongoing consumer proposal and overall financial health. They can help you understand the potential consequences of new credit activity, including how it might affect your ability to complete the proposal successfully and your long-term financial recovery. By seeking their guidance, you ensure that your actions align with the terms of your proposal and avoid complications that could arise from unplanned credit usage.

Monitor your credit report

Regularly reviewing your credit report is essential to ensure that all the information it contains is accurate and that you are complying with the terms of your consumer proposal. By keeping a close eye on your credit report, you can stay updated on your credit status and quickly spot any discrepancies or issues that may arise. This proactive approach allows you to address potential problems early, preventing them from escalating and impacting your financial recovery. Regular monitoring also helps you track your progress and make informed decisions about your credit management.

Budgeting and financial planning

Creating a detailed budget is a key step in managing your finances effectively, especially while undergoing a consumer proposal. Start by outlining all sources of income and listing all your expenses, including both fixed costs (like rent or mortgage, utilities, and insurance) and variable costs (such as groceries, transportation, and personal expenses).

Incorporate any debt repayments into your budget, ensuring that you allocate funds specifically for these debts to stay compliant with your proposal terms. A well-structured budget helps you track your spending patterns, identify areas where you can cut back, and prioritize essential expenses over discretionary spending.

Effective budgeting not only assists you in maintaining control over your financial situation but also helps you avoid the pitfalls of accumulating new debt. By planning your finances meticulously, you can manage your cash flow more efficiently, meet your financial commitments, and work towards achieving long-term financial stability and recovery. Regularly reviewing and adjusting your budget as needed will keep you on track and support your progress throughout the consumer proposal period.

Prioritize essential spending

When managing your credit cards during a consumer proposal, it’s important to focus on using them only for essential expenses. This means allocating your credit card use to necessary purchases such as groceries, utilities, or medical expenses, and avoiding non-essential or discretionary spending. By prioritizing essential spending, you can maintain better control over your finances and prevent the accumulation of new debt.

Responsible spending habits not only help you stay within your budget but also support your overall financial stability. Avoiding unnecessary purchases reduces the risk of overspending and ensures that you can manage your credit card balances more effectively. This disciplined approach helps you adhere to the terms of your consumer proposal and contributes to your long-term financial recovery.

Build an emergency fund

An emergency fund acts as a financial safety net, providing you with the resources needed to cover unexpected expenses such as medical emergencies, car repairs, or urgent home repairs without relying on credit cards.

Start by determining a realistic savings goal based on your monthly expenses and potential emergency costs. Even a modest emergency fund can make a significant difference. Aim to gradually build this fund by setting aside a small portion of your income each month.

Having an emergency fund in place helps you avoid the need to resort to credit cards for unforeseen expenses, which can lead to additional debt and complicate your financial situation further. By reducing your reliance on credit for emergencies, you can stay within the terms of your consumer proposal and continue making progress toward financial recovery.

Regularly review and adjust your emergency fund as your financial situation changes. Maintaining this reserve not only provides peace of mind but also supports your long-term goal of achieving financial stability and successfully completing your consumer proposal.

Explore alternative credit options

As you work on rebuilding your credit during a consumer proposal, exploring alternative financial products can be a practical approach.

1. Secured credit cards – One such option is a secured credit card. Unlike traditional credit cards, secured credit cards require you to make a deposit that serves as collateral. This deposit typically acts as your credit limit, providing the lender with a form of security. Using a secured credit card responsibly can greatly help rebuild your credit score. By making timely payments and keeping your credit usage low, you ensure that positive information is reported to the credit bureaus, which can improve your credit history.
2.  Credit-building accounts – Additionally, consider other financial products designed for individuals working to improve their credit. These might include credit-builder loans or specialized credit accounts offered by financial institutions for credit recovery. Each of these options can help demonstrate your commitment to managing credit responsibly.

When exploring alternative credit options, make sure you understand the terms, fees, and interest rates. Using these options responsibly—by paying on time and keeping balances low—can help improve your credit score.

Incorporating these alternative credit options into your financial strategy can help rebuild your credit while staying on track with your consumer proposal.

Rebuilding Credit After the Proposal

Successfully completing a consumer proposal is a significant step toward financial recovery. Once the proposal is discharged, shift your focus to rebuilding your credit:

• Timely Payments – Continue to make timely payments on any remaining debts and new credit accounts.
• Debt Management – Avoid taking on more debt than you can handle. Gradually building credit through responsible use of credit cards and other financial products can improve your credit score over time.
• Financial Education – Consider seeking financial education resources to improve your understanding of credit management and financial planning.

While it is possible to own a credit card during a consumer proposal, it requires careful management and consideration. If you have existing credit cards, it’s best not to use them during the proposal period. Although not impossible, obtaining new credit cards can be challenging due to the impact of the consumer proposal on your credit score. By gaining a clear understanding of how a consumer proposal affects your credit and adopting sensible financial practices, you can manage your credit cards more effectively. This means being aware of the potential impact on your credit score, avoiding unnecessary debt, and making timely payments. Always check with your Licensed Insolvency Trustee to advise you on the best practices for rebuilding credit and applying for secured credit cards.

If you are falling behind on credit card bills and want to find out if a consumer proposal is the best solution for your situation, talk to a LIT who can assess your unique situation and give the best advice on what debt relief options are available to you.

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