The Effect Of R7's (Debt Settlement) On Your Credit Report.

The Effect of R7's (Debt Settlement) on your credit report.

Nancy Zimmerman was asking this question over on her blog

www.nancyzimmerman.com

Saturday Case Study: how much does an R7 affect your ability to get a loan?

Sep 29th, 2007 by nancy zimmerman

One of my clients gave permission to seek opinions on her debt options. She is up to her eyeballs, and, 3 big cheers to her, is taking charge of the situation. She has a solid income and has a lot of equity in her home. She doesn't want to go the bankruptcy route - in fact, was told she couldn't - so is considering using a debt consolidation firm. It would result in an R7 on her credit report.

Her mortgage is up for renewal in a year.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
This is a really good question that I thought my readers should know about:
My reply to this question:

Nancy,

Here are what the ratings mean:
From: Equifax Canada FAQs

Credit Ratings What it Means
- R0 Too new to rate; approved but not used
- R1 Pays (or paid) within 30 days of payment due date or not over one payment past due
- R2 Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due
- R3 Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due
- R4 Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due
- R5 Account is at least 120 days overdue, but is not yet rated "9"
- R7 Making regular payments through a special arrangement to settle your debts
- R8 Repossession (voluntary or involuntary return of merchandise)
- R9 Bad debt; placed for collection; moved without giving a new address
R7 is Making regular payments through a special arrangement to settle your debts

When you settle your debts, using a debt settlement company, the creditors aren't very excited about that. Obviously they want to recover the full amount of their money with the full amount of interest.

What happens with R7 is that all debts included in the debt settlement will go to R7. This is very harsh on your credit score. The reprocussions of this will be felt for 6 years +

Actually, this will be reported for the amount of time that it takes to fully paid the debt settlement agreement, and then six years from the very last payment. So it could be on your report for 3 + 6 = 9 years. (3 years to complete the debt settlement agreement.)

The point is: If you don't need to apply for alot of credit in the next 9 years, then this is an alright option. It's VERY limiting, however, if you're going to need any type of credit in that time period.

If you try to borrow money for a car purchase in that time period, you're going to pay very high interest rates. You could pay as high as 29.99% for a car loan. Especially if you've done a debt settlement agreement. This is because you're considered very high risk.

Finally, I've consulted with many people who have declared bankruptcy, and they've all said the same thing: "If I had of known the amount of crap that I would have to go through in order to do this, I never would have." !!

While debt settlement and bankruptcy seem like easy and painless short term options, they are extremely limiting and expensive in the decade to follow!

Ultimately my recommendation is this:
The best option is this: Scraping by and getting your bills current, even if you have to eat macaroni and cheese for a year and cut out all other expenses for however long it takes, is the best option.

If you have to cut out all frivolous expenses, cable tv, going out to movies, new clothes, buying from Salvation Army etc... this is the best route.

Managing your debts properly not only gives you a good credit rating with your lenders, but will teach you financial maturity and help out your self esteem a great deal.

Admitting defeat and declaring bankruptcy or doing debt settlement will give a painless easy way out but you will regret it for hte rest of your life.

It's a good idea to look at your budget and see what you can cut out. It's the difference between needs and wants.. If you've gotten into debt, and agreed to make payments, then it's good for your mental well being, (however painful) to keep to those agreements.

I would like to thank Nancy Zimmerman for asking that question as it is very timely and of interest to thousands of Canadians.

Add Your Comments:

Fields with * are required
Your Comment Below:


