What your credit score really says about financial recovery

Ask many Canadians what a credit score measures, and they’ll tell you it’s a reflection of their financial health.

According to Jeff Lewis, Chief Insolvency Officer and Licensed Insolvency Trustee at Bromwich+Smith, a credit score isn’t the definitive health check many think it is. Instead, he describes it as “A measure of how responsible you are, using credit. That’s all it is.”

This distinction matters, especially for people navigating financial recovery from debt.

Your credit score doesn’t tell the full story of where you stand financially, explains Lewis. It doesn’t reflect your income, savings or how stable your day-to-day finances are. It’s simply a snapshot of how you’ve used credit over time and how risky you may appear to lenders.

In some cases, your financial situation versus your credit score may reflect very different realities.

“You may have a high credit score and be financially struggling,” Lewis said.

People with substantial savings or high incomes who rarely use credit can end up with low scores, he notes. The system simply has nothing recent to measure in this case.

In other words, a credit score is useful in some scenarios, but it isn’t fully reflective of your financial health.

Before we talk about what financial recovery looks like, let’s clarify some terminology.

• Your credit score is a three-digit number, typically ranging from 300 to 900 in Canada, that lenders use to assess risk (the higher the score, the lower risk you are to lend credit to)
• A credit report is the full record behind that number, detailing your accounts, balances, payment history and any insolvency filings
• Credit ratings rank each listing on your credit report to show how effectively you manage your specific debts

What actually happens to your credit during insolvency

When someone files a consumer proposal or bankruptcy, both their credit score and the contents of their credit report change.

“Your credit score will drop,” Lewis said. “It’s an algorithm used by the credit agency, so we don’t know how it is determined, but it will drop.”

“Generally, your score is low anyway,” he continues, “because you’ve been in difficulty for some time.” By the time someone seeks insolvency support, financial strain, high balances, and missed payments have usually already hit their credit score.

“A credit report is really a financial snapshot of all your debts and filings.  It shows each debt that you have, and the history for each debt, usually over the last three or four years,” explains Lewis.

Filing a consumer proposal or bankruptcy flags the affected debts on your credit report with a specific rating. That rating tells lenders a formal process is underway.

That visibility can make people hesitate to move forward with insolvency. A common belief suggests that formal debt solutions freeze your credit-rebuilding efforts for years. But that’s not how it works.

“The biggest myth I’ve ever heard in my insolvency career is that if you file a bankruptcy, you can’t get credit for seven years,” Lewis said.

“Seven years is the amount of time that a first bankruptcy will sit on your credit report as a notice to creditors but the bankruptcy can be discharged in as quick as nine months, and within a couple of years of discharge, you can build yourself up to a very good credit score again.”

Recovery takes time, but it can start much sooner than most people expect.

How to move the needle when rebuilding your credit

Ryan (a pseudonym) is a former Bromwich+Smith client who completed a consumer proposal. For him, rebuilding credit wasn’t something that started after the process ended. It began right away.

He got a credit card and used it carefully, for essentials like groceries, and focused on consistency. “I would immediately pay it off with my debit. I started learning some of the tricks of the trade.”

This approach of using credit steadily to pay small bills, then paying it off reliably each month, is one of the most effective ways to rebuild a credit profile over time, said Lewis.

Then in terms of what not to do, he shared some patterns lenders are looking for that indicate you’re struggling with debt:

“You don’t want to show the lender that you’re over dependent on credit,” he said. “You don’t want to miss a payment, you don’t want to go over your credit limit.”

Lewis said lenders also look at how much of your available credit you’re using. Carrying a balance close to your limit signals risk. As a general guideline, he recommends keeping balances well below half of what’s available. The lower, the better.

He warns that applying for several credit products in a short window, or carrying multiple cards at the same time, pulls a score down.

The real measurements of your financial health and recovery

Lewis debunks the idea that the only measure of your financial health is your credit score and report.

“Financial health is being able to pay your bills on time, having a rainy-day fund, savings for the medium term, and long-term savings,” he explained.

Your credit score might be low, for now, and your credit report might reflect your insolvency status, but that doesn’t mean you’re not able to start making healthy financial decisions.

Many people, like Ryan, leverage the financial counselling sessions built into the consumer proposal process to kickstart better habits and pivot from managing debt toward long-term stability

“In five years, I have gone from a 300 credit  score, to my credit score almost in the 700s,” he said. “I got my student loans paid off, got a house three-quarters of the way paid off and I got a truck fully paid off in payments. I was able to do all of that simultaneously, while in the midst of a proposal. You can do it too.”