Bad debt is represented on your credit report as a R9, the lowest on the R scale credit bureaus use to evaluate each of your loans. Your credit report is one of the first things lenders look at when you apply for credit. Any time you apply for a credit card, mortgage, car loan, insurance, an apartment, or some jobs, someone may look at your report.
Potential creditors look at your credit rating and reports to evaluate your level of risk. They want some assurances that they will be repaid for the money they lent out. A lower credit score means you’re at a higher risk, and may either result in higher interest rates or even being denied outright.
Credit Rating vs. Credit Report
Though the two terms are often used interchangeably, your credit rating and report are two separate ways of looking at your credit-worthiness. The difference is that your credit rating (or score) is one number that represents your overall performance with credit. It’s a quick summary that lenders rely on before approving loans. Your credit report shows how you have handled each different debt with a rating on the R scale. For example, if you have always paid your utilities on time but struggled with a credit card debt, you could have both an R1 and an R9 on your report.
If you’ve been denied a loan or are worried about how financial difficulties have affected your credit, you may have questions about accessing your credit report and score. Keeping track of your report lets you see yourself the way lenders do, and it can help you on your financial recovery after a bankruptcy or consumer proposal.
To get a copy, contact the two credit bureaus Equifax and TransUnion. You will have to provide identification and background information, and you can get the report free by mail or pay for instant access. There is no free option for accessing your credit score.
How Do You Get an R9?
#1 Ongoing Non-Payment
The simplest way you can wind up with a R9 is through ongoing non-payment. A R9 is applied to a debt that you haven’t made payments on for 6 months. There are other related reasons it may be applied to a credit product.
Filing for bankruptcy will get you an R9 on your credit report, while typically a consumer proposal gets a R7 – not the worst rating you can get, but still a mark that will make it a challenge to qualify for credit in the future. However, bankruptcy does not tend to make your credit worse. If you are filing for it, your credit rating has likely received numerous bad ratings already.
#3 Moving without updating your address
Moving without notifying your creditors of a change of address, and without paying the debts you owe them, can make it look as though you are evading their collection efforts. This can result in a R9 on its own. There is no way to escape debts without settling them.
#4 Having the debt moved to a collection agency
Creditors including utilities, credit card companies, payday lenders, and contractors will eventually decide it’s not worth investing more resources into collecting your debt. That doesn’t make it go away. Instead, they will send the debt to a collection agency, which can work in one of two ways.
Some debt collection agencies remit the debt back to the original creditor, while they get paid on average between 25 to 45% of the money collected.
There are also agencies that buy debt. This is a way for collectors who do not expect payment to recoup some of their losses, paying pennies on the dollar for hard-to-collect debts and then keeping everything they manage to collect.
How Do You Resolve a R9?
There are three main ways to resolve an R9, though in all cases, it still takes time before it’s cleared from your credit report.
File for Bankruptcy: A bankruptcy does not require approval from your creditors and can be completed in as little as 9 months. The R9 will be removed 6 years after the conclusion of your bankruptcy.
Settle Your Debt: A debt settlement arrangement such as a consumer proposal is normally completed in 36 to 60 months. Upon completion of your proposal the R9 becomes an R7 for three years.
Pay the Debt in Full: If the debt is a smaller amount of money, you may simply be able to pay it off in full. However, even paying the debt in full means that the rating will remain on your credit history. Almost all negative information stays on your credit history for 6 years in Canada.
Doing nothing will likely not resolve your R9. Even non-payment will be removed from your history after 6 years, but only if the creditor stops reporting the debt. More often, the debt is sold to a collection agency which will continue to report non-payment. When debts go to collection, it can really complicate your financial situation.
When debt collectors start to call or take action to collect, it’s time to find help from bankruptcy trustees (now called Licensed Insolvency Trustee). Working with Licensed Insolvency Trustees, you find out all of the options available to you, and what each options means for your finances, credit rating, and future.
Recovering from a R9
There’s more to do besides wait for a R9 to be removed from your credit report. There are steps you can take to make a positive impact on your credit report and score. Once you qualify for a credit card after insolvency, you can improve your credit by paying all of your bills on time (including utilities, phone, internet, rent), by paying more than minimum payments, and avoid applying for too much credit.
Another factor in your credit score is your credit utilization ratio, a measure of how much of your total available credit you are currently using. A utilization ratio of 30% or less is generally looked at favourably by lenders.
To learn more about credit counselling, getting out of debt, and how insolvency effects you, contact us today at any of our locations. The first consultation is free and we’re always ready to answer your credit questions.