Name*

Email*

Website

Code*

Enter Above Code

Note: Comments are moderated - Spam will be deleted



16 Comments
On Aug 23, 2011, Cam Said:
I am going to give you my situation and ask for advice. I have approximately 5500 in debt from a previous relationship. This was supposed to be paid by my ex and I have just found out that she didnt. Leaving me with 4 R9 ratings on my credit I can pay these off in the next 12 months by myself but I talked to a credit counsellor and he says oh yeah go through me and it will be better . He will charge me 900 and spread it out over a year but I will rec ieve R7's for each debt. Good idea or bad?????????
On Mar 16, 2010, Heather Groves Said:
TransUnion will list an R7 for 2 yrs after it is paid in full and Equifax will list it for 3 yrs after it is paid in full. While you are on the actual credit counselling program some/most creditors will place an R9. The reason for this is (as regardsTransUnion) once an R7 is place on your report, it automatically sets a timer to drop off in 2 yrs.
On Mar 9, 2009, Greg Martin Said:
Hi Monty Loree, If you obtain a copy of a credit report from Equifax or Transunion it will state on there that an R7 will last on your credit bureau for three years from the date of Final payment. Look under the catagory of Voluntary Deposit - Orderly Payment Of Debts, Credit Counseling It will state: When voluntary deposit – OPD – credit counseling is paid, it will automatically purge from the system three (3) years from the date paid. Hope that helps. Sincerely, Greg Martin President/Credit Counsellor Inspire Credit Counselling Services
On Mar 9, 2009, mk Said:
This is rather interesting. i have actually just finished my credit counselling after 3.5 years (i was ona 5 year program). In some cases i am glad i did counselling, in other case i wish i would have gone bankrupt. for example, my friend went bankrupt 220,000k in the hole, he only had to pay 500 a month for 9 months and now done with that - he wont get any credit, etc for 7 years i guess. myself, paid 700+ a month for 3.5 years (was supposed to be 5 years). Over the past 3.5 years, i was able to keep my lease on a pt cruiser, i was able to lease out a new vehicle ford focus (which i still have for 1 more year) and have been able to get credit to buy a 2009 escape... as for credit cards, a relative has gotten me one with my name on it as I travel often for work, etc Visited 23 countries in the past 3 years... as far as my integrity is concerned, i am proud that i have come out of a dark hole and feel rather releived and a weight lifted off my shoulders. I have not applied for a credit card recently so dont know if it would be accepted or not... (anyways, I have prepaid MC from BMO which is just as fine :) )
On Oct 1, 2008, Monty Loree Said:
Hi Greg, Can you state anywhere that R7's only stay on a credit report for 3 years. I'm inclined to disagree with you.
On Oct 1, 2008, Greg Martin Said:
Also CJ, Just so you know you are allowed to have certain types of credit with the R7's. You are allowed to apply for Mortgages, car loans, and any type of secured credit. ie... secured credit cards. The only types of debt you are not allowed to apply for are unsecured debts. Hope that helps Greg Martin Credit Counsellor
On Oct 1, 2008, Greg Martin Said:
The information in this site is not 100% accurate. R7's on your credit bureau do not last there for 6 years from the date of final payment. It is only 3 years from the date of final payment. ie.. if you pay your debt off over 3 years through credit counselling you will only have R7's on your credit bureau for 6 years. Greg Martin Credit Counsellor
On Mar 12, 2008, Monty Loree Said:
Hey CJ, You mentioned that " my credit score goes back to the beginning - where i'll have to re-build it." That's probably what I mean.. You have to start from scratch rebuilding your credit score.
On Mar 11, 2008, CJ Said:
I went through Credit Counseling and paid off my debt in a little under 4 years. I went through counseling that is provided through my region. The max you could be on it was 4 years, and after you're done you have 2 years with a R7 credit rating and you CANNOT have any type of credit whatsoever. Once you are done, you fax for the last time your completed information to Equifax and Trans Union Canada. If I don't remember to do that, then I have a R7 for 3 years instead of 2. I think this was a great option, and has taught me a lot. I don't think there was any other way I could've paid my debt off. This article makes it seem so bad to have this done, but honestly it's not. I have researched so much on this program and only found good things. You do not have this rating for 6 years (maybe it differs from agency to agency), and after my 2 years after completing my program, my credit score goes back to the beginning - where i'll have to re-build it.
On Oct 3, 2007, bb Said:
Thanks Angella for answering part 2 of my question! I will look at that!
On Oct 3, 2007, Angella Said:
Your credit does start to improve when you've caught up the R5, but not much. Basically, every 6 months you see a minor improvement, with the largest at 2 and 3 years. Go to myfico.com and use their score simulator to see what happens with your debt when you pay it off and how the various intervals since your last slow pay affect your credit.
On Oct 2, 2007, Monty Loree Said:
To clarify... One way I would say that there is no way out with debt, is if the debt was having a derogatory effect on your health. IE.. you worked so hard to pay off the debt you gave yourself a heart attack. Or you worked 3 jobs for years and worked yourself into exhaustion where you weren't able to do it any more. The body can only take so much. Where as we live in a mechanized world debt wise, we are still flesh and blood. It's like trying to run beside a car for 10 miles. The car is a machine and we aren't. When you take on too much debt, then all of a sudden you are required to be machine like to pay everything off. If your health is becoming at risk, then maybe you've taken on too much debt. If you're just looking for a convenient way out of your debt to save your self the problem, then bankruptcy is not the answer.
On Oct 2, 2007, Monty Loree Said:
BBoutilier, Ok... To have too much debt is excruciating. You lose sleep, it's bad for your health and it's very harsh on your family and marriage. Acquiring too much debt means that a person probably hasn't gone through the pain in the first place. Sometimes there is no way out. However, if a person is able to pay their debts, even if it takes 10 years to do so, then that's what they should do. I know, I've had experience with agonizing pain because of too much debt. I stayed the course and paid off the debt as agreed. I will offer a preliminary coaching on getting out of debt. If anybody's interested, let me know.. BTW.. I do charge an hourly rate. Peace of mind usually comes with some education. Many times people can get out of debt, but they just need a little coaching. One of my favorite shows is 'til debt do us part.
On Oct 2, 2007, BBoutilier Said:
Sorry,my first point was that you seemed to assume that this person was taking the easy way out but perhaps they felt they had no other option.It is very hard to find objective advise on how to get out of debt,usually one only finds companies offering bankruptcy,consolidation or counseling. No one tells you how to go forward without using these options. My second point was a question actually...I am wondering how long a level 5 rating affects one's credit? Thanks!
On Oct 1, 2007, Monty Loree Said:
Can you explain... A R7 rating stays on your credit report for at least 6 years... I wasn't clear on your point.
On Oct 1, 2007, B Boutilier Said:
Don't you think it's a pretty hard place for a responsible person to be? I am sure this person doesn't think it is a painless solution or they likely would have gone ahead without seeking help. If their credit is already at a level 6 does this make it any more advisable? How long will the 6 rating stay on the record?

The Effect of R7's (Debt Settlement) on your credit report.

Add Your Comments